The government has decided to extend more tax breaks to companies in special economic zones (SEZ), with the finance ministry giving its nod to allow income-tax benefits on export profits for 20 years instead of 10 years. Units in SEZs are allowed income-tax deduction on export profits for 10 years under Sec 10 A of the IT Act 1961.
The Grinch might not have stolen X-mas but early Lok Sabha elections have, almost definitely, robbed the government of the Budget, its season for showing goodwill and showering gifts on the discerning and the deserving.
So why wait till the end of February and the beginning of an inevitable code of conduct handed out by the election commission to start doing the good work? The government has set in motion a process of policy and tax-rate fine-tuning and exporters are one of the first set of beneficiaries. Inter-unit sales in the SEZs will also be treated as exports for income tax purposes. Although this was an Exim policy announcement, it was not brought into force by the revenue department.
The relevant amendments to the I-T Act 1961 will be done through an SEZ ordinance, said a senior finance ministry official. The proposed move is expected to provide some cushion for exporters against the backdrop of the appreciation of the rupee vis-a-vis the dollar. Currently, a tax deduction under Sec 10 A is allowed on export profits of units in free trade zones, STP, electronic hardware technology park engaged in the manufacture or production of articles, things or computer software. No deduction is allowed to any undertaking beyond the assessment year 2009-10.
However, for a unit in an SEZ, IT deduction is available even beyond the assessment year 2009-10. These units enjoy a deduction equivalent to 100% of the export profits for the first five years, 50% of profits for the next two years. A further deduction equivalent to 50% of the export profits is available for three consecutive years, with re-investment conditions.
The deduction is set to be extended by another 10 years. For the first five years, the units will continue to be eligible for a 100% deduction on export profits. A deduction equivalent to 50% of the export profits will be available for the next five years (instead of two now). And a further deduction up to 50% of the export profits is set to be granted for 10 consecutive years (instead of three now), subject to the reinvestment conditions.
The conditions are that the amounts credited to the reserve account are to be utilised for acquiring new plant and machinery which will have to be used before the expiry of a period of three years. Till the acquisition of plant and machinery, the reserves can be utilised only for the purposes of the business of the undertaking. The IT Act makes it clear that the reserves cannot be used for distribution of dividends or profits or for remittances outside India as profits or creation of any assets outside India.
In the official amendments to the Finance Act 2003, the government extended 100% tax exemption to off shore banking units set up in SEZs for three years and a 50% exemption for the next two years. Corporate tax benefits are reckoned to be better in the Indian SEZs compared to China. China's SEZs offer a two-year tax holiday for manufacturers followed by a three-year discount of 50% on corporate tax.
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