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Serving outsiders may trim SEZs tax sops limit
November, 17th 2006

The finance ministry has initiated a dialogue with the commerce ministry to frame a new set of norms, prescribing that only those non-processing activities which are based on the needs of SEZ units will qualify for tax sops. If the proposed norms come into effect, tax sops for SEZ developers would be commensurate to the use of urban infrastructure by the SEZ units. Norms will be laid down to define the needs of SEZ units.

This means that a developer wont get excise and customs duty exemptions for building urban infrastructure in these zones insofar as he intends to offer the services to consumers outside the SEZ. Also, to compute the developers income tax liability, the deduction wont be permitted on the income generated by offering such services to outsiders.

The revenue department feels developers should not be allowed to make available facilities built for SEZ units to others for commercial gains and still claim tax benefits. The department feels that in the absence of these checks, the SEZ policy could prove to be disastrous for the real estate sector, an official said.

The government has already notified the authorised non-processing activities in SEZs. Non-processing area in multi-product SEZs can be up to 65%, while for product-specific zones the upper limit is 50%.

The revenue department now wants to define the extent of tax sops a developer can get vis-a-vis the needs of the SEZ concerned. The commerce ministry is, however, keen to dub the issue as a closed chapter. Why cant the developer get tax sops for creation of the infrastructure and its sale, too? This is anyway less expensive for the government than building the infrastructure on its own, said a commerce ministry official. Finance ministry officials, however, said since a major part of the SEZ land can be outside the processing areas, it is imperative that the tax sops are restricted.

We are in the process of preparing the norms for tax sops with regard to non-processing areas, a revenue department official said. It may be noted that the RBI had virtually endorsed this view, when it initially refused to grant infrastructure status to SEZs and advised banks to treat exposure to SEZ projects at par with lending to commercial real estate projects. The Left parties has also exhibited similar sentiments.

Core facilities in the non-processing segments of SEZs include power plants, sewage plants and roads , schools, hospitals, hotels, cinema halls and shopping malls.

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