Pranab to talk to PM on SEZ tax tangle

External Affairs Minister Pranab Mukherjee, who heads an Empowered Group of Ministers (EGoM) on special economic zones (SEZs), is likely to consult Prime Minister Manmohan Singh to resolve the dispute between finance and commerce ministries over tax exemption for export profits from the zones.

The EGoM has failed to arrive at a decision on the Income Tax Act’s Section 10 AA, which provides tax exemption on profits earned by units in SEZs.

While the commerce ministry wants export profits to be determined on the basis of the turnover of an SEZ unit, the finance ministry wants to take into account the company’s total turnover, including from the non-SEZ units. This, according to the commerce ministry, would reduce the exemption that was promised earlier.

The group of senior ministers met on October 30 but sources said Mukherjee did not want to take a stand on the issue. “Mukherjee said he would discuss with the prime minister,” said a government source in the know. Decisions taken by the EGoM do not require the approval of the Union Cabinet.

The EGoM is likely to meet at a later date, probably after Mukherjee discusses the issue with the prime minister.

The issue is of great significance to firms that have presence in both SEZ and non-SEZ units. Software companies like Infosys Technologies Ltd and Wipro Ltd have presence both inside and outside SEZs. Also, income tax benefits under the Software Technology Parks of India scheme will get over on March 31, 2010, and information technology companies have been opening most of their new operations in SEZs.

SEZ units and the commerce ministry argue that the current literature of the controversial Section lowers the tax exemption that the zones are eligible for. The SEZ Act of 2005 provides the zones 100 per cent income tax deduction on export profits in the first five years of operation.

But Section 10 AA says the export profit has to be taxed in proportion to the unit’s contribution to the company’s turnover.

Companies argue that the export profit of an SEZ unit should be computed in proportion to the turnover of the unit and not the entire company. This is because the present arrangement eats into the income tax deduction.

According to sources, the commerce ministry has been arguing that this is an anomaly, while the finance ministry says this is a conscious decision. “The finance ministry told the EGoM that the present arrangement will discourage shifting of existing work by companies to their SEZ units. But the commerce ministry is saying there have been no cases of misuse,” said the source.