A. Basic Understanding:
The government has notified various specified areas as Special Economic Zones (“SEZ”) or Free Trade SEZones under the provisions of Section 3 and Section 4 of the Special Economic Zone Act, 2005 (“SEZ Act”). Section 27 of the SEZ Act provides that “the provisions of the Income-tax Act, 1961 (“the Act”), as in force for the time being, shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule (2nd Schedule)”. 2nd Schedule to SEZ Act provides the modifications made under the Income tax Act, 1961 for the purpose of giving some relaxations to the SEZ Unit. The same, inter-alia, includes the introduction of Section 10AA of the Income tax Act, 1961 w.e.f. financial year 2005-06. We will understand the provisions of Section 10AA of the Income tax Act, 1961 in this article and also the relaxations and exemptions given to SEZ under Income tax laws.
B. Entities eligible for deduction and Period of deduction under Section 10AA of the Act:
An entrepreneur, who begins to manufacture or produce articles or things or provide any services during the period beginning from 1st April, 2005 to 31st March, 2020, shall be eligible to take a deduction under section 10AA with respect to the export turnover of his unit located in SEZ.
Period of Deduction:
The deduction under Section 10AA of the Act if allowed to the eligible entities:
1. Deduction is available for a period of maximum 15 years from the year in which the entity has commenced the manufacturing or provision of services.
2. The deduction under Section 10AA of the Act is allowed to the assessee from the total income computed as per the Income tax provisions. Hence, the deduction is allowed to the maximum of total income of such assessee – Amendment made by Finance Act, 2017.
3. Units which have already availed the deduction under Section 10A of the Act for a consecutive period of 10 years are not eligible to claim this deduction.
4. Entities engaged in services in relation to Computer Software are also eligible. Further, the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.
C. Calculation of deduction amount under Section 10AA of the Act:
The amount of deduction allowed under Section 10AA of the Act will be computed as under:
|A. Profits derived from eligible unit||
|B. Export turnover of such unit||
|C. Total Turnover of such Unit||
|D. Amount of deduction under Section 10AA||
1. Export turnover means the consideration in respect of export by the undertaking brought into India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India.
2. The Income in relation to Export benefits will not be allowed as deduction under Section 10AA of the Act as per Supreme Court Judgment in case of Liberty India.
D. Utilization requirement of Special Reserve created:
Section 10AA (2) provides that the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilized:
If above conditions not fulfilled
If the amount of reserve is not utilized within the prescribed time limit or utilized for any non-permitted purpose, then the amount not so utilized shall be deemed to be profits:
E. Other Conditions:
Relaxation to Software Companies and ITeS (IT Enabled Services): Circular 14/2014 – 08.10.2014:
The Companies engaged in the development of Computer Software and ITeS can take the benefit of any of the below two options in order to transfer technical manpower (the same will not be deemed as formation of SEZ by splitting up of any existing unit):
F. Some Important Points: