Coronavirus lockdown: Govt may extend tax holiday, incentives for SEZs

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Bogged down with the current coronavirus outbreak, the government is likely to extend tax-holiday and other incentives to Special Economic Zones (SEZs) under it's Sunset Clause policy, the window for which ends on March 31.

After endless rounds of talks on the issue, domestic industry had accepted the end of the sunset clause but the government may allow the tax-free window to remain operational for some time to help companies battle the downturn emerging from the latest global pandemic.

The clause promises 100 per cent Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50 per cent for next 5 years thereafter and 50 per cent of the ploughed back export profit for next 5 years, according to the SEZ India, an office under the Commerce Department. 

Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units, make up the other benefits, which have led to SEZs being the source of major foreign exchange earners like IT, engineering goods and textiles exports.

The clause also assures the developers of SEZs, income tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. 

With SEZs being home to the majority of Information Technology companies, industry body Nasscom had made a detailed petition to the government before the last budget to continue with the exemptions, and further expand them. 

Nasscom had pushed for retaining existing tax benefits under Section 10AA of Income Tax. It had also pitched for a concessional rate of 9 per cent Minimum Alternative Tax (MAT), and exemption from Dividend Distribution Tax (DDT).

Other benefits planned

The government is also expected to accept the demands, if latest deliberations on the issue just before the coronavirus outbreak took place, are to be considered. "To raise investments and boost exports from the SEZs nationwide, the government is considering removing MAT, reduction of duties on domestic sales and allowing job work, a senior Niti Aayog official said.

At multiple inter-ministerial meetings, the Commerce Department has also repeatedly asked the revenue department to consider whether MAT can be removed from the export turnover from SEZs, sources said.

The government had cut MAT to 15 per cent from 18.5 per cent last year, while also slashing the corporation tax rate to 22 per cent from 30 per cent. However, the Central Board of Direct Taxes also issued a detailed circular that MAT credit will not be available to a company that opts for lower corporation tax rate.

As a result, SEZ developers have continued to push for an exemption from MAT, arguing that the provisions make SEZs an unfavorable investment sector. Case in point, of the 370 notified SEZs, only 234 are operational, according to official statistics.

Some of the latest suggestions originated from the Baba Kalyani Committee on SEZs which also  recommended promotion of MSME investments in SEZs by linking with MSME schemes and allowing alternate sectors to invest in sector specific SEZs. It had also batted for additional enablers and procedural relaxations as well as granting SEZs infrastructure status to improve their access to finance and enable long term borrowing.

The commerce department has also pointed out that many SEZs are also operating at sub-par levels with the number of current units being much lower than the original target.

On the other hand, Commerce and Industry Minister Piyush Goya last week informed Parliament that the Board of Approval on Special Economic Zones (SEZs) has approved 101 cases of de-notification between April 1, 2008 and February 29, 2020. The reasons given for these requests for de-notification include poor market response, lack of demand for space and change in the fiscal incentive regime for SEZs, he had said.

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