Special Economic Zone Act, 2005

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With an intention to give boost to economic growth, the government has enacted the special economic zone (SEZ) Act, 2005, whereby various fiscal incentives have been introduced for entrepreneurs and developers. One such fiscal incentive provided is exemption from payment of tax on book profit, for an entrepreneur operating a unit in a SEZ or a developer of a SEZ.

The SEZ Act, 2005 inserted sub-section (6) in section 115JB of the Income-Tax Act, 1961 (the Act), which provides that the provisions pertaining to payment of tax on book profit shall not apply to income, which accrues or arises from any business carried on, or services rendered, by an entrepreneur or a developer "in a unit or SEZ".

In a situation where an entrepreneur or a developer is providing infrastructure facilities both inside and outside a SEZ, the issue that needs to be addressed is whether the exemption from payment of tax on book profit applies to the entire profits or only to proportionate profits derived from services rendered inside a SEZ?

Considering the broader objective of the SEZ Act, it appears that answer to the subject question should be in affirmative. As long as business is carried on from the SEZ, it should not make a difference whether the services are rendered inside or outside the SEZ.

This view may also find support from the fact that the exemption from book profit tax is provided by way of non-application of section 115JB in-toto, rather than mere exclusion of income and expenditure relating to undertaking eligible for tax holiday under section 10AA or section 80IAB of the Act. It may be noted that section 115JB provides for exclusion of income and expenses relating the STPI unit/ EOU unit, the profits in respect of which are eligible for tax holiday.

Another aspect that needs consideration is exemption from dividend distribution tax (DDT) granted to a developer of the SEZ. Such exemption is granted in respect of total income of an undertaking or enterprise engaged in developing and operating or developing, operating and maintaining a SEZ.