India: India Budget 2016: Sun Setting For Special Economic Zones (SEZs) Under The Income Tax Act

The Finance Minister in his Budget speech last year had mooted the proposal to reduce the rate of corporate tax from 30% to 25% over the next four years, along with corresponding phasing out of exemptions and deductions. In the Budget proposals of 2016 presented on 29th February 2016, a final plan of phasing out exemptions and deductions has been laid out, which includes taking away the income tax deductions available to SEZ developers and units in prospectively.

The Government has proposed to implement this decision in a phased manner. Based on the following guiding principles, the incentives available to SEZ Developers and Units under the Income Tax Act are proposed to be phased out in a specified manner:

  1. Profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate tax payers.
  2. The provisions having a sunset date will not be modified to advance the sunset date. Similarly the sunset dates provided in the Act will not be extended.
  3. In case of tax incentives with no terminal date, a sunset date of 31.3.2017 will be provided either for commencement of the activity or for claim of benefit depending upon the structure of the relevant provisions of the Act.
  4. There will be no weighted deduction with effect from 1st April 2017.

Accordingly, in case of a SEZ unit, it is proposed that if a unit commences its operations on or before 31st March 2020, it shall be eligible to claim income tax benefit under section 10AA of the Income Tax Act. Whereas, the developers of SEZs, which are not operational yet, have been given time up to 31st March 2017 to make their SEZs operational to avail income-tax benefits under section 80-IAB of the Income Tax Act.

Deduction for Units established in SEZ under section 10AA of the Income Tax Act

It is proposed to amend section 10AA of the Income Tax Act to provide for a sunset date of 31st March 2020 for commencement of activity of manufacture or production of any article or thing or providing services by a unit located in a SEZ for availing the deduction under said section.

Clause 8 of the Finance Bill, 2016 provides that –

In section 10AA of the Income-tax Act, in sub-section (1), for the words and figures "April, 2006, a deduction of", the words, figures and letters "April, 2006, but before the 1st day of April, 2021, the following deduction shall be allowed" shall be substituted with effect from the 1st day of April, 2017.

The said clause 8 seeks to amend section 10AA of the Income Tax Act relating to special provisions in respect of newly established Units in SEZs. Section 10AA provides that an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, who begins from his unit for manufacturing or producing articles or things or providing any services during the previous year relevant to any assessment year commencing on or after the 1st April, 2006, is allowed deduction on the profits derived from the export of articles or things or services.

It is proposed to amend sub-section (1) of the said section 10AA so as to provide that the deduction under this section is available only for an above referred entrepreneur whose unit begins to carry out above referred activity before the 1st April 2021.

This amendment will take effect from 1st April 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years. The impact of the above amendment can be summarised as under:

Section Incentive presently available under the Income Tax Act Proposed Amendment
Section 10AA
Special provision in respect of newly established units in SEZs
Profit linked deductions for units in SEZ for profit derived from export of articles or things or services. No deduction shall be available to SEZ units commencing manufacture or production of article or thing or start providing services on or after 1st April, 2021 (i.e., from previous year 2020-21 onwards).

Deduction for development of SEZ under section 80-IAB of the Income Tax Act

It is proposed to amend section 80IAB of the Income Tax Act so as to provide that no deduction shall be available under this section where the development of Special Economic Zone begins on or after 1st April, 2017.

Clause 40 of the Finance Bill, 2016 provides that –

In section 80-IAB of the Income-tax Act, in sub-section (1), the following proviso shall be inserted with effect from the 1st day of April, 2017, namely:—

"Provided that the provisions of this section shall not apply to an assessee, being a developer, where the development of Special Economic Zone begins on or after the 1st day of April, 2017."

The said clause 40 seeks to amend section 80-IAB of the Income Tax Act relating to deductions in respect of profits and gains by an undertaking or enterprise engaged in development of SEZ. Under the aforesaid section, an enterprise being a developer in a notified SEZ, who has commenced the business of developing a SEZ on or after 1st April 2005 shall be allowed deduction of an amount equal to 100% of the profits and gains derived from such business. It is proposed to amend the said section so as to provide that this section shall not apply to any enterprise which commences the business activity on or after 1st April 2017.

This amendment will take effect from 1st April 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years. The impact of the above amendment has been summarised as under:

Section Incentive presently available under the Income Tax Act Proposed Amendment
Section 80IAB –
Deduction in respect of profits derive from development of SEZ
100% profit linked deductions for specified period on eligible business carried on by industrial undertakings or enterprises referred in section 80IAB of the Income Tax Act.

No deduction shall be available if the specified activity commences on or after 1st day April, 2017. (i.e., from previous year 2017-18 and subsequent years).

The above phasing out of deductions for SEZ developers and units would be a clear signal indicating the end of era of income tax benefits/ incentives for SEZs. It can also be seen as an attempt to operationalise, within one year, those SEZs which are notified but are not operational yet. If these SEZs become operational by or before 31st March 2017, they would be eligible to avail income tax benefits (10-years' tax holiday) under section 80-IAB of the Income Tax Act. Likewise, the operational SEZs would have the incentives to bring as many units as the tax benefits (15-years' tax holiday) under section 10AA of the Income Tax Act would be available to new SEZ units, which become operational by or before 31st March 2021.

According to the latest SEZ Fact Sheet available, formal approval has been issued to 416 SEZs, out of which 329 SEZs are notified. 205 SEZs are operational and 4,127 units are operating in these SEZs. A total investment of INR 3,73,445.83 crore has been made in these SEZs and they employ 15,56,537 persons. Exports from these SEZs stood at INR 4,94,077 crore in 2013-14, INR 4,63,770 Crore in 2014-15 and INR 3,41,685 crore in 2015-16 (As on 31st December, 2015).

Article by Hitender Mehta, FCS, FCA, LL.B.
Partner, Vaish Associates Advocates
Author, Law and Practice relating to Special Economic Zones (a Taxmann publication)
Co-Chairman, National SEZ Council, ASSOCHAM (2015)

© 2016, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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