Podcast transcript: Incentive insights: Maharashtra IT/ITES Policy and its impact on investment

12 min | 22 November 2023

Bhavesh Thakkar
EY India Tax and Regulatory Services Partner

Kanchan: Welcome to our first episode of the series on incentive policies by EY India Insights podcast. I am your host Kanchan Umranikar, Senior Manager in EY Indirect Tax practice. Today, we will be talking about the recently revamped Maharashtra IT/ITES Policy 2023 and how it has made Maharashtra the preferred investment destination for IT companies. As Maharashtra has traditionally been one of the preferred destinations for IT companies, policy makers always reinforced the investors by giving the right policy push by incentivizing the sector. Maharashtra was one of the first states in India to devise a dedicated IT policy in the late 1990s. Since then, there have been several replacement policies, culminating in the 2023 policy, which is active today. 

To gain deeper insights into this, we have Bhavesh Thakkar with us. Bhavesh is Tax and Regulatory Services Partner at EY India, with a special focus on incentives and subsidies. He also specializes in providing end-to-end services in relation to the fiscal incentives by state and central governments for new and expansion units. He has worked for 200-plus applicants across sectors. Let us interact with Bhavesh on the Maharashtra IT/ITES policy. Welcome to the podcast, Bhavesh.

Bhavesh: Thank you, Kanchan. It is a pleasure to be here to discuss on the Maharashtra IT policy. 

Kanchan: We want to understand the basic coverage of the policy. Who all would be eligible under the new policy for availing incentives?

Bhavesh: To apply for incentives, the policy sets forth certain eligibility conditions that have to be met. The policy allows all entities operating within the ambit of information technology (IT) or even information technology enabled services (ITES) to file an application. This includes entities engaged in back-office operations, call centers, support centers, co-working spaces, and data processing centers. The policy also recognizes upcoming subsectors such as data centers, Animation, Visual Effects, Gaming and Comics companies, which are popularly called the AVGC companies, emerging technologies such as machine learning and augmented reality.

Kanchan: That means the policy has a broad coverage and is not just limited to pure IT or software companies.

Bhavesh: Yes, and also the incentives under this policy are not restricted to new IT set-ups only. Existing set-ups undertaking expansions are also eligible, provided they bring in the additional investment, which is more than 25% of their existing gross block. If the gross block of that unit is INR 50 crore as on a particular date, and the unit then will have to make the investment of at least INR 12.5 crore, which is 25% of INR 50 crores, to qualify it as an expansion unit and apply under the policy.

Kanchan: In the Maharashtra industrial policy, the state is classified in various zones or areas. The investment in underdeveloped areas incentivized more. Is the mechanism similar in the IT/ITES policy as well?

Bhavesh: Recognizing that some regions in the state require more attention and support than others, the policy divides the areas in Maharashtra into two zones; Zone-I include the municipal corporations in Mumbai metropolitan and Pune metropolitan regions, and Zone-II includes all areas other than areas covered in Zone-I. Since Mumbai and Pune are more developed areas in the state, they have been classified as Zone-I. Companies are free to set up their operations in any location in Maharashtra. However, the incentive quantum will differ on the basis of the zone where they are set up.

Kanchan: This classification seems quite rational. You mentioned earlier that the new policy has recognized emerging technologies differentially. Can you elaborate on this?

Bhavesh: One of the reasons why the policy is noteworthy is its recognition of emerging technologies. Most policies you would see offer incentives to the IT sector as a whole. But this policy offered incentives to these technologies over and above what is offered commonly to all IT companies. It is important to understand what constitutes emerging technologies and why differential treatment is given to those.

The policy states that any evolving technology whose development and practical applications are large and unrealized should be considered. It also offers a few examples of virtual and augmented reality (VR/AR), artificial intelligence (AI), machine learning (ML) and blockchain, among a few others. The good part is that the door has been left open for inclusion of other developing technologies if the investors are able to prove the worth. The recognition of these technologies is the defining aspect of this policy since it encourages research and development in that area.

Kanchan: This appears to be a visionary step by the Maharashtra government. What incentives are exactly available under this policy?

Bhavesh: The policy divides the incentives in two parts - common incentives for all entities operating within the ambit of IT and additional incentives for certain subsectors such as start-ups, data centers and AVGCs, as we discussed. These incentives are also dependent on whether the unit has been set up in Zone-I or Zone-II. Largely, the incentives revolve around multiple aspects. I will talk of some of the key ones. 

The major one is capital subsidy, through which a percentage of your capital investment is spread over a period of specified years. This is available for AVGC units and emerging technology units. First three units in the AVGC category and first 50 units in the emerging technologies category will have an added advantage of anchor units and higher amount of subsidy.

For the emerging technology units that fulfill certain criteria of employment and investment, those will get a capital subsidy as anchor unit. The subsidy would be 20% of capital investment, with an upper cap of INR 1 crore as brought in by the government. Capital investments include cost of hardware and software but exclude building and land cost.

For AVGCs, this is a very significant incentive because the first three units with investment and employment criteria will have 25% of the fixed capital investment coming back by a way of subsidy and the upper cap over here is INR25 crore. Capital subsidy will be the major incentive. 

Apart from that, there are certain other incentives. Let us take the electricity duty exemption. This will be typically given for a specified number of years, ranging from 10 to 15 years, depending on the zonal classification. In some cases, this can be a permanent exemption also. 

The concept of refund of past duty paid before the exemption is allowed has been removed from the new policy altogether, which is extremely important as companies will have to apply for the exemption at the earliest, or else they will lose those benefits as the duties paid before these exemptions will not be refunded. 

Then there is stamp duty exemption, under which there is a complete waiver of stamp duty which is paid on lease or purchase of land. The percentage of exemption will depend on the zone in which the unit has been set up and the type of set-up. Please mark here that this is an exemption and not a refund. If the unit has paid the stamp duty, then the same cannot be refunded. Units will have to obtain an exemption certificate and not pay the duty in the first place itself. 

Another key incentive is the power tariff, which comes in two forms – one is companies being allowed to avail of industrial tariff rather than the commercial tariff, which is a significant INR 4-5 per unit change and also an INR 1-2 rupee reimbursement on per unit of the power consumed.

There are smaller incentives also such as expenditure-linked subsidies and employment-linked subsidies. There are also some non-fiscal measures like open access electricity. Rental assistance similar to those offered in Gujarat has also been proposed under this policy, but the detailed guidelines are yet to be announced.

Kanchan: The incentives seem quite attractive, making the policy all the more encouraging. Any procedural aspects that you would like to highlight here?

Bhavesh: The policy aims to simplify the procedural aspects of claiming incentives. This has to be done through an online, unified, and integrated single-window platform for the IT sector. The portal will include registrations and applications pertaining to service registrations, incentives, general information such as the policy, any subsequent government resolutions, incentive calculators, etc.

Kanchan: These developments clearly show the government’s intent towards bringing in ease of doing business.

Bhavesh: Absolutely, Kanchan.

Kanchan: With your practical experience of working on various incentives projects in India, would you like to give some perspective on where Maharashtra's IT/ITES policy stands compared to other states?

Bhavesh: Like Maharashtra, most other states have a dedicated IT policy in place. Most of the incentives offered are through exemptions of stamp duty and electricity duty, supply of power at industrial rates and lease/rental assistance. States like Uttar Pradesh, Haryana, and Odisha also have a policy dedicated to data centers. However, what sets Maharashtra apart is that it has one of the most forward-looking policies in place in this sector. While incentivizing general IT operations like back office, it also considers data centers, AVGC units and emerging technologies, which we discussed. This is not present in other states’ policies as incentives are granted on a very general basis for IT sector as a whole. To conclude, the incentives quantum as well as the non-fiscal incentives make Maharashtra a very attractive investment destination for IT and ITES units.

Kanchan: Thank you for sharing these interesting insights and explaining some of the important aspects of the policy to us. I think we have left enough points for IT/ITES companies to ponder upon when they are thinking about any new investment.

Bhavesh: Thank you so much, Kanchan, for this opportunity.

Kanchan: On that note, we have come to the end of this episode on the Maharashtra IT/ITES policy. This will be followed by many more episodes on various incentive policies offered by central and state governments. If you would like us to explore any specific topic in relation to state or central incentives, please leave your suggestions and we will try to address it in our next episodes.

Thank you for listening in. Until next time, this is Kanchan signing off.