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National Summit SPECIAL ECONOMIC ZONES

Resolving Policy and Tax Issues


Income-tax issues Rupesh Jain
02-12-08
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INCOME TAX BENEFITS & ISSUES


Benefits to Developer/Co-Developer of SEZs. Benefits to units in SEZs. Benefits to OBUs and IFSC Key Issues for consideration

INCOME TAX BENEFITS & ISSUES


Benefits to Developer/Co-Developer A. Tax holiday u/s 80-IB B. Exemption from payment of Dividend Distribution tax u/s/ 115-O C. MAT provisions u/s 115 JB not applicable .

INCOME TAX BENEFITS & ISSUES


A. Tax holiday under Section 80-IAB Qualifying amount : Profit derived from any business of developing SEZ. Quantum of deduction : 100% of profits Time period: any 10 consecutive years out of 15 years beginning with the year of notification of the SEZ.
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INCOME TAX BENEFITS & ISSUES


Conditions to be fulfilled: Taxpayer is developer of SEZ (as defined in S.2(2) of SEZ Act). A developer is: A person or; A State Govt; or A Co-Developer who has been granted approval u/s 3(1) of SEZ. SEZ has been notified on or after April 1, 2005. Accounts of the enterprise to be audited. Profits on which deduction is allowed u/s 80IAB , not eligible for deduction under any other provision.
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INCOME TAX BENEFITS & ISSUES


Implication on transfer: Transfer of operation and maintenance of SEZ by one Developer to another-transferee eligible for deduction for unexpired period. Transfer of P&M previously used to the new SEZ not to affect the deduction. No capital gains on transfer of land, building or any rights therein or any P&M, in the course of or shifting to SEZs subject to construction/purchase of land, building, P&M in the SEZ within 3 years after or one year before transfer.
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INCOME TAX BENEFITS & ISSUES


Transfer of undertaking in the case of amalgamation/demerger-transferee eligible for deduction for unexpired period. Transfer of undertaking by way of slump salewhether transferee eligible to claim deduction? Benefit attaches to the undertaking:
CBDT Letter No. 15/5/63-IT(A-I) dt. 13.2.63 ITO v HPCL: 25 TTJ 28 (ITAT-Bom) ITO v SLM Maneklal India Ltd: 17 ITD 515 (ITAT-And) Shah Granite (P) ltd v ITO: 21 ITD 282(ITAT-Bom)
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INCOME TAX BENEFITS & ISSUES


B. Dividend Distribution Tax (DDT) Exemption (Section 115-O) No DDT on dividend declared, distributed or paid by undertaking/enterprise engaged in developing, or developing & operating, or developing, operating & mainting; of SEZ

INCOME TAX BENEFITS & ISSUES


Such dividend is also not taxable in the hands of the recipient. Undertakings engaged only in operating; or maintaining; or operating and maintaining, or developing and maintaining (?) not eligible for DDT exemption.

INCOME TAX BENEFITS & ISSUES


Benefits to SEZ Units A. Deduction of profits for 15 years B. MAT provisions u/s 115 JB not applicable. C. Exemption from capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any SEZ [u/s 54GA]

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INCOME TAX BENEFITS & ISSUES


A. Tax holiday u/s 10AA Applies to following units: Manufacturing/Service operations commenced on or after April 1, 2005 in SEZ. Not formed by splitting up or re-construction of any existing business unit (w.r.e.f. 10.2.2006) Not formed by transfer to new company of previously used plant & machinery (w.r.e.f. 10.2.2006)
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INCOME TAX BENEFITS & ISSUES


Income derived should be from export of articles or thing or from services from such unit. Export in relation to the SEZ defined in Explanation 1(ii) to S.10AA, as taking goods or providing services out of India from a SEZ, whether physically or otherwise (on site computer development specifically considered as export) Export as per section 2(m)(iii) of SEZ Act has a much wider meaning and includes supplying goods or services from one unit to another unit or Developer, in the same or different SEZ.
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INCOME TAX BENEFITS & ISSUES


Quantum of deduction: 100% of profits from exports, for 5 years from the year in which manufacturing/services begin. 50% of profits for next 5 years. Upto 50% of profit for the next 5 years, subject to the amount debited to P&L Account and credited to SEZ reinvestment Reserve Account, to be used for acquisition of P&M within 3 years of credit of reserve and for purpose of SEZ business in the meantime, but not for dividend distribution or for creation of assets outside India.

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INCOME TAX BENEFITS & ISSUES


Existing units in FTZ/EPZ to be eligible for deduction for the unexpired period of the ten consecutive years on conversion of FTZ/EPZ into SEZ and thereafter upto 50% of profits subject to reserve creation. If the period of ten consecutive years for FTZ/EPZ has expired, prior to conversion of FTZ/EPs into SEZ, no deduction u/s10AA is available

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INCOME TAX BENEFITS & ISSUES


Qualifying Amount:
Amount of = Deduction Profit of business of undertaking X Export Turnover Total turnover of business carried on by Assessee

Amount of deduction u/s 10A/10B= Profits of business of undertaking X Export Turnover Total turnover of business carried on by the Undertaking

In case of amalgamation or de-merger: the amalgamated/resulting company may avail the exemption for the unexpired period.

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INCOME TAX BENEFITS & ISSUES


Benefits to OBU and units of an IFSC (Section 80IA)

Deduction in a phased manner in respect of certain incomes for 10 years beginning with the year in which the permission under law to set up off shore banking unit is granted. First 5 years : 100% deduction Next 5 years: 50% deduction

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INCOME TAX BENEFITS & ISSUES


Any income by way of interest received by a nonresident or person who is not ordinarily resident in India, on a deposit made on or after the April 1, 2005 in an Offshore Banking Unit is exempt [u/s 10(15)(viii)] No TDS applicable on aforesaid interest payment.

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INCOME TAX BENEFITS & ISSUES


Key Issues for Consideration Whether income from operating and maintaining SEZ qualifies for deduction under section 80IAB. Whether contractors appointed by Developer or Co Developer eligible for benefit u/s 80IAB. Rule 10 of SEZ Rules extends exemptions, drawbacks and concession on goods and services available to Developer/co-Developers also to contractors appointed by them. Explanation to Section 80IA denies deduction to a person executing work contract entered into with the eligible enterprise/undertaking.
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INCOME TAX BENEFITS & ISSUES


Anomalies in relation to calculation of dividend distribution tax liability, where developing SEZ is one of the many businesses of an assessee. Ambiguity regarding manner of computation of deduction u/s 10AA(7). Inter-unit export may not qualify for exemption u/s 10AA. Whether in order to be export of products u/s 10AA, customs clearance is necessary. Transfer of business/unit from STP/EOU/FTZ to SEZ-whether eligible for deduction u/s 10AA
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Thank You

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