Corporate Finance is the field of finance dealing with financial decisions that business enterprises make and the tool and analysis used to make the decisions. There are three methods used in corporate financing, these are borrowings, Issue of shares, and retained earnings. Corporate taxations play a vital role in making decisions about corporate financing. The provisions of tax laws have a wider impact on Capital investment decisions that deal with which project to invest in, whether it is feasible to fund the investment with debt or equity, as well as the time when dividend should be paid to the shareholders.
The deductibility of interest paid on debt reduces the tax liability of the company therefore the companies preferred to fund the new project out of borrowed capital. However, Companies with low expected marginal tax rates on their interest deductions are less likely to finance new investments with debt. Availability of deductions under the tax laws will reduce the taxable income which will lower the average tax rate and ultimately minimize the tax benefit on interest paid on borrowings. The companies have to pay tax first on the earned profits and secondly when it declares dividends. The companies have to pay Corporate Dividend Tax on the declared dividend.
In tax laws, there are certain types of deductions, tax incentives available to the corporates which need to be considered while taking financial decisions.
While local jurisdictions, such as states, may also provide tax incentives for businesses, country-wide incentives are most widely applicable and are broadly organized into four categories: location-based, industry-specific, export linked, and activity-based.
These benefits, subject to specified conditions, include incentives for units situated in special economic zones (SEZs) or less-developed regions; incentives for specific industries, such as power, ports, highways, electronics, and software; newly set-up Indian companies, startups recognized under the National Startup Policy, and establishing a new industrial undertaking.
Incentives are also available to non-resident companies in the form of presumptive taxation in areas such as shipping, oil and gas services, aircraft, and power industries, among others.
Tax incentives for SEZs
Special economic zones have been set up throughout the country in order to promote competitive business environments. Both developers and occupiers of SEZs enjoy substantial long-term tax holidays and concessions that are worth exploring when establishing an operation in India, although these may be phased out under the direct tax code (DTC) for SEZs that are operationalized after March 31, 2020.
Presently, units in SEZs enjoy 100 percent income tax exemptions on export income for the first five years, 50 percent for the next five years thereafter, and 50 percent of the plowed back export profit for another five years.
Other benefits include a refund of integrated goods and services tax (IGST) on goods imported by units and developers of SEZs, easy refund procedure of input GST paid on procurement of goods and services if any, and minimal compliance requirement and return filing procedure.
Units in SEZs also receive additional benefits from respective state governments in the form of stamp duty exemption, VAT exemption or refund, and electricity duty exemption.
Conditions for SEZ developers
- To avail incentives, the firm must be involved in the development, operation, and maintenance of SEZs, including their infrastructure facilities.
Conditions for SEZ unit
- Must be engaged in the export of goods and services from April 1, 2005, onward;
- Must not be formed by splitting up or reconstructing an existing business; and,
- Not to be formed by transferring a previously owned plant and machinery to the SEZ unit.