The Finance Act 1993 with effect from the Assessment Year 1994-95, had provided that any new industrial undertaking located in an industrially backward State or Union Territory as specified in the 8th schedule or set up in any part of India for the generation and distribution of power will be completely exempt from income tax to the extent of 100% of the profits and gains derived from such industrial undertaking for the initial five assessment years. Of course such new industrial undertaking or power plant should begin manufacturing or producing articles on or after 1.4.1993 and before 1.4.2000, later on increased to 3 1.3.2002. Thus, a power plant can be set up in any part of India so as to become eligible for a 5-year tax holiday. But a new industrial undertaking to be eligible for a complete tax holiday for the first five years must be located in an industrially backward area as specified in the 8th schedule which broadly relate to Arunachal, Assam, Goa, Manipur, Meghalaya. Mizoram, Nagaland, Sikkim, Tripura, Union Territory of Andaman & Nicobar Islands, J&K, Pondicherry, Lakshadeep, D. & N. Haveli, etc.
A good deal of tax saving can be achieved through proper tax planning by starting a new industrial undertaking in the industrially backward areas or a new power plant in any part of India.
From the Assessment Year 1995-96 similar tax holiday would be available on a new industrial undertaking in any notified very Backward District manufacturing, etc. between 1.10.1994 to 3 1.3.2002. Vide Notification No. S.O. 440(E) dated 15.6.1999, 52 Category “A” and 70 Category “B” Districts have been notified [see (1999) 238 ITR 14 St.]. Likewise, the Income Tax (Amendment) Act, 1998 also made more changes.
The Finance Act 2002 had further extended the period from 31.3.2002 to 31.3.2004 by which if any new industrial undertaking is set up in a backward State or backward District, then it will be eligible to the tax holiday as it allowed to other industries set up earlier, namely 100% tax holiday for five years and 25% or 30% for the balance five years.