Special Economic Zones (SEZ) are likely to get total exemption from tax on their profits soon.

The next meeting of the empowered group of ministers (EGoM), scheduled to take place on Friday, would take up the issue of totally exempting the export profits of SEZ units from income tax for a tax holiday period of five years.

Among other controversial matters that are on the agenda is the definition of what constitutes a ?vacant? land and in this context whether it should withdraw the approval given to Adani Group?s multi-product SEZ at Mundra in Gujarat and Essar?s steel SEZ for alleged violation of the rules regarding vacancy of land. Also on the table are categorising SEZs as core sector projects, exempting SEZ units from Minimum Alternate Tax (MAT), doing away with export duty on supply of steel to SEZs, as well as extending Cenvat credit facility to SEZ developers, sources said.

At present, the particular provision that deals with this issue of tax on export profits of SEZ units is Section 10AA of the Income Tax Act. This Section accords income tax exemption to the SEZ Units on the export income. But, as per the Section, export turnover of the unit is divided by the total turnover of the assessee while calculation of exemption from export profit.

Experts said this is currently hurting the units, particularly the big IT companies, as in many cases the assessee has units outside the SEZ. Abhishek Goenka, partner, BMR & Associates, said, ?EGoM has still not made the clarification on Section 10AA of the Income Tax Act and it is one of the main issues plaguing SEZs. The current provision significantly limits the extent of tax holiday. Large companies that has units in the SEZs, practically do not get any tax holiday.?

Export Promotion Council for EOUs and SEZs (EPCES) has proposed that the total export turnover of an SEZ unit should be divided by the total turnover of the SEZ unit only and not by the total turnover of the assessee company.

Regarding Adani Group?s multi-product SEZ at Mundra in Gujarat and Essar?s steel SEZ, the finance ministry had reportedly demanded the withdrawal of approval to these SEZs alleging that those companies were setting up these zones on land that already had existing structures and not on vacant land as per the guidelines.

However, the Attorney General of India had opined against it, saying it was not legally tenable to withdraw approval given to SEZs. Mundra SEZ was notified in 2004, though the SEZ Act and Rules, that has the ?vacant land? condition, became operational only in 2006. Due to the opposition of finance ministry, Mundra SEZ is unable to get any duty exemption on the inputs used for their activities.

The other important issue is that of the finance ministry?s proposal to impose MAT on SEZ units, like it was imposed on Export Oriented Units (EOU). However, since imposition of MAT was not part of the original SEZ policy, commerce ministry has opposed any such change of rules citing that investors have committed huge amounts based on the earlier rules that spared SEZs from MAT.

Also on the EGoM agenda is the proposal to removing lending curbs on special economic zones and give SEZs the coveted ?infrastructure? status, which would help them raise loans at cheaper rates from domestic banks. Within a few months of the operationalisation of the SEZ Act and Rules, the Reserve Bank of India started treating lending to SEZs at par with loans given to the commercial real estate sector, which carries much higher risk weightage than the infrastructure sector, making it difficult for SEZ developers to tap the local debt market.

But due to the ongoing turmoil in the global financial system that is limiting the financing options, the government is likely to take a positive stance on this.

The eGoM will also take up extending Cenvat credit to domestic manufacturer for supplies to SEZ developers, that is on inputs used in finished goods. At present, the Cenvat credit is given only for supplies to SEZ units.

Another important issue is regarding giving exemption from export duty on supplies of steel from domestic tariff area (or DTA?the area outside SEZs and within the country where normal tariffs apply). Sales from domestic tariff area (DTA) to SEZs are treated as deemed exports. The government had imposed export duty on certain steel products to rein in inflation.

But then, the finance ministry?s notification, on imposition of 5-15% export duty on semi-finished and finished steel products, started affecting supplies of steel to SEZs, where there is a huge demand for steel. The commerce ministry has demanded that the export duty be exempted for sale of steel products for ?consumption within the SEZs?.