The much-awaited revised Direct Taxes Code (DTC) Bill introduced in Parliament on Monday proposes SEZ units to be entitled for the grandfathering of the tax benefits in the regime. However, the issue that remains unanswered is whether new units set up under DTC regime would be entitled for tax holiday.

Further, DTC has introduced ?investment-linked incentive scheme? from the existing ?profit-linked incentive scheme? which is a paradigm shift in the ideology of policymakers. The initial draft of the code was silent on whether the existing SEZ units, if allowed for tax holiday, would be allowed to claim profit-linked tax incentive or investment-linked tax incentive as introduced in the regime.

The new Bill has provided some relief to the units in SEZ.

DTC Bill has provided deduction under Section 10AA of the existing Income Tax Act which will be available to the SEZ units that begins to manufacture or provide any services on or before March 31, 2014. Therefore, SEZ units which will be set up till March 31, 2014 will be entitled to claim profit-linked tax holiday as provided under the existing Income Tax Act. Similarly, SEZ developers will be grandfathered with profit-linked tax holiday for the unexpired tax holiday period by March 31, 2012.

Now, one may assume that SEZ units, which will be set up post March 2014, will be entitled for investment-linked tax incentive as provided in DTC. It appears that policymakers want to do away with such profit-linked investments in a phased manner. But it is early to comment on this.

While the Bill provides a relief by allowing profit-linked tax holiday to the SEZ units, it has also brought the book profits of SEZ units under the minimum alternate tax (MAT) at the rate of 20% under DTC regime. This may be a blow to the units as currently under the existing Income Tax Act SEZ developers/units are not liable to pay MAT. Therefore, SEZs move away from a 0% tax regime to 20% tax regime instead of a full 30%. MAT impact may somewhat diluted since the Bill allows MAT credit for subsequent 15 years.

A welcome step for SEZ units/SEZ developers, the Bill gives them extension of claiming tax holiday as per existing Income Tax Act albeit with narrower benefits. So it seems that SEZs will have a life after all.

The writer is tax partner, Deloitte. Also contributed by Ramaaranjan Mohanty, senior manager (international tax), Deloitte