In a bid to boost fresh investments in the making of machinery and reviving industrial growth, the finance minister proposed a 15% deduction for all companies that invest Rs. 100 crore or more on new projects and plans.
However, the investment allowance is valid only for two years from April this year.
The idea is to kickstart demand for goods and revive sagging industrial growth amid a crippling economic slowdown.
So, any company making an investment of Rs. 100 crore on a new project, plant or machinery between April, 2013 and March 2015 will be able to enjoy a tax deduction of Rs. 15 crore. This would be in addition to the current rates of depreciation.
The move is aimed at bringing investments back on the table and revive India’s growth. Besides, it is also expected to generate millions of fresh jobs, considered crucial for social inclusiveness.
Investment allowance is a tax benefit offered to companies to encourage them to make capital investments. The firms can deduct a specified percentage of capital costs from the taxable income.
Corporate India, which had made a strong pitch for an investment allowance, welcomed the move.
"We are happy that the finance minister has introduced this as this would significantly boost investment which is crucial for economic growth and importantly it is for a specified time-frame," said Chandrajit Banerjee, director-general, Confederation of Indian Industry.
The hardening of interest rates has weakened demand and most companies have shied away from making any fresh investment, leading to sluggishness in the economy. The economic survey tabled in Parliament on Wednesday, said that an increase in corporate investment would be crucial to get back on to a high growth path.
Though companies making large investments would directly benefit from the move, SMEs are also expected to get some boost from it.
Investment allowance is different from investment credits that primarily allow firms to deduct investment costs directly from their tax liabilities.
The economic survey, presented on Wednesday, underlined the need to boost investment.
The country’s growth rate has always been linked to the overall investment rate. India's economy grew at an average of 9.5% between 2005-06 and 2007-08 when investments were over 35% of GDP.