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IT SEZs must wait for 100% tax exemption
October, 31st 2008

IT may be a long wait for IT SEZs which are looking forward to a review of section 10AA (7) of the Income Tax Act for enjoying 100% tax exemption on profits.

The empowered group of ministers (eGoM) on special economic zones (SEZs), which met on Thursday, has not only deferred a decision on the need for a review, it is also now clear that a change in the section can only happen through an amendment to the Act. Since the Act can be amendment only by Parliament, any change in the current provisions could take several months.

Section 10 AA (7) of the i-t Act states that only a proportion of profits of a SEZ unit, based on the proportion of export sales from the unit to the total turnover of the parent company, will be exempt from taxation.

For instance, if a SEZ unit exports 50% of the companys total turnover, then the exemption on the profit that it makes from exports will be restricted to only 50% instead of 100% as otherwise promised in the SEZ Act. While this will not affect most units in the SEZs as companies have mostly set up independent subsidiaries in the SEZs which are separate entities, big IT companies like Infosys, Wipro and TCS, which have set up units under the parent company, might get caught in the taxation net.

Under the SEZ Act, profits earned by the unit are 100% tax-exempt in the first five years and 50% tax-exempt for the next five years. Units are also eligible for 50% tax exemption on reinvested profits for another five years. Section 10AA (7) is an aberration and that needs to be corrected. The eGoM chairman has heard the points made by everybody and a decision will be taken, commerce and industry minister Kamal Nath said after the meeting. The finance ministry, however, is opposing the move.

Speaking to the media, Mr Nath emphasised that at this point of time (of global slowdown), the government needed to give out signals of enhanced economic activity. It is very important that every step is taken to sustain economic activity, he said. When asked how section 10AA(7) would be changed, the minister said the Income Tax Act needs to be amended in Parliament.

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