Acquisition of assets is considered a crucial aspect of both business and individual decision-making, particularly in financial matters. The Indian tax system established specific rules for asset acquisition that affect the transaction’s overall cost and advantage. This blog provides information regarding the consequences of acquiring assets in India.

Types of Asset Acquisition

In India, asset acquisition can be split into two types:
Capital Assets : – Capital Assets includes Real estate, machinery, trademarks, patents and other long-term investments.
Current Assets : – This type of assets includes Inventory, account receivables and other short-term assets.

Each type has its own tax rules under Indian law.

Taxation on Purchase of Capital Assets

Stamp Duty and Charges on Registration: – Buying immovable property can be treated as paying stamp duty and registration charges. States vary in their rates, typically ranging from 5 to 8 percent of the property’s market value. For example, if a company buys an office building in Maharashtra worth INR 10 crores, it will pay around INR 50 to 80 lakhs in stamp duty and registration charges.

Goods and Services Tax (GST):  GST is applicable when purchasing machinery and equipment. The rate can be varied between 12% and 18%. For instance, when the manufacturing company purchases machinery worth Rs. 1 crore, Rs. 12 to 18 lakhs are paid more as GST. GST also allows businesses to decrease the tax as they pay for the purchase of goods and services from the tax on the goods and services sold.

Depreciation: According to the Income Tax Act 1961, depreciation on capital assets is available as a business expense against taxable income. One must understand that every category of assets has different depreciation rates. For example, machinery usually have a 15% per annum rate of depreciation while buildings will have a 10% rate of depreciation. This deduction helps to minimize the taxable income on the basis of which the required tax amount is determined.

Capital Gains Tax: Selling an asset means the profit is subject to capital gains tax. Long-term capital gains (assets held for more than 36 months) are taxed at 20% with indexation benefits. Short-term gains are taxed at the regular income tax rate. For example, if a company sells land bought for INR 50 lakhs

ten years ago for INR 2 crores, the indexed cost might be around INR 1 crore, making a long-term capital gain of INR 1 crore, taxed at 20%.

Taxation on Purchase of Current Assets

Inventory: Inventory purchases are subject to GST. But since inventory is part of the cost of goods sold, the GST paid can be claimed as an input tax credit, so the tax doesn’t become a financial burden.

Accounts Receivable: There are no direct tax implications for acquiring accounts receivable. However, the revenue from collecting receivables is subject to income tax.

 

Deductions and Benefits

Interest on Loan: If the acquisition is financed through a loan, the interest paid can be claimed as a deduction under Section 36(1)(iii) of the Income Tax Act. This applies to both capital and current assets, reducing overall taxable income.

Investment Allowance: Section 32AC provides an investment allowance for companies investing in new plant and machinery. This is an additional 15% deduction on the cost of new assets, provided the investment exceeds INR 25 crores in a financial year.

Example: Imagine ABC Ltd. is planning to acquire a new factory building and machinery. Here’s the breakdown:

  • Building Cost: INR 5 crores
  • Machinery Cost: INR 3 crores
  • Stamp Duty and Registration: 7% on building cost = INR 35 lakhs
  • GST on Machinery: 18% = INR 54 lakhs (claimable as input tax credit)

In the first year, ABC Ltd. can claim depreciation on both the building and the machinery, significantly cutting its taxable income. Plus, any interest paid on loans for the acquisition is deductible, further lowering the tax bill.

By planning ahead and understanding these tax implications, ABC Ltd. can make smarter financial decisions, boosting its growth and profitability.

 

Questions to Understand your ability

Q: What tax is primarily levied on the purchase of machinery in India?

  1. Stamp Duty
  2. Capital Gains Tax
  3. Goods and Services Tax (GST)
  4. Income Tax

Q: When a business buys an office building in Maharashtra worth INR 10 crores, how much is typically paid as stamp duty and registration charges?

  1. INR 1 crore to 1.5 crores
  2. INR 50 lakhs to 80 lakhs
  3. INR 10 lakhs to 20 lakhs
  4. INR 2 crores to 3 crores

Q: Which section of the Income Tax Act allows interest paid on loans for asset acquisition to be claimed as a deduction?

  1. Section 80C
  2. Section 24
  3. Section 36(1)(iii)
  4. Section 44AD

Q: What is the tax rate for long-term capital gains in India with indexation benefits?

  1. 10%
  2. 15%
  3. 20%
  4. 30%

Q: Under Indian law from the following which type of asset includes inventory?

  1. Capital Assets
  2. Fixed Assets
  3. Intangible Assets
  4. Current Assets

Conclusion

Knowing the tax implications of asset acquisition in India is crucial for making smart financial moves. By leveraging tax benefits like depreciation, input tax credits, and investment allowances, businesses can optimize their tax liabilities and improve financial efficiency. Proper planning and compliance with tax regulations ensure that asset acquisitions boost overall growth and profitability.

FAQ's

Stamp duty varies by state and usually ranges from 5% to 8% of the property’s market value. In Maharashtra, for instance, buying an office building worth INR 10 crores means coughing up INR 50 to 80 lakhs.

When you buy machinery, you’re hit with GST, which can be between 12% and 18%. So, for a machine worth INR 1 crore, expect to shell out an extra INR 12 to 18 lakh. But hey, you can claim this as an input tax credit later!

Indexation adjusts the purchase price of assets for inflation, lowering your taxable gains. So, sell an asset held for over 36 months, and your gains are taxed at 20% after indexation benefits. Short-term gains? Those are taxed at normal income rates.

Depreciation lets you write off the cost of capital assets over time against your taxable income. Different assets have different rates: machinery typically depreciates at 15% per annum, while buildings get 10%. This helps lower your taxable income.

Buying inventory? You pay GST upfront. But don’t worry, it’s not a financial burden. You can claim it back as an input tax credit since inventory is part of your cost of goods sold.

Acquiring accounts receivable? No direct taxes there. But when you collect, the revenue is subject to income tax. So, keep your books straight to avoid surprises.

Absolutely! Interest on loans taken for acquiring assets can be deducted under Section 36(1)(iii) of the Income Tax Act. This deduction applies to both capital and current assets, slashing your overall taxable income.

Section 32AC gives a 15% investment allowance for companies investing in new plant and machinery. But there’s a catch – your investment must exceed INR 25 crores in a financial year to qualify.