In a significant relief to the IT industry, the Central Board of Direct Taxes has said IT and ITeS units that shifted operations to special economic zones will be able to enjoy the tax sops under the scheme as long as their transferred technical manpower to the new unit is less than 20% of existing workforce.

This clarification seeks to settle the issue on companies shifting operations to SEZs to take advantage of the profit linked exemptions available under the policy that was leading to increased litigation.

The new government had promised to review the overall SEZ policy to give a new lease of life to these tax-free zones that have failed to takeoff as envisaged. Apex direct taxes body's clarification comes under the Section 10AA of the I-T Act, 1961, that provides for deduction in respect of the profits derived by a unit set in SEZ from export of computer software or from providing ITeS.

The tax exemption is available if the new SEZ is not formed by split-up or reconstruction of an existing business or by transfer of used plant or machinery. However, the deduction is available if the earlier used plant and machinery does not exceed 20% of total value of the plant or machinery used in new business.

However, tax authorities had in a number of cases denied the tax benefits if technical manpower from the existing units had been transferred or redeployed to the new unit.

An instruction issued by the board stating that there is no bar on transfer of manpower to SEZ units added to the confusion in the industry.

This prompted the industry to take up the issue with the board. It subsequently represented to the Rangachary committee, set up by the previous government, that there is a limited pool of software developers of skilled, talented and experienced manpower with domain knowledge.