EXPORT PROMOTION COUNCIL FOR EOUs & SEZ UNITS
EPCES circular no. 39 dated 28-2-2007
Sub : Amendment to Section 10AA of the Income Tax Act relating to SEZ Act, 2005, by the Budget, 2007.
Hon’ble Finance Minister has presented Budget-2007 today. SEZ units are provided exemption from Income Tax under Section 10AA of the Income Tax Act, as given in the 2nd Schedule of the SEZ Act, 2005. Section 10AA of the Income Tax Act, as given in 2nd Schedule of the SEZ Act, 2005 has been amended by the Finance Bill, 2007. The Finance Bill, 2007, Provisions relating to direct taxes, provides as follows:-
MEASURES TO PLUG REVENUE LEAKAGES
Tax benefit only for new units in special economic zones : Sections 10AA of the Income-tax Act provides that in computing the total income of an entrepreneur, from his unit in the special economic zone, the following deduction shall be allowed:—
(i) hundred per cent. of profits and gains derived from the export made in eligible business for a period of five consecutive assessment years beginning from the year in which such business commences;
(ii) fifty per cent. of such profits and gains for further five assessment years and thereafter;
(iii) an amount not exceeding fifty per cent of the profit debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be created and utilized for the purposes of the business in the specified manner, for the next five consecutive assessment years.
Under the existing provisions contained in sub-section (4) of the said section, it is provided that section 10AA is applicable to any undertaking being the unit, which has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone.
Considering the fact that the special economic zones are intended to promote new industry and new investment and not to facilitate migration of existing industries to avail of tax concessions, it is proposed to substitute sub-section (4) of section 10AA so as to provide that section 10AA is applicable to any undertaking, being the unit, which fulfils all the following conditions, namely:-
(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
It is also proposed to provide that the conditions of (ii) shall not apply in respect of any undertaking, being the unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section. It is also proposed to provide that the provisions of Explanation 1 and Explanation 2 to subsection (3) of section 80-IA shall apply for the purposes of clause (iii).This amendment will take effect retrospectively from 10th February, 2006. [Clause 7] It may please be recalled that earlier Ministry of Commerce & Industry had issued a Notification on 10-8-2006 wherein Rule 18(4) had been amended as follows:-5. In sub-rule (4) of rule 18 of the principal rules, after clause (f), the following clause shall be inserted, namely:-
“(g) the use of any plant or machinery previously used for any purpose in Domestic Tariff Area.”.Hence as per amendment carried out by Ministry of Commerce & Industry earlier, no proposal was to be considered if the proposal involves the use of any plant and machinery previously used in any plant and machinery previously used for any purpose in the DTA. Now by carrying out an amendment in Section 10AA of the IT Act, income tax exemption has been denied to the SEZ units if it is formed by the splitting up or reconstruction of a business already in existence or if the SEZ unit is formed by the transfer to a new business of machinery or plant previously used for any purpose.
This is for your information please.
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