TAX NEWS - June 2010

India Tax: Commerce Ministry move to remove tax breaks for new SEZs, income tax (I-T) exemptions

In a move that could affect investments into Special Economic Zones (SEZ), the revised draft for Direct Taxes Code (DTC) has proposed to put an end to profit-linked income tax exemptions to new units that would come up in these tax-free enclaves, according to Commerce Ministry officials.

Terming this proposal as one that amounts to "closing the door on SEZs," Commerce Ministry officials told Business Line that they would soon take this up with the Finance Ministry.

The revised draft has said, "Profit-linked deductions are distortionary in nature as they create an incentive to inflate profit as well as to transfer profits from a taxable entity to a non-taxable one."

The draft said, therefore, it has been decided not to extend the scope or the period of profit-linked deductions. It said such exemptions also lead to tax evasion and avoidance.


SEZ Act

However, the draft said specific provisions for protecting such deduction for the "unexpired period" have been provided in the Direct Taxes Code (DTC) in the case of SEZ developers. The draft added that a similar provision to protect profit-linked deductions of units already operating in SEZs for the unexpired period will also be incorporated.

Under the SEZ Act, units get total income tax (I-T) exemption on export profits for the first 5 years, and 50 per cent exemption for the next 5 years. The developers get 100 per cent I-T exemption for a block of consecutive 10 years of the first 15 years.

Commerce Ministry officials said from the initial interpretation of the revised draft they think that only the developers and existing units will get the income tax (I-T) exemption for the remaining period of the total promised period.

"We want the I-T exemption under the SEZ Act to continue for developers and units. Income tax (I-T) exemption is the only advantage for people to set up units in SEZs. If you take this away, they will be at par with the DTA (Domestic Tariff Area or the area outside SEZs where taxes and duties are applicable) units. A lot of investment that was to come into SEZs may not happen," a Commerce Ministry official said.

The official said that new developers are likely to get investment-linked incentives under the DTC.

Dr L.B. Singhal, Director-General, Export Promotion Council for EOUs and SEZs (EPCES), said, "The new proposals would virtually amount to closing down the SEZ scheme. Only the existing SEZ developers and units might continue, but no new SEZ would be developed."

"The Finance Minister had assured in Parliament that the Government is committed to ensuring the growth of SEZs. We request that for ensuring the same, new SEZ units must be given income tax exemption as provided in the SEZ Act," he said.