Budget may introduce new tax regime for SEZ units

New model suggested under proposed Direct Taxes Code Bill

The Union Budget for 2013-2014 is likely to introduce a new tax regime for units located in Special Economic Zones (SEZs).

This will be on the lines suggested under the proposed Direct Taxes Code (DTC) legislation. Under the new scheme, SEZ units will get investment-led tax benefits, not those based on the profits earned.

Under the new norms, a company will enjoy income tax (I-T) benefits till it recovers the investment made to set up the unit inside an SEZ. It will start paying income tax similar to those paid by units outside SEZs once it recovers the capital.

This is to retain the interest of companies to set up shop inside the tax-free enclaves, a senior commerce department official told Business Standard. However, it is unclear if the new tax regime will apply to existing or new units.

Some experts say the move will largely benefit those with high investments, as in multiproduct or manufacturing SEZs. The investment component for information technology (IT) companies, for instance, are comparatively lower. “This is not practiced anywhere in the world. This will only give rise to more litigation. Only sectors having huge investments will benefit such as in the infrastructure sector but this will be extremely discouraging for IT companies,” said Hitendra Mehta, partner, Vaish Associates, a Delhi-based corporate, tax and business advisory law company.

Under Section 10AA of the I-T Act, SEZ units get full exemption on export income in the first five years, 50 per cent for the next five years and 50 per cent of the ploughed-back export profit for the next five years. Major SEZ developers are concerned about the deadline for profit-linked deductions with the proposed introduction of DTC.

“While we discuss the support given to the export sector, only the tax and duty forgone is highlighted. We forget the contribution made by this sector in bridging the trade deficit. The Ministry of Finance should re-look while finalising the Budget, especially in view of the widening trade deficit year after year…Developers are probably shying away from making investments as they are apprehensive of getting units to establish their units in their SEZs if there is no tax advantage available. The major benefit a unit can get is the I-T benefits,” said P C Nambiar, director of Serum Bio Pharma Park, the country’s first biotech SEZ and chairman of the Export Promotion Council for EOUs (export-oriented units) and SEZs (EPCES).

EPCES has also urged the finance minister to remove the Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on SEZs. Introduction of MAT and DDT last year had adversely impacted SEZ developers and units.

Of the 588 SEZs formally approved, 385 have been notified but only 161 are operational. As of September 30, total investments in SEZs was Rs 219,000 crore and employment generated was 893,465. Export during 2011-12 was Rs 364,477 crore. This sector registered export growth of 36 per cent over the previous period in the first half of this financial year.