Realty boost: IT SEZ developers get flexibility to use vacant space

The commerce ministry has made life easier for developers of special economic zones (SEZs) related to information technology (IT) and IT-enabled services (ITES) as the income-tax holiday given to them is being withdrawn.

The developers, basically real estate players such as DLF and Hiranandani Group, can now use their vacant spaces like domestic tariff areas (DTAs) for purposes other than IT and ITeS, subject to riders and a nod from the Board of Approval. A notification amending the SEZ Rules, 2006, issued by the ministry, said a part of the SEZ could be declared “non-processing area” where free-zone rules would not apply. The non-processing area, which has to be a complete floor, will free companies from various compliance rules that apply to SEZ units. 

These compliances relate to monthly and annual progress reports in terms of investments made, revenues, and foreign exchange earned as well as complete security over goods imported duty-free and movements of persons, etc.

However, SEZ units and IT and ITES units in non-processing areas will require a complete check and security mechanism for goods and movements of persons so that other units do not take some of the existing benefits of free-zone areas.

Currently, developers and units can get exemption from Customs duty on imported goods, exemption from goods and services tax (GST) on services and construction, stamp duty and electricity tariff concessions.

However, developers need to give back proportionate tax benefits they got when they took the SEZs. Tax benefits taken for creating infrastructure and facilities, which would be used by companies in non-processing areas, would also have to be returned, according to the notification.

Experts say the exact guidelines for calculating tax liabilities by the finance ministry would provide industry clarity on whether the new norms are viable or not.

An industry representation had asked the government to treat the tax liability of those zones which are at least 10 years old as zero to factor in depreciation rates.

“We will need to wait and see how the Ministry of Finance prescribes the guidelines for calculating the value of tax benefits because it would include income tax and indirect taxes such as service tax, goods and services tax, and Customs,” said Ajit Krishnan, partner, international tax and transaction services, EY.

Many IT SEZ developers may consider de-processing their areas to be able to make their projects financially viable, he said.

The notification says the processing area has to be at least 50 per cent of the total even after carving out a non-processing zone or a minimum of 15,000 square metres for Category C cities, 25,000 square metres for Category B cities, and 50,000 square metres for Category A cities. Large cities like Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, and Pune are categorised as A, while Ahmedabad, Bhubaneswar, Chandigarh, Coimbatore, Indore, Jaipur, Kochi, Lucknow, Madurai, etc are treated as B. The rest are in Category C.

“This will provide operational and economic viability for developers of SEZs,” said Ritika Longaney Gupta, partner (tax and regulatory), EY India.

SEZ developers had an income tax holiday for 10 years on their income if they had developed the SEZ before April 1, 2017. Also, the units providing IT/ITES from an IT/ITES SEZ were also eligible for a tax holiday provided they set up their unit before April 1, 2020.

The units had an income-tax holiday for the first five years and a 50 per cent tax concession for another five.

Till now, floor-wise denotification of land was not allowed. However, the entire SEZ or a part of the SEZ land was allowed to be denotified.

Vivek Rathi, national director (research), Knight Frank India, said the amendment permitted partial and floor-wise denotification, thus introducing fresh possibilities for utilisation within SEZs, especially benefiting IT and ITES companies as they currently dominated the SEZ landscape.

“In 2023 too, against the backdrop of a tough global environment, the India office market is on track to record healthy transactions growth. Meanwhile, the supply momentum has moderated after the pandemic-related interruptions. This revision in the SEZ Rules will infuse new office supply, which in many cases is in sought-after markets, and further help the cause of office demand.”