Basic Understanding:
The government has notified various specified areas as Special Economic
Zones (“SEZ”) or Free Trade SEZones under the provisions of Section 3 and
Section 4 of the Special Economic Zone Act, 2005 (“SEZ Act”). Section 27 of the
SEZ Act provides that “the provisions of the Income-tax Act, 1961 (“the
Act”), as in force for the time being, shall apply to, or in relation to, the
Developer or entrepreneur for carrying on the authorized operations in a
Special Economic Zone or Unit subject to the modifications specified in the
Second Schedule (2nd Schedule)”. 2nd Schedule to SEZ
Act provides the modifications made under the Income tax Act, 1961 for the
purpose of giving some relaxations to the SEZ Unit. The same, inter-alia,
includes the introduction of Section 10AA of the Income tax Act, 1961 w.e.f.
financial year 2005-06. We will understand the provisions of Section 10AA of
the Income tax Act, 1961 in this article and also the relaxations and
exemptions given to SEZ under Income tax laws.
B. Entities eligible for deduction and Period of deduction under Section
10AA of the Act:
Eligible Entities:
An entrepreneur,
who begins to manufacture or produce articles or things or provide
any services during the period beginning from 1st April, 2005 to 31st March, 2020,
shall be eligible to take a deduction under section 10AA with
respect to the export turnover of his unit located in SEZ.
Period of Deduction:
The deduction under Section 10AA of the Act if allowed to the eligible
entities:
·
100% of the Profits and Gains from exports from such unit – FOR FIRST
FIVE YEARS;
·
50% of the Profits and Gains from exports from such unit – FOR NEXT FIVE
YEARS;
·
50% of the Profits and Gains from exports from such
unit – FOR NEXT FIVE YEARS provided that the same has been debited from
Statement of Profit and Loss and credited to a reserve called “Special Economic
Zone Re-investment Reserve Account”.
Analysis:
1. Deduction is available for a period of maximum 15 years from the year
in which the entity has commenced the manufacturing or provision of services.
2. The deduction under Section 10AA of the Act is allowed to the
assessee from the total income computed as per the Income tax provisions.
Hence, the deduction is allowed to the maximum of total income of such assessee
– Amendment made by Finance Act, 2017.
3. Units which have already availed the deduction under Section 10A of
the Act for a consecutive period of 10 years are not eligible to claim this
deduction.
4. Entities engaged in services in relation to Computer Software
are also eligible. Further, the profits and gains derived from on
site development of computer software (including services for development of
software) outside India shall be deemed to be the profits and gains derived
from the export of computer software outside India.
C. Calculation of deduction amount under Section 10AA of the
Act:
The amount of deduction allowed under Section 10AA of the Act will be
computed as under:
|
Particulars
|
INR Amount
|
|
A. Profits derived from eligible unit
|
XXXX
|
|
B. Export turnover of such unit
|
XXXX
|
|
C. Total Turnover of such Unit
|
XXXX
|
|
D. Amount of deduction under Section 10AA
|
A/C*B
|
Notes:
1. Export turnover means the consideration in respect
of export by the undertaking brought into India by the assessee but does
not include freight, telecommunication charges or insurance attributable
to the delivery of the articles or things outside India or expenses, if any,
incurred in foreign exchange in rendering of services (including computer
software) outside India.
2. The Income in relation to Export benefits will not be allowed as
deduction under Section 10AA of the Act as per Supreme Court Judgment in case
of Liberty India.
D. Utilization requirement of Special Reserve created:
Permitted Purposes:
Section 10AA (2) provides that the amount credited to the Special
Economic Zone Re-investment Reserve Account is to be utilized:
·
for the purposes of acquiring machinery or plant which
is first put to use before the expiry of a period of three years following the
previous year in which the reserve was created – means within three
years, the machine is required to be acquired and put to use; and
·
until the acquisition of the machinery or plant as
aforesaid, for the purposes of the business of the undertaking other than
for distribution by way of dividends or profits or for remittance outside India
as profits or for the creation of any asset outside India.
AND
·
Form 56FF is required to be filed to the Income
tax department duly verified by Chartered Accountant – Online Filing Available.
If above conditions not fulfilled
If the amount of reserve is not utilized within the prescribed time
limit or utilized for any non-permitted purpose, then the amount not so
utilized shall be deemed to be profits:
·
If amount is utilized for a non-permitted purpose – IN THE YEAR OF
UTILIZATION.
·
If amount is not utilized within the time limit – NEXT YEAR TO THREE
YEARS COMPLETION.
E. Other Conditions:
·
Unit of SEZ shall not be formed by splitting up or reconstruction of a
unit already in existence.
Relaxation to Software Companies and ITeS (IT Enabled Services):
Circular 14/2014 – 08.10.2014:
The Companies engaged in the development of Computer Software and ITeS
can take the benefit of any of the below two options in order to transfer
technical manpower (the same will not be deemed as formation of SEZ by
splitting up of any existing unit):
·
50% of the total technical manpower of the NEW SEZ UNIT can be the
persons transferred from the old units (either in SEZ or not); OR
·
Any number of technical manpower can be transferred from OLD UNITS to
NEW SEZ UNITS provided that the entity is required to demonstrate the total
addition of technical manpower at the enterprise level being at least 50% of
the total technical manpower of the SEZ unit.
·
It is not formed by transfer of old machineries to new business except
that Second hand imported machinery can be used in the SEZ unit and other old
machineries cannot be more than 20% of the total plant and machinery.
·
Where a deduction under this section is claimed and
allowed in respect of profits of any of the specified business, referred to in
section 35AD, for any assessment year, no deduction shall be allowed under the
provisions of section 35AD in relation to such specified business for the same
or any other assessment year.
F. Some Important Points:
·
Physical relocation of SEZ unit from one SEZ area
to another will not debar any entity to get deduction under this Section.
·
Separate books of account are not required to be
maintained. However, AO can call for the details separately for such SEZ unit.
·
In case the SEZ unit has been sold by way of slump
sale, then also the deduction will be available to the buyer for the unexpired
period.
·
Any R&D service embedded in the “Engineering
and Design” with respect to Computer Software will be covered under “computer
software”.
·
SEZ UNITS ARE LIABLE TO PAY TAX UNDER
MINIMUM ALTERNATE TAX (MAT) UNDER SECTION 115JB OF THE INCOME TAX ACT, 1961.
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