Make SEZ scheme attractive

D. Murali
The Hindu Business Line
There is urgent need for the Government to announce an extension of the tax holiday for the IT sector under the Income Tax Act, 1961 beyond March 31, 2010. However, to help in mitigating the impact of the economic slowdown and maintaining the competitive edge of this sector, it will be beneficial to the industry if the tax holiday is extended by a block of two-three years as compared to piecemeal extension, says Naveen Aggarwal, Executive Director, ICE Tax, KPMG.

This will give enough room to the players in the industry to plan their business and would attract long-term investments, he explains, during a pre-Budget interaction. “Even if the government wants to bring this sector in the tax net, it would be worthwhile to do so in a phased manner. A sudden climb in the tax rate from 11.33 percent (at present applicable under MAT) to 33.99 percent may be too steep for the industry to bear.”

The income-tax holiday has been the industry’s saviour over the years and has played a pivotal role in its success, and one of the sectors that has been worst affected in India by the global recession is the IT/ITES sector, Aggarwal observes.

“This sector has perhaps been one of the biggest success stories in India post the economic reforms of 1991. While a lot of credit for the success of this sector goes to the technical brilliance and the entrepreneurial spirit of a young, ambitious India, eager to take on the world, the Government policies have also played a key role in catalysing its growth.”

Excerpts from the interview.
On SEZ issues.

Relaxation on use of old plant and machinery: To make the SEZ scheme more attractive, the Government should consider relaxing the existing stringent conditions for transition of STP/EOU units to SEZs. It is suggested that the limit of 20 percent for transfer of used machinery or plant to the new SEZ unit be increased to 40 percent. This would grant some flexibility to the industry while preserving the intention of law, in the sense that the majority of the total machinery or plant used in the SEZ unit would still be new.

Government SEZs: In the current scenario, SEZs are not a commercially viable option for small and medium sized enterprises (SMEs), as the minimum space available and investment required in the SEZ are substantially high. As a result, these SMEs are largely deprived of the benefits of the SEZs. In order to address this issue the Government may consider setting up SEZs developed/operated by it that allow SMEs to acquire space and invest as per their requirements.

Alternatively, the Government may introduce regulations that make it mandatory for the private SEZ developers to reserve a certain portion of their SEZ space exclusively for SMEs.

Formula anomaly: As per recent news articles, the matter of formula anomaly under section 10AA of the Act is reportedly taken care of. Relevant legislative amendments need to be carried out as soon as possible to avoid confusion on this issue.

While the IT/ITES industry is at the crossroads, awaiting the Budget with bated breath, the present adversity still holds a few opportunities. As some of the biggest companies in the West battle for survival, outsourcing is one of the best ways in which they can achieve further economies in these challenging times. However, in order to help the industry exploit this situation to its advantage, the Government must play its part and fulfill the industry’s wish list. It’s over to the Finance Minister.