Answer ... Expenditure of a personal or capital nature is not allowed for tax deductions. However, in the case of capital expenditure incurred on acquiring business assets (eg, plant and machinery, buildings, furniture, intangibles), tax depreciation is allowed at rates prescribed based on the written-down value method under the tax laws.

Answer ... Indian tax law offers profit-linked tax incentives, exemptions and reductions, subject to prescribed conditions, in limited cases. These incentives are being phased out in a time-bound manner.

However, to encourage investment and propel growth in key sectors, the tax laws provide for investment-linked incentives. The deduction of capital expenditure incurred wholly and exclusively for certain specified business is allowed in the year of incurrence of such expense. These provisions apply to specified businesses, which include:

• setting up and operating cold chain facility/warehousing facilities for the storage of agricultural produce;
• laying and operating cross-country natural gas or crude or petroleum oil pipeline networks for distribution, including storage facilities that are an integral part of such networks;
• building and operating a new hotel with a rating of two stars or above;
• building and operating a new hospital with at least 100 beds;
• developing and building a housing project under a government scheme for slum redevelopment/rehabilitation or affordable housing;
• producing fertilisers;
• setting up and operating a semiconductor wafer fabrication manufacturing unit; and
• developing or operating and maintaining an infrastructure facility.

Businesses that are engaged in manufacturing or production, or in the generation, transmission or distribution of power, are eligible for extra benefits in the form of an additional claim of depreciation of 20% over and above the normal rates on investments in new plant and machinery.

In addition to tax-related incentives, to promote investments, a number of states offer incentives for setting up new operations or expanding operations in India. Such incentives include:

• the allocation of land at nominal value;
• stamp duty exemptions;
• goods and services tax-linked subsidies; and
• interest subsidies.

Further, to enhance manufacturing capabilities, the central government has also announced, for a limited duration, a production-linked incentive scheme, providing a percentage of incremental sales as an incentive for certain key sectors, including:

• advance chemistry cell batteries;
• electronic/technology products;
• automobiles and auto components;
• pharmaceuticals;
• telecommunications and networking products;
• textile products;
• food products;
• high-efficiency solar photovoltaic modules;
• white goods (air conditioning and light-emitting diodes); and
• specialty steel.

Answer ... The Indian government has notified 10 income computation and disclosure standards (ICDSs). The ICDSs provide a set of rules for computing taxable income under the headings:

• profits and gains of business or profession; and
• income from other sources.

They apply to all taxpayers following the mercantile system of accounting.

The method for the valuation of inventory for the purpose of computing business profits is prescribed under a specific ICDS. The tax accounting standard is broadly aligned to general accounting norms that require inventories to be valued at the lower of the actual cost or the net realisable value. The tax accounting standard defines the basis for determining cost of inventory, net realisable values and so on.

Answer ... The tax laws generally apply only to real income/losses, and not notional gains/losses. Therefore, the taxation of derivative contracts is generally based on actual realisation. Given the complexity of derivative contracts, tax positions are often the subject of litigation, requiring an informed analysis.