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The three-year long wait of companies to avail full income tax benefits on export profits from their SEZ units will come to an end in two months. Official sources said the government has firmed up plans to bring changes in Section 10AA of the Income Tax Act in the forthcoming Union Budget to rectify an anomaly in the wording of the Section that adversely affected SEZ units.

The decision to clear the uncertainty caused by the anomaly is also seen as a stimulus measure to step up investment in SEZ and beat the ongoing slowdown. It will significantly boost the prospects of IT/ITeS sector as it accounts for a majority of the total SEZ projects.

The finance ministry has held discussions with the commerce ministry, industry players and experts in this regard. Senior officials said the Finance Bill 2009-10 would have a view on this. “It would be coming in the Budget,” an official said.

Pramod Bhasin, president and CEO of Genpact, and chairman of Nasscom told FE, “This issue is very important from the point of view of viability of SEZ projects. But I must acknowledge that the government is handling this effectively. Our information tells us that the government is taking care of this (removing the aberration) so that SEZs can function properly.”

In February 2009, the then finance minister Pranab Mukherjee said in the Parliament that the government will look into this issue. Mukherjee, in his speech had then acknowledged the anomaly. Pointing out that it “has resulted in discriminatory treatment of assessee having units located both in SEZ and the Domestic Tariff Area (DTA) vis-à-vis assessee having units located only within the SEZs,” Mukherjee had said, “It has now been decided to remove this anomaly through necessary changes in the Act.”

This anomaly has been in place since February 2006 when the SEZ Act and Rules became operational.

The rectification of the anomaly will be a very big incentive for companies to move into the SEZs as they can keep the tax rebate earned on exports from SEZs separate from similar rebate earned from their units in DTA (or the area outside SEZs in the country where normal taxes and duties apply). As per the Section 10AA, ‘export turnover of the unit’ is divided by the ‘total turnover of the assessee’ for calculation of exemption from income tax on export profit.

Experts said this is currently hurting the units, particularly those of the big IT companies, as in many cases the assessee has units outside the SEZ too. They said the wording of the current provision significantly limits the extent of tax holiday. Due to this Section, big companies with units in the SEZs and outside SEZs, practically do not get any tax holiday.

Export Promotion Council for EOUs and SEZs had proposed that the ‘total export turnover of an SEZ unit’ should be divided only by the ‘total turnover of the SEZ unit’ and not by the ‘total turnover of the assessee company.’ After the aberration is removed, IT companies like TCS, Wipro, Infosys and HCL would not need to set up separate companies for units running in different tax jurisdictions.

For instance, companies in IT sector running units in zones like Software Technology Parks and in SEZs will not need to set up separate shell companies for both areas. Before the year 2000, Section 10A (relating to software technology parks and the erstwhile Export Processing Zones) and Section 10B (relating to Export Oriented Units) of the Income Tax Act were worded as ‘total turnover of the assessee’ regarding calculation of income tax. Later on in Finance Act 2000, the finance ministry issued a clarification that in the context of Section 10A and 10B of the Act, the total turnover of the ‘assessee’ means the turnover of the ‘undertaking’. The ministry said the section shall not have any material relationship with the other business of the assessee outside these zones.

“This issue was debated eight years back and the circular is valid even today. It should be read as total turnover of the ‘undertaking’,” an official said. But wary of revenue losses from tax sops to SEZs, ministry officials were of the view that in the context of SEZs, it was a conscious decision to use ‘assessee’ in Section 10AA of the Income Tax Act.

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June 2024