What tax treaties or exemptions influence investor returns?

Tax treaties and exemptions significantly influence the net returns for investors in industrial land and infrastructure projects, particularly for foreign investors. These mechanisms aim to avoid double taxation, reduce withholding taxes, and offer fiscal incentives to encourage capital inflows into priority sectors like manufacturing, logistics, and industrial development. Below are five key categories of tax treaties and exemptions that affect investor returns:

1. Double Taxation Avoidance Agreements (DTAs)

• India has signed DTAs with over 90 countries, including Singapore, UAE, UK, Mauritius, and the USA.
  
• These treaties provide relief from being taxed in both India and the investor’s home country on:
  
  • Dividends
    
  • Interest income
    
  • Capital gains
    
• For example, under the India–Singapore DTAA:
  
  • Capital gains tax on sathe le of shares may be exempt or taxed at a lower rate, subject to conditions.
    
• Investors can avail DTAA benefits by submitting Form 10F, a tax residency certificate (TRC), and PAN.

2. Withholding Tax Rate Reductions

• Income distributed to foreign investors—such as dividends, interest, or lease paymentsis typically subject to withholding tax.
  
• DTAAs often reduce the applicable tax rate, e.g.:
  
  • From 20% to 10% or 5% on interest payments
    
  • From 15% to 5% or exempt on capital gains in specific treaty countries
    
• Lower withholding improves cash flow and repatriation efficiency for foreign equity and debt holders.

3. Exemptions under Special Economic Zones (SEZs)

• Industrial projects located in SEZs may qualify for:
  
  • Income tax holiday for a defined period (e.g., 15 years under Section 10AA)
    
  • Exemptions on customs duty, excise duty, and GST on capital goods and raw materials
    
  • Stamp duty and electricity duty relief from state governments
    
• These incentives improve project IRR and long-term investor returns when structured correctly.

4. Tax Deductions for Infrastructure and Industrial Development

• Projects that qualify as infrastructure under Section 80-IA of the Income Tax Act (e.g., roads, industrial parks) may be eligible for:
  
  • 100% deduction of profits for 10 consecutive years out of 15
    
• Industrial park developers under the Industrial Policy Scheme may also receive accelerated depreciation, GST refunds, or input tax credits.
  
• These fiscal benefits lower the effective tax rate and enhance net distributable profits.

5. Capital Gains Tax Exemptions or Deferrals

• Under Section 54EC or Section 115F, capital gains from industrial land may be:
  
  • Exempt if reinvested in eligible bonds (e.g., NHAI, REC) or notified funds
    
  • Deferred under specified schemes when reinvested in SEZs, startups, or specified asset classes
    
• For foreign investors, capital gains on share transfers may be exempt under DTAs(e.g., India–Mauritius, India–Netherlands), subject to substance and anti-abuse provisions.