SEZ UNITS MAY NOT GET 100% TAX BREAK FOR NOW

Amiti Sen, New Delhi, September 29, 2008
The Economic Times

A number of units in special economic zones (SEZs), especially those set up by IT companies, may not get 100% tax exemption on profits, at least for the next few months. The empowered group of ministers (eGoM) on SEZs does not seem keen to review section 10 AA (7) of the Income-Tax Act which states that only a proportion of profits, based on the proportion of export sales from the SEZ unit to the total turnover of the company, will be exempt from taxation.

The commerce department had asked the eGoM to correct the anomaly in the I-T Act since SEZ units, in theory, were supposed to be given a 100% tax holiday in the first five years of operations. If the eGoM refuses to take a view on the issue, then the matter has to be taken to the Cabinet so that the I-T Act can be amended. “This will not be possible till the new government is in place next year,” an official source said.

While Section 10 AA (7) will not affect those companies that have set up independent subsidiaries in the SEZs, units set up by IT companies under the parent company might get caught in the taxation net. For instance, if an IT unit in a SEZ exports 50% of the company’s total turnover, then the exemption on the profit that it makes from exports will be restricted to only 50% instead of 100% –– notwithstanding the promise made in the SEZ Act.

Speaking to ET, a government source said the eGoM was not comfortable with the taxation issues and wanted those to be addressed at a “more appropriate” forum. “The commerce department has been informed by the eGoM that the issue related to interpretation of Section 10AA (7) of the I-T Act may not be settled within the group. It should be settled elsewhere,” the source said.

According to sources in the commerce department, if the eGoM refuses to sort out the issue, it has to be taken to the Cabinet by the department. If the Cabinet gives its nod to the department’s proposal of giving 100% tax exemption on profits to units in SEZs, then the I-T Act would need to be amended by Parliament.

All this would take some time. Since the government will be in election mode early next year, it is unlikely that anything in the area could be done before the new government is sworn in, sources added.