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DTC rolls out, ends tax sops
July, 26th 2010

Companies sitting on the fence are trying to see if they can use the eight-month window still available to set up units in special economic zones. Units have to come up before March 31, 2011, to avail of income-tax concessions available for SEZ units.

The second draft of the Direct Tax Code (DTC) has proposed to do away with the tax sops for SEZs units unless these are operational by this date. As a result, there is a spurt in queries, including from countries like the UK and Australia, but investors are not sure if they can have the units operational in eight months.

M S Jagan, consultant, Sri City Pvt Ltd, said, Theres a rush to take up space in the next six months. Developers are also not sure if they would get customers after April. Sri City is a multi-product SEZ coming up in Andhra Pradesh, close to Chennai.

People trying to rush in include those trying to shift from software technology parks to SEZs, or multinationals keen to set up captive outsourcing units in India. Mid-size information technology (IT) firms vying for captive BPO (business process outsourcing) businesses are also keen.

Others who want to move include companies who have some exports but see this rising in future. Once you have a unit, you can expand it later. The expansion will be eligible for tax sops, but not new units, said Hemal Zobalia, executive director, KPMG. For an SEZ to be operational, it must show some exports, said Sri Citys Jagan.

Tapan Sanghal, associate director, PricewaterhouseCoopers, said companies which can demonstrate that they can be operational in eight months are able to pull projects to India. But those who feel they cant are holding back.

Uncertain horizon
Take a high-end walkie-talkie maker, which has units in China and Malaysia and is keen set up a manufacturing unit in India, investing $20 million. Theres no way he can be operational by March 2011. Once things are clearer, he can decide. Today, the incentives given by the SEZ Act are being taken away by the IT Act, said an expert.

The uncertainty in policy environment is hurting investments. Iffco, for instance, is promoting a large agro-processing zone in Nellore in Andhra Pradesh, which will see an investment of over Rs 5,000 crore spread across 2,700 acres. It has already invested around Rs 500 crore, but it is unlikely to invest the rest if the tax sops are taken away.

Though there have been a spurt in queries, the developers are not ready. Of 500 SEZs proposed, only 111 have come up. These, too, are being developed in a phased manner. The developers are not sure if they should go ahead and who will be the takers.

For developers, the changes are severe. Many have spent hundreds of crore in acquiring land and are in the process of developing. Some could finish development by March 2011, but what if there are no takers? That is their biggest grievance, said KPMGs Zobalia. Some mid-way path has to be found for SEZs which have been approved and registered, so that their money doesnt go down the drain.

Sanghal said people who have their plans ready and feel they can be operational in eight months want to move in quickly. Unless theres greater clarity on tax sops, not many would like to take a risk. Investors want to be sure their investments are not jeopardised, said Sanghal.

Theres another problem for IT companies. Henceforth, tax-saving concessions will be given only on investments, which is not good news for the IT industry, as they have no investments. The most SEZs are only on IT, which is why the finance ministry wants to stop giving tax sops to SEZs. But this will also affect the multi-product SEZ developers and units there, who need tax sops, said Jagan.

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