Tax holiday to Developers undertaking development of an SEZ
Current Situation:
Under the existing provisions of the Income-tax Act, 1961 (the Act), profit based deduction is available to an undertaking developing, operating and maintaining a SEZ notified on or after April 1, 2005 under provisions of the Special Economic Zone Act 2005.
Such undertaking is eligible for a deduction of 100 percent of the profits and gains derived from such business for a period of 10 consecutive years out of 15 years, beginning from the year in which the SEZ is notified by the Central Government.
Further, incase a Developer developing such SEZ on or after April 1, 2005 transfers the operation and maintenance of such SEZ to another Developer (i.e. Transferee Developer), the Transferee Developer becomes entitled to deduction for the remaining period of the 10 consecutive years.
In addition to the profit based deduction, an SEZ Developer is also currently exempt from the applicability of Minimum Alternate Tax liability and Dividend Distribution Tax.
DTC Proposals:
DTC has proposed to bring a paradigm shift in granting tax incentives to SEZ Developers. The DTC has proposed to substitute the profit based incentives prevalent under the existing provisions of the Act with the expenditure / investment based deductions for SEZs notified on or after April 1, 2012. It has also provided for grandfathering of existing profit based deduction to SEZs notified on or before March 31, 2012 for the unexpired deduction period. However, SEZ Developers irrespective of the date of notification of their SEZs, shall no longer enjoy the exemption from Minimum Alternate Tax liability and Dividend Distribution Tax under the DTC. The impact of DTC for SEZs notified on or before March 31, 2012 and on or after April 1, 2012 have been summarized as under:
SEZs notified on or before March 31, 2012
- Profit based deduction under section 80-IAB of the Act would be grandfathered under DTC for the balance unexpired period out of the prescribed 10 years
- While computing profits eligible for deduction, the methodology prescribed under Schedule 12 of the DTC shall be applicable.
- However capital expenditure as well as expenditure incurred prior to the commencement of business shall not be allowed
- The conditions specified under section 80-IAB for availing tax deduction shall continue to be applicable
- Minimum Alternate Tax and Dividend Distribution Tax exemptions shall not be available once the DTC comes into force.
SEZs notified on or after April 1, 2012
- SEZ Developers shall be eligible for claiming expenditure / investment based deduction
- Profits shall be gross earning as reduced by business expenditure in accordance with Schedule 12 of the DTC
- Capital expenditure and expenditure incurred prior to commencement of business shall be allowable as business expenditure, except expenditure incurred on acquisition of any land including long term lease, goodwill or financial instrument
- Minimum Alternate Tax and Dividend Distribution Tax exemptions shall not be available.
Our Comments:
- Postponing of the trigger date for the applicability of investment- based deduction is a welcome development for the SEZ developers. This would provide them with an appropriate window for planning their business operations
- Investment-linked incentive could be a little attraction for low capital intensive projects. Hence, the proposed infrastructure creation for such projects could see a downside
- As per Schedule 12, it is stated that the cost of land, including long term lease will not be considered as an eligible capital expenditure. This means, that an SEZ Developer will not be able to claim a tax relief of the land cost, which is currently possible under the computation of income from business under the present Act. Land cost could be a major component of the project cost. This proposal could severely impact the large SEZs (including those promoted by the Semi – State Government institutions), which follow a model of leasing plots coupled with provision of basic infrastructure
- Even though it has been clearly mentioned in the DTC that an undertaking involved in the development, operation and maintenance of an SEZ may avail of investment based tax benefits, there has been no clear mention as regards the deduction available to a Transferee Developer, thus creating ambiguity as to whether such Developers can avail of investment-based tax benefits under DTC
- Absence of MAT exemption under the DTC would imply that SEZ Developers would need to pay a minimum tax of 20 percent on book profits. The MAT paid by the SEZ Developer could be carried forward and set off against subsequent 15 years. The MAT liability, though credit is available, may result in additional cash outflow issue for SEZ Developers
- Denial of DDT exemption under the DTC could also create a negative impact and may demand a re-look at the IRR projections of SEZ projects
- From a demand perspective, postponing the grandfathering date for the SEZ Units (from March 31, 2011 to March 31, 2014), is a positive development and could result in continued demand, at least, till March 31, 2014. However, removal of MAT exemption to SEZ Units could leave very little attraction for SEZ Units.
SEZ and Real Estate-Undoubtedly, the DTC has done more good to the real estate industry, for instance, relief by way of grandfathering clause and removal of MAT based on Gross assets, there are certain provisions where further clarity would be required. for e.g. DTC has no specific provision for grandfathering of unutilized MAT credit available under the Act.
Relief given to SEZ developers by way of grandfathering clause has been partly nullified by the proposed levy of MAT at a high rate of 20 percent.
