Income-tax holiday for export-oriented units (EoUs), set to expire in 2009, are unlikely to be extended in Budget 2007. The finance ministry, backed by the recommendations of the Prime Minister’s economic advisory council, has rejected the commerce ministry’s demand for extension of the sunset clause for EoUs. The likely rejection would be a big disappointment for EoUs which were positive about an extension since the government is considering extending similar sops to STPIs beyond 2009.

In its reply to pre-Budget proposals of the commerce department, the revenue department said the demand of removal of sunset clause for EoUs could not be met as the PM’s economic advisory council had recommended the deduction under Section 10B should not be extended beyond assessment year 2009-10. The finance ministry argued that since the tax benefit under Section 10A was similar to Section 10B, the recommendation also applies in case of Section 10A.

The commerce department’s argument was that since EoUs earn thin profit margins, withdrawal of the tax incentives will erode profitability of existing EoUs and discourage fresh investments. According to sources, big investments haven’t been made in the EoUs in the past two years, since such investments have long gestation periods and would not be able to enjoy tax sops if the sops were to run out in 2009.

According to ministry sources, since STPIs and EoUs were extended tax benefits under the same chapter of the foreign trade policy, an extension in sops for the latter should also apply to the former. While the government has not decided to extend tax sops to STPIs yet, it is under serious consideration.