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Companies can now transfer manpower from existing units to SEZs without losing tax benefits: Fin Min
October, 10th 2014

Information technology and IT-enabled services sectors got a substantial relief with the finance ministry saying that companies will be able to transfer or redeploy up to 50% of manpower from existing units to new ones in special economic zones (SEZs) without losing any tax benefits.

The clarification issued by the Central Board of Direct Taxes (CBDT) under the finance ministry comes after intense lobbying by the industry and seeks to clears the air on the availability tax benefits to the IT companies that have set up parallel operations in SEZs to take advantage of profit-linked exemptions available under the policy.

Section 10AA of the Income Tax Act, 1961, provides for deduction in respect of the profits derived by a unit set up in an SEZ from exports of computer software or from providing ITeS.

However, this tax exemption is not available if the unit is formed by splitting or reconstruction of an existing business or by transfer of used plant or machinery. CBDT has said mere transfer or redeployment of technical manpower from an existing unit of a taxpayer to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, provided the number of technical staff so transferred does not exceed 50% of the total manpower actually engaged in developing software at any point of time.

Companies can now transfer manpower from existing units to SEZs without losing tax benefits: Fin Min The earlier limit was set at much lower 20%. The application of the provision had led to litigation as also concerns about the reopening of past assessments in cases of transfer or redeployment of technical manpower from existing units to new SEZ units on the premise that it was tantamount to splitting up or reconstruction of the existing business.

Industry grouping Nasscom had lobbied the government on the issue. The new government has assured investors about a non-adversarial tax policy and experts and the industry said the clarification was a step in this direction.

"It is consistent with the stated policy of the government of removing tax aggression because it specifically provides that past assessments will not be reopened," said Dinesh Kanabar, deputy CEO, KPMG. "This re-clarification is a welcome step and reflects the progressive thinking of the new leadership at the helm, which is able to adapt itself to the business nuances and make positive changes for the well-being of the IT sector," said Rajiv Chugh, tax partner, EY.

Nasscom said the circular allowed flexibility to account for total manpower at the enterprise as well as unit level, which is a great step to ease the technicalities involved in the process.

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