Sunset date for claiming Income Tax exemption for SEZs – Extension Needed

Sunset date for claiming Income Tax exemption for SEZs – Time to further extend the sunset date mentioned under Section 10AA of the Income Tax Act, 1961 considering difficulties faced by SEZ Units to commence the production due to restriction placed for controlling pandemic Covid-19.

Article explains Sunset date for claiming Income Tax exemption for SEZs, Sun set clause for Income Tax Exemption and   Issues which are hampering start of commercial by revised sunset date of 30th June 2020 or why Government should further extend the sunset date mentioned under Section 10AA of the Income Tax Act, 1961.

Sunset date for claiming Income Tax exemption for SEZs

Time to further extend the sunset date mentioned under Section 10AA of the Income Tax Act, 1961 considering difficulties faced by SEZ Units to commence the production due to restriction placed for controlling pandemic Covid-19.

Special economic zones (SEZ) in India are a popular investment destination for many multinationals, particularly exporters. SEZs in India are areas that offer incentives to resident businesses. SEZs typically offer competitive infrastructure, duty free exports, tax incentives, and other measures designed to make it easier to conduct business.

Some incentives for setting up a SEZ in India include:

• Duty free import and domestic procurement of goods for the development, operation, and maintenance;
• 100 percent income tax exemption on export income for first five years, 50 percent for five years thereafter, and 50 percent of the export profit reinvested in the business for the next five years;
• Exemption from the goods and services tax (GST) and levies imposed by state government (supplies to SEZs are zero rated under the IGST Act, 2017, meaning they are not taxed);
• Single window clearances for all state and federal government approvals;
• Exemption in electricity duty and tax on sale of electricity by certain states in India;
• Presence of customs officer in the SEZs to facilitate and expedite the trade processes; and
• Some states also offer land to SEZ developers at concessional rates to promote industries in accordance with the state’s prevailing Industrial Policy.

Sun set clause for Income Tax Exemption

As mentioned above, the SEZ Units enjoys the income tax exemption under Section 10AA of the Income Tax Act, 1961. According to Section 10AA of the Income Tax Act, units in SEZs get a phased tax-holiday for a period of 15 years. The benefit is available to only those units that start operations before Jun 30,2020. The clause promises 100 per cent Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50 per cent for next 5 years thereafter and 50 per cent of the ploughed back export profit for next 5 years.

This section has sun set clause, which states that Units which commences the commercial production on or before 31^st March 2020 will be entitled for the income tax exemptions. In other words, any unit which commence commercial productions / manufacturing will not be entitled for the income tax exemption under Section 10AA of the Income Tax Act, 1961.

Considering the current unprecedented situation arisen due to Covid-19 and pan India lockdown announced by the Central Government, the sun set date was extended from 31^st March 2020 to 30^th June 2020 vide ordinance passed by the Central Government (Taxation and other laws (Relaxation of certain provisions) Ordinance, 2020). The extension of the sunset date from 31^st March 2020 to 30^th June 2020 considering in mind hardship expected to be faced by the industry.

The date was extended to 30^th June 2020 considering the initial period of lockdown, however currently the country wise lockdown has been extended with limited opening up till 30^th June 2020. Further, every state has power to restrict the movement of the people and operations as per the situation in the state.

Considering the sun set clause many companies accelerating either the setting up or expansion of their plans to meet the cut off date of Jun,30 2020 to be eligible for tax holiday as it is the direct tax benefit. We would like to mention that still the SEZ Units are still facing below issues which is hampering start of commercial by revised sunset date 30^th June 2020.

Issues which are hampering start of commercial by revised sunset date of 30^th June 2020

1. Shortage of Manpower:

Post Covid-19 Lockdown, the manpower started moving to their home cities from their work cities. This was not just limited to intra state movement but also lot of interstate movement happened. Further, the full manpower still cannot resume the work due to limitation in movement of people from one city to another. This has resulted in acute shortage of manpower for full function of the unit. Though the SEZ Units could function but due to shortage of manpower, none of these units could function with full capacity. The shortage of manpower severely impacted the project implementation timelines. Specially, the new / upcoming units are facing incalculable delays in starting production.

2. Restriction on movement of Foreign Technicians in India

As part of measure to control Covid-19 pandemic, the Central Government banned inward movement of foreign nationals. All the visa issued were cancelled and the landing of international flights was suspended. The suspension of international flights continues and expected to continue till 30^th June 2020.

Though the suspension of international travelers is need of hour, but it also had unintended impact of movement of skilled foreign technicians which is critical for implementation of new projects wherein there are imported machines. Again, this impacted project timelines and delayed starting of the project.

3. Restriction on domestic suppliers to supply capital goods, raw material and other goods.

Any unit is dependent on the local sourcing of the material. The “Unlock-1” has started from 1^st June 2020 but still different states have preferred to delay opening up of all the establishments. This has resulted in impact on local sourcing immensely. The local suppliers are not working to its full extent owning to multiple reasons some of them are mentioned in this also. This impacted project timelines and delayed starting of the project.

4. Shortage of funds during this period

It is well known fact that the lockdown has resulted into shortage of funds as the economy came to standstill. The RBI has taken up various steps to ease out the liquidity issue in the economy, but it would take some more time to get hold of funds for capital investments as the priority of the companies will be first to manage working capital. Restriction on fund flow certainly slowed down the project implementation.

The current lockdown position is unprecedented, it has impacted on basics on which economy / industry runs. Due to the restrictions, the units are still not able to function with full strength owning to situations which are beyond their control. Therefore, it is practically impossible for the SEZ units to commence the production by 30^th June 2020, the date set to claim Income Tax exemption under Section 10AA of the Income Tax Act, 1961.

SEZs are the major source of foreign exchange for India and the share of SEZ exports in India’s total exports value has grown to around 30 per cent in 2018-19. SEZ established in India have provide huge investments, export potentials and employment generation over the last periods. Considering the pandemic situation, it is appreciable that the Government authorities are continuously issuing notifications/circulars to give some relief in SEZ regulations, various measures to help exporters deal with the slowdown and policy steps for different sectors.

As far as direct tax benefit for SEZ units, any new SEZ Unit commencing production after 30th June 2020 will be deprived of income tax benefits owing to reasons beyond their control. The extension given for period of 3 months is not sufficient, due to extension lockdown period in India.

Hence, entire SEZs eagerly waiting and appealing to the Central government to extend the sunset date from 30^th June 2020 to 31^st December 2020 for the SEZ Units which has obtained LOA before 31^st March 2020. This will help the deserving SEZ Units to claim income tax-holiday under Section 10 AA of the Income Tax Act, 1961. The extension of the tax-free window to remain operational for some time will help companies, battle the downturn emerging from the latest global pandemic and boost their operations in full swing to earn foreign exchange and export orders which is in line with “Atmanirbhar Bharat”.