Sharma, Pranab lock horns on I-T holiday for SEZ units

Written by Rituparna Bhuyan | New Delhi | Updated: Aug 21 2009, 05:31am hrs
A policy measure, which seeks to provide full income tax exemption to units located inside Special Economic Zones (SEZs)has become the cause for yet another point of friction between the commerce ministry and finance ministry. The bone of contention is a corrected tax exemption formula prescribed by Section 10aa of the Income tax Act of 1961, which the commerce ministry feels should be applicable from April 1, 2006, and not 2010, as clarified by the finance ministry in this years Budget presented in July.

Commerce minister Anand Sharma has sent a missive to finance minister Pranab Mukherjee in the third week of July, asking him to ensure that the corrected formula is made applicable with retrospective effect and not prospectively from April 1, 2010 as clarified in the Budget 2009-10 documents. Government sources said commerce secretary Rahul Khullar had also taken up the matter with his peers in North Block.

The old formula, which came in to force from April, 2006, took into account total turnover of the company setting up a SEZ, which includes business inside as well as outside the zones. As a result, companies like Infosys, Wipro and Tata Consultancy Services, which has business setups in SEZs as well as outside, were not enjoying 100% tax exemption promised in the SEZ Act of 2005.

Differences between the commerce and the finance ministry on the tax exemption formula are not new. The issue was referred to an empowered group of ministers, headed by Pranab Mukherjee, during his stint as external affairs minister in the UPA-I regime.

Subsequently, while presenting the interim Budget in February, 2009, Mukherjee-who had taken over as the finance minister-had accepted that the structure of the formula was an anomaly. But rectification of the anomaly was not carried out by the finance ministry.

Finally, in July, 2009, the Budget memorandum clarified that that total turnover of the undertaking and not the assessee would be taken in to account while calculating the export profit, but with prospective effect from April 1, 2010. This meant that between April 2006 and March 2010, exempted export profit of SEZs would be calculated based on the old formula which had the anomaly.

The prospective nature of the clarification is simply not acceptable and the issue has been taken up at the highest level, said a commerce ministry official. Some companies having SEZ-based business met Sharma in the third week of July, when he was in Pune and urged him to take up the issue. SEZ units maintain that the finance ministry clarification on section 10aa of the Income Tax Act is a breach of the intent of the SEZ Act.

An anomaly has to be corrected from the beginning. The intent of the SEZ policy is to provide 100% income tax exemption for the first five years, which was not happening due to the flaw in the formula, said PC Nambiar, of Pune-based Serum Bio Pharma Park, India s first biotech SEZ.

Significantly, the finance minister, while presenting the interim Budget in February, 2009, had accepted that there was flaw in the wording of Section 10 aa of the IT Act. Pointing out that it has resulted in discriminatory treatment of assessee having units located both in SEZ and the Domestic Tariff Area (DTA) vis--vis assessee having units located only within the SEZs, Mukherjee had said.

Experts point that if not resolved, issue could lead to litigation. I cannot understand how an intention (of an clarification) can be prospective and not retrospective. In the past, there has been litigation on clarifications released with prospective effect. Many court judgments have held that a clarification has to be retrospective, said Tapan Sangal, senior manager, PriceWaterhouseCoopers.

Vikram Bapat, executive director, PriceWaterhouseCoopers points out that other clarifications in the Budget memorandum of 2009-10 are retrospective in nature. If the issue goes to courts, it will be interesting to see how it gets interpreted, he said.