The long wait of units within Special Economic Zones (SEZ) to get total exemption from income tax on their export profits was further stretched on Thursday with an Empowered group of ministers (eGoM), that was to take a final call on the issue, choosing instead to defer it indefinitely.
However, commerce and industry minister Kamal Nath told reporters after the eGoM that taking into account prevailing economic gloom, the aberration in law regarding the matter has to be corrected soon to send the right signal to investors and, in turn ensure that there is no decline in economic activity.
“We have decided not to take a decision (on Thursday), but a decision will be taken. There is an aberration and it will be corrected,” he said.
Asked whether the finance ministry objected to awarding SEZ units total income tax exemption for a tax holiday period of five years, Nath said “everyone has their own view. The chairman of the EGoM (external affairs minister Pranab Mukherjee) heard all points made by everyone and will make a decision soon in this regard.”
Nath said he pointed out clearly that at a time of global financial crisis the government needs to send a signal to strengthen economic activity. “It is very important that every step is taken to sustain economic activity and not cause any decline in economic activity. So at this point of time, it is very important to take the right decision not in the context of this (the matter regarding giving income tax exemption to SEZ units on their export profits) alone, but in the context of the overall approach by the government,” he said.
The issue was taken up in the last EGoM on October 24, but was deferred to Thursday as the discussions were inconclusive. “Whatever changes are to be carried out, will be done through an amendment (of the Income Tax Act),” Nath said
The particular provision that deals with this issue of income tax on export profits of SEZ units is Section 10AA of the Income Tax Act. This Section accords income tax exemption to the SEZ Units on the export income. But, as per the Section, export turnover of the unit is divided by the total turnover of the assessee while calculation of exemption from export profit.
Experts said this is currently hurting the units, particularly the big IT companies, as in...
many cases the assessee has units outside the SEZ too. They said the wording of the current provision significantly limits the extent of tax holiday, adding that huge companies with units in the SEZs and outside SEZs, practically do not get any tax holiday.
Export Promotion Council for EOUs and SEZs (EPCES) has proposed that the total export turnover of an SEZ unit should be divided by the total turnover of the SEZ unit only and not by the total turnover of the assessee company.
Prior to 2000, in Section 10A of the Income Tax Act relating to software technology parks and the erstwhile export processing zones as well as in Section 10B of the same Act relating to Export Oriented Units, used the words ‘total turnover of the assessee’ regarding calculation of income tax.
Later on in Finance Act 2000, the finance ministry issued a clarification that in the context of Section 10A and 10B of the Act, saying that the total turnover of the assessee means the turnover of the undertaking within the zone. The ministry had said that this had got no correlation whatsoever with the activities outside the zone, sources said. Again in the Finance Act 2001, the total turnover of ‘assessee’ was changed to the word ‘undertaking’.
“This issue was debated eight years back and the circular is valid even today. It should be read as total turnover of the ‘undertaking’,” an official said.
But finance ministry officials are of the view that in the context of SEZs, it was a conscious decision to use ‘assessee’ in Section 10AA of the Income Tax Act, as SEZs enjoy several other sops....