Tax sop window for SEZ units to stay open longer

As per the new proposal, units in these zones will get 18 months from the date of last clearance obtained to begin commercial operations and become eligible for the 15-year tax sop. As per the DTC Bill, units are required to commence operations by March 31, 2014, to get the tax incentives, irrespective of whether the state and central agencies give them the clearances. The Bill also says that the developer of the SEZ should get the zone notified on or before March 31, 2010.

Tax incentives for SEZ units include 100% income tax exemption on export profits for the initial five years, 50% for next five years and 50% of profits ploughed back for the last five years. They are also eligible for customs and excise duty waivers and exemption from service tax. Comparable benefits are given to the developers of these zones (see chart).

Out of the 585 SEZs that have got formal approvals so far, just 133 are operational. There are another 42 that have received in-principle approvals. The ministry?s move will be a big relief for developers of these units, many of whom are scrambling to obtain sundry clearances from the Centre and states and begin operations.

The government is planning to introduce DTC from April 1, 2012, replacing the existing Income Tax Act, for a simpler tax legislation with fewer exemptions.

An essential feature of DTC is the shift from profit-linked incentives (which is what most SEZ tax sops are) to a regime of investment-linked incentives, which is considered to be more efficient and targeted better.

The investment-linked incentive would ensure that businesses get accelerated depreciation and is more suited for capital-intensive industries.

?There have been numerous representations from industry bodies and SEZ developers to review the sunset clause proposed for SEZs under DTC. We want to extend the deadline for projects to avail of existing benefits.

A formal proposal may be sent soon to the standing committee for inclusion in the DTC draft,? said a finance ministry official, requesting anonymity.

Though the Bill has been introduced in parliament and is currently with the parliamentary standing committee, changes can be introduced by the finance ministry either through a formal proposal to the committee or through amendment in the draft once it comes back to the administrative ministry after vetting by the committee.

The DTC proposals on SEZs were strongly opposed by the industry, which feels it would defeat the idea of developing clusters of industrial excellence in different parts of the country with prime focus of increasing exports.

?SEZ units will get a big relief from the government’s new proposal as several projects were getting delayed due to late clearances from state governments and the Centre. While this proposal is a welcome step, the government should also do away with the 18.5% minimum alternate tax on SEZs imposed in the DTC Bill,? said OP Kapoor, deputy director general, Export Promotion Council for EOUs and SEZs.

The industry fears that the uncertainty in tax laws and backtracking on the tax exemption commitment will reduce investor interest and affect project implementation. Fifteen SEZs including Satyam Computer Service, MIDC, Bengal Shapoorji Infrastructure Development, K. Raheja Universal, DLF Ltd (3 SEZs), TCG Urban Infrastructure Holdings, Essar SEZ Hazira are already considering denotification. Many more SEZs, which are yet to commence commercial activities are likely to withdraw from the scheme.

With the proposal to impose MAT and dividend distribution tax (DDT) on SEZs, fresh proposals to set up these zones have also dried up. ?The changes would hurt growth of exports, employment and investment very badly,? said an industry expert.

Ever since the enactment of SEZ Act in 2005, these zones have become major sources of foreign exchange earnings. Exports from SEZs registered record growth of 43.11% in 2010-11 at Rs 3,15,868 crores.

Total employment generated by these zones is 6,76,608 while total investments are Rs 2,02,810 crore. Out of 584 formally approved SEZs, 378 has been notified and 133 are operational.

Incentives & facilities offered to units in SEZs:

– Duty-free import/domestic procurement of goods for development, operation and maintenance of SEZ units

– 100% income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first five years, 50% for next five years and 50% of the ploughed-back export profit for next five years

– External commercial borrowing by SEZ units up to $500 million in a year without any maturity restriction through recognised banking channels

– Exemption from central sales tax

– Exemption from service tax

– Single-window nod for central & state-level approvals

– Exemption from state sales tax and other levies as extended by the respective state governments

Major incentives & facilities for SEZ developers:

– Exemption from customs/excise duties for development of SEZs for authorised operations approved by the BoA

– Income tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act

– Exemption from centra sales tax

– Exemption from service tax