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Sunset clause for tax benefits for units in SEZ, except IFSC


APRIL 30, 2018

By Bahroze Kamdin and Vidya Shenoy

THE Special Economic Zones (SEZ) Act 2005 (SEZ Act) aims to provide for the establishment, development and management of Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto. The modifications made to Income-tax Act, 1961 (the Act) vide the SEZ Act were effective 10 February 2006, and included deduction under section 10AA for income of units in SEZ; deduction in respect of profits and gains by an undertaking or enterprise engaged in development of SEZ under section 80IAB, and deduction in respect of certain incomes of offshore banking units and units in International Finance Services Centre (IFSC) under section 80LA, etc.

India's first IFSC is operational in Gujarat International Finance Tec-City (GIFT) which is a multi services SEZ.

Direct Tax benefits to units in SEZ including IFSC

The deductions under section 10AA of the Act and section 80LA of the Act are similar: 100% of profits for the first 5 years; 50% of profits for the next 5 years. Units in SEZ are eligible for additional 50% of profits ploughed back for the next 5 years.

Further, u nits in IFSC, enjoy additional tax benefits – Reduced Minimum Alternate Tax (MAT), from 18.5 % to 9 %, and abolished Dividend Distribution Tax (DDT).

Sunset Clause for tax benefits to SEZ

The Finance Act 2016, paved the path for phasing out deductions and exemptions available to SEZ developers and units in SEZ under the Act:

1. Section 10AA – No deduction shall be available to unit commencing manufacture or production of article or thing or starting to provide services on or after 1 st day April 2020 (financial year 2020-21 onwards).

2. Section 80IAB – No deduction shall be available if the specified activity commences on or after the 1 st day April 2017 (financial year 2017-18 onwards).

The Memorandum to Finance Bill 2016, had proposed that the provisions having a sunset date will not be modified to advance the sunset date and for the tax incentive with no terminal date, a sunset date of 31 March 2017 will be provided either for commencement of activity or for claim of benefit depending upon the structure of the relevant provisions of the Act.

Presently, deduction under section 80LA of the Act available to a unit in IFSC, does not have a sunset clause.

Units that can be set up in IFSC are international banking units, stock / commodity exchanges, depository, clearing corporations, brokers, capital market intermediaries, insurance companies, reinsurance companies, and insurance brokers.

Units that can be set up in GIFT SEZ (non-IFSC) are IT/ITeS (R&D facilities of various IT companies; BPO, KPO; e-commerce companies, vertical IT/ITeS parks, web / digital content development / ERP / software and application development) and others (trading, legal data bases, R&D services, payroll, computer software services, including information-enabled services such as back office operations, remote maintenance, call centres, professional services (excluding legal services and accounting), content development or animation, educational services, data processing, financial services, engineering and design, tourism and travel related services, graphic information system services, entertainment services, human resources services, medical transcriptions and insurance claim processing).

The paradox here is that units set up in GIFT SEZ will have a sunset clause and so should be set-up by 31 March 2020, while units in the IFSC can be set up later.

The withdrawal of the deduction of 10AA for units set up post 31 March 2020, shall result in tax outflow @ 30% (plus applicable surcharge and cess) on the profits and gains derived from the export of articles or things or from services rendered by a unit in SEZ.

According to the SEZ fact sheet available on the SEZ India website, as on 31 January 2018, formal approval has been issued to 423 SEZs, out of which 357 SEZs are notified. About 31 SEZs got an in-principle approval. It is also mentioned that 221 SEZs were operational and 4,765 units were operating in these SEZs as on 30 September 2017, and a total investment of INR 4,48,832.43 crore has been made in these SEZs and they employ 18,23,451 persons. Exports from these units were as under:

Exports in 2015-16 Rs.4,67,337 crore
Exports in 2016-17 Rs.5,23,637 crore
Exports in 2017-18 Rs.2,66,773 crore (growth of 13.09% over the exports of the corresponding
 (As on 30.09.2017) period of FY 2016-17)

[Source :]

SEZs aim to attract foreign direct investment and improve the economy by exporting products and services and finding markets globally. The government has made visible changes to provide impetus for growth of an IFSC. One of the recent changes being unified regulator for IFSC in India, which would help India achieve its full potential in global financial markets. Considering the fact that SEZs seek to enhance exports and the first IFSC at GIFT city is set for exponential growth, the sunset clause for SEZ (at least GIFT SEZ) should be extended.

(Bahroze Kamdin is Partner, Deloitte India & Vidya Shenoy is Manager, Deloitte Haskins and Sells LLP and the views expressed are strictly personal.)

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