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TAX EXEMPTION SCHEME

TAX EXEMPTION SCHEME. Special Economic Zone (SEZ) And Export Oriented Units (EOU) Presentation By: Ankur Shah Partner SNK. SNK. Agenda. Special Economic Zone: Incentives under Income Tax Incentives under Other Acts Other Special Fiscal Provisions Export Oriented Unit:

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TAX EXEMPTION SCHEME

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  1. TAX EXEMPTION SCHEME Special Economic Zone (SEZ) And Export Oriented Units (EOU) Presentation By: Ankur Shah Partner SNK SNK

  2. Agenda Special Economic Zone: • Incentives under Income Tax • Incentives under Other Acts • Other Special Fiscal Provisions Export Oriented Unit: • Incentives under Income Tax • Other Special Fiscal Provisions

  3. Special Economic Zone(SEZ)

  4. What is an SEZ? “….it is a specifically delineated duty-free enclave and shall deemed to be a foreign territory for the purposes of trade operations and duties and tariffs” . . . . EXIM Policy 2000, Chapter 9 para 30 The purpose - “... to provide an internationally competitive and hassle-free environment for exports”

  5. What is special? • Duty-free! Exemption from taxes, various subsidies and tax sops • Hassle-free! Exemption from stringent labour and environment regulations • Foreign enclave! A designated duty free enclave and to be treated as foreign territory for trade operations and duties and tariffs • Single Window Clearance! • No license required for import • Only 25% of the area for industrial activity – the rest of the area for entertainment and residential as well as other commercial activities!

  6. What is special? • No fixed wastage norms • Full freedom for subcontracting including subcontracting abroad • Job work on behalf of domestic exporters for direct exports allowed • Contract farming allowed for agriculture/ horticulture units • No routine examination by Customs of export & import cargo • In house customs Clearance

  7. website : www.sezindia.nic.in

  8. Fiscal Benefits available to SEZ Income Tax Exemptions of tax, duties or cess in 21 Acts Cenvat Customs VAT Central Sales tax Service Tax Stamp Duty Securities Transaction Tax FEMA Other Acts

  9. Synopsis of Key Tax incentives under SEZ Act, 2005 In addition to the above, most State Governments extend additional benefits & incentives under their respective SEZ Schemes such as exemption from local taxes, levies & duties, exemption from electricity, water duties, declaration of SEZs as Public Utility Services

  10. Income Tax Benefits

  11. Relevant Sections in Income Tax Act,1961

  12. Relevant Sections in Income Tax Act,1961 Changes in the Income Tax Act 1961 relating to SEZ made by Special Economic Zones Act 2005 w.e.f 10/02/2006

  13. Exemption to newly established Units in SEZ - Section 10AA

  14. Exemption to Unit who begins to manufacture or produce articles or things or provide any services during the PY relevant to any AY commencing on or after 01.04.2006 • Deduction – Total 15 Years • 100% of Profits from export for 5 consecutive years • 50% of Profits from exports for further 5 assessment years • 50% of Profits in the form of credit to “Special Economic Zone Re-investment Reserve Account” for next 5 years

  15. Calculation of Deduction Profit of x ETO of the unit the unit TTO of the business of of the assessee Where, ETO = Export Turnover TTO = Total Turnover Anomaly needs to be resolved

  16. Use of Special Economic Zone Re-investment Reserve Account ( S 10AA(2)(a)) • Acquiring machinery or plant • Until the acquisition of the machinery or plant, 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;

  17. Mis-use of Special Reserve Account( S 10AA(3)) • If the Special Reserve Account is misutilised, then the deduction would be taken back in the year in which the Special Reserve Account is misutilised. • If the Special Reserve Account is not utilised for acquiring new plant and machinery within three years then the deduction would be taken back in the year immediately following the period of three years.

  18. Consequences for merger and demerger ( S 10AA(5)) • Where an undertaking is transferred to another company under a scheme of amalgamation or demerger, the deduction under section 10AA shall be allowable in the hands of the amalgamated or the resulting company. • However, no deduction shall be admissible under this section to the amalgamating company or the demerged company for the previous year in which amalgamation or demerger takes place.

  19. Definition of Export in relation to SEZ Similar Provisions

  20. Definition of Export in relation to SEZ Anomaly needs to be resolved

  21. Exemption of Capital Gain on Shifting to SEZ - Sec 54GA

  22. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone. • The exemption is available to all categories of assesses on capital gain arising on the transfer of certain capital asset of industrial undertaking from urban area to SEZ. (whether developed in an urban area or not) • The Asset transferred should be machinery or plant or building or land or any rights in building or land • The capital gain should be utilized within one year before or three years after the date of transfer for the specified purpose.

  23. Specified Purpose- 54GA contd.. (i) Purchase of plant or machinery (ii)Acquisition of building or land or construction of building (iii) Shifting of the original asset and transferring the establishment of such undertaking to the Special Economic Zone; and (iv) incurring expenses on such other purposes as may be specified in a scheme framed by the Central Government for the purposes of this section. • The amount of capital gain which is not so utilised for the specific purposes should be deposited in an account with any specified bank or institution and utilised in accordance with the scheme notified by the Central Government

  24. Quantum Of Deduction-Sec 54GA contd..

  25. Definition of Urban area • Urban area means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-section.

  26. Deduction in respect of profits by SEZ Developer - Sec 80 IAB

  27. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in development of Special Economic Zone. • An undertaking which develops a special Economic Zone notified on or after 1.4.2005 will not be eligible to claim deduction under section 80-IA, but will now be claiming deduction under new section 80 – IAB. • Available to an assessee, being a Developer whose gross total income, includes any profit and gains derived by an undertaking or an enterprise from any business of developing a special Economic Zone, notified on or after 1.4.2005 under Special Economic Zones Act,2005

  28. QUANTUM OF DEDUCTION- Sec 80 IAB contd.. • A deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years. • The assessee has the option of claiming the said deduction for any 10 consecutive assessment years out of 15 years beginning from the year in which a SEZ has been notified by the Central Government

  29. Transfer of Undertaking • If a taxpayer who develops a special economic zone on or after April 1, 2005 (“transferor”) transfers the operation/maintenance of such zone to another developer (“transferee”), then deduction shall be allowed to the transferee for the remaining period of 10 years as if the operation and maintenance were not so transferred. • Similar rule will be applicable in the case of amalgamation of an Indian company which has developed a special economic zone with another Indian company.

  30. Non applicability of MAT to SEZ Developer and Unit - Sec 115JB(6)

  31. Section 115JB(6) of the Income Tax Act provides that the provisions of this section shall not apply to the income accrued or arising on or after 1st Day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.

  32. No Tax on Distributed Profits - Sec 115O(6)

  33. No tax on dividends would be chargeable in respect of the total income of an undertaking or enterprise engaged in • developing a SEZ or • developing and operating a SEZ or • developing, operating and maintaining a SEZ • If such dividend (whether interim or otherwise) is declared, distributed or paid by such Developer or enterprise, on or after the 1st day of April, 2005 out of its current income • No tax either in the hands of the Developer or enterprise or person receiving such dividend

  34. Offshore Banking Unit (OBU)

  35. Interest Income from OBU is exempt In computing the total income of previous year of any person any income by way of interest received by • Non resident or • a person who is not ordinarily resident in India on a deposit made on or after the 1st day of April, 2005, in an Offshore Banking Unit shall not be included (Section 10(15)(viii))

  36. Deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre 80LA Assesses covered • Scheduled bank, or, any bank incorporated by or under the laws of a country outside India; and having an Offshore Banking Unit in a Special Economic Zone; or (ii) Unit of an International Financial Services Centre,

  37. Amount of deduction-Sec 80LA(1) (a)100% of such income for 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which • the permission,under 23(1)(a) of the Banking Regulation Act, 1949 or • permission or registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or • any other relevant law was obtained, and thereafter; (b) 50% of such income for next 5 consecutive assessment years.

  38. Income Exempted-Sec 80LA(2) Income refers to income : (a) from an Offshore Banking Unit in a SEZ; or (b) from the business referred to in Section 6(1) the Banking Regulation Act, 1949 with an undertaking located in a SEZ or any other undertaking which develops, develops and operates or develops, operates and maintains a SEZ; or (c) from any Unit of the International Financial Services Centre from its business for which it has been approved for setting up in such a Centre in a SEZ.

  39. Other Benefits

  40. Benefits under Customs • Exemption from any duty of customs on goods imported into, or services provided in, an SEZ or a Unit, to carry on the authorised operations by the Developer or Entrepreneur. Accordingly, as definition of import does not include DTA to SEZ supply, the procurement of goods or providing of services from will not amount to import. • Exemption from any duty of customs on goods exported from, or services provided from, an SEZ or a Unit, to any place outside India. • Drawback or such other benefits as may be admissible from time to time on goods brought or services provided from the DTA into an SEZ or Unit or services provided in an SEZ or Unit by the services providers located outside India.

  41. Benefits under Excise • Exemption from any duty of excise, on goods brought from DTA to an SEZ or Unit to carry on the authorised operations by the Developer or Entrepreneur. • Domestic sales by SEZ units will now be exempt from SAD

  42. Benefits under Service Tax • The exemption from payment of service tax on taxable services rendered to a Developer or a Unit (including a Unit under construction) • by any service provider • shall be available to carry on the authorized operations in a Special Economic Zone (Consumption Criteria) – Section 26(1)(e) and rule 31

  43. Benefits under Central Sales Tax • Every Developer and the entrepreneur is entitled for exemption from the levy of taxes on the sale or purchase of goods other than newspapers under the Central Sales Tax Act, 1956 if such goods are meant to carry on the authorized operations by the Developer or entrepreneur. – Sec 26(1)(g) • This is subject to the condition that the dealer selling goods in the course of inter state trade or commerce to a registered dealer under the Central Sale Tax Act, 1956 shall furnish a declaration in Form – I prescribed under the Central Sales Tax (Registration and Turnover) Rules, 1957.- Proviso to Rule 32

  44. Changes made in Central Sales Tax Act,1956 No CST shall be payable by any dealer in respect of sale of any goods made by such dealer, • in the course of inter-State trade or commerce, • to a registered dealer (developer of SEZ or SEZ Unit as the case may be) • for the purpose of manufacture, production, processing, assembling, repairing, reconditioning, re-engineering, packaging or for use as trading or packing material or packing accessories in an unit located in any SEZ, • if such registered dealer has been authorised to establish such unit by the authority specified by the Central Government in this behalf. (Development Commissioner is of SEZ is authorized to permit a person to set up unit in SEZ)(Section 8(6) of Central Sales Tax Act, 1956)

  45. Benefits under Securities Transaction Tax • Every Developer and the entrepreneur shall be entitled to exemption from the securities transaction tax leviable under section 98 of the Finance (No. 2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre. Sec 26(1)(f)

  46. Benefits under Stamp Duty under Indian Stamp Act,1899 • Exemption from stamp duty on any instrument executed, by, or on behalf of or in favour of the Developer, or Unit or in connection with the carrying out of purposes of the Special Economic Zone. (Section 3 Third Proviso of Indian Stamp Act,1899) • Effected by Change in Indian Stamp Act,1899 by Special Economic Zones Act, 2005 Third Schedule, Part III

  47. Benefits under Foreign Direct Investment (FDI) • FDI is allowed through automatic route for all manufacturing activities in SEZ except - • Arms and ammunition , Explosives and allied items of defence equipments, Defense aircrafts and warships, • Atomic substances, Narcotics and Psychotropic Substances and hazardous Chemicals, • Distillation and brewing of Alcoholic drinks and • Cigarette/cigars and manufactured tobacco substitutes.

  48. FDI Contd.. • 100% FDI in trading activity is permitted • 100% FDI allowed for townships and recreational facilities on a case to case basis, • 100% FDI allowed for franchise for basic telephone service in SEZ • SEZ Unit can manufacture articles reserved for SSI even if foreign equity exceeds 24%. No License is required (Department of Industrial License Press Note No 5 dated 29-03-2000 Notification 7(11)/2000-IP dated 04-12-2000)

  49. Benefits under Companies Act, 1956 • Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration • Regional office of Registrar of Companies in SEZs • Exemption from requirement of domicile in India for 12 months prior to appointment as Director

  50. Benefits under Banking / External Commercial Borrowings • External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions • Freedom to bring in export proceeds without any time limit • Flexibility to keep 100% of export proceeds in EEFC account. Freedom to make overseas investment from it • Commodity hedging permitted • Exemption from interest rate surcharge on import finance • SEZ units allowed to ‘write-off’ unrealized export bills

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