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Finmin firm on taxing SEZ units

Units in SEZs continue to be haunted by the implication of section 10 AA (7) of the Income-Tax Act which could prevent them from enjoying a complete tax exemption on profits.

, ET Bureau|
Sep 08, 2008, 12.40 AM IST
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NEW DELHI: Units in special economic zones (SEZs) continue to be haunted by the implication of section 10 AA (7) of the Income-Tax Act which could prevent them from enjoying a complete tax exemption on profits in the first five years as promised in the SEZ Act.

The finance ministry has said that the provisions of the section ��� which state that only a proportion of profits, based on the proportion of export sales from the SEZ unit to the total turnover of the company, will be exempt ��� was very clear in its intention and there was no room for any further clarification.

The commerce & industry department will now, as a last resort, ask the empowered group of ministers on SEZs to make suitable changes in the SEZ Act so that units are not prevented from enjoying 100% tax concession as promised.
Sources said the finance ministry intended to do nothing to change the interpretation of the section as the meaning was very clear and it could not be re-interpreted in any way.

If section 10 AA (7) is implemented, it would mean that if a unit exports 50% of the company���s total turnover, then the exemption on the profit that it makes from exports will be restricted to only 50% instead of 100% promised in the SEZ Act.

The commerce department and SEZ units argue that there is an anomaly in the definition as the formula considers the total turnover of the assessee (which may have more than one unit both inside and outside SEZs) instead of the total turnover of the SEZ unit to compute export profits of the SEZ unit.

Interestingly, subsection (4) of section 10 B of the I-T Act on the same issue pertaining to 100% EOUs is differently worded. In this case, the ratio of the export profit and the total profit of the undertaking is compared with the ratio of the export turnover with the total turnover.

According to commerce secretary G K Pillai, there is a need to amend the SEZ Act to make the necessary changes as SEZ units cannot be made to pay taxes on their profits because of the wording of the Act. ���We will ask the EGoM to recommend an amendment to the SEZ Act,��� he said.

Commerce department officials point out that the exemption on export profits of SEZ units was the most important feature of the SEZ Act and could not be diluted.

As per the Act, SEZ units that start producing articles or providing services on or after April 1, 2005, will be eligible for a deduction of 100% of export profits for the first five years from the year in which such manufacture or provision of services begins.

A deduction will be allowed for 50% of export profits for the next five years while for the following five years, units will get up to 50% deduction on reinvested profits.
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