Finance ministry on Thursday ruled out any profit-linked tax benefit to special economic zones (SEZs) under the proposed Direct Taxes Code (DTC), aimed at reforming tax structure in the country. “There will be no profit-linked deductions for special economic zones under Direct Taxes Code. But SEZ developers and units may still get investment-linked tax deductions,” revenue secretary Sunil Mitra said in an interview.
The revised discussion paper on DTC released recently said profit-linked deductions are distortionary in nature as they create an incentive to inflate profit as well as to transfer profits from a taxable entity to a non-taxable one.
“Therefore, it has been decided not to extend the scope or the period of profit-linked deductions,” it said, adding such exemptions also lead to tax evasion and avoidance.
Mitra said existing SEZs will continue to get residual tax benefits committed under the SEZ Act which came into effect in 2006. Under the SEZ Act, units get total income tax exemption on export profits for the first five years, and 50% exemption for the next five years. The developers get 100% income tax exemption for a block of consecutive 10 years of the first 15 years.
Many major developers and export promotion councils have approached commerce ministry to highlight the possible adverse impact of the DTC on SEZ projects. After the representations from developers and export promotion bodies, commerce secretary Rahul Khullar met Mitra on Wednesday to discuss the issue. Both were tight-lipped over the outcome of the meeting.
Mitra said it is not correct to say units in SEZ cannot get investment-linked deductions. There are reports that commerce minister Anand Sharma is likely to meet finance minister Pranab Mukherjee on the issue and Khullar is confident of a compromise solution.