Tax benefits in SEZ: manpower transfer limit raised for IT firms

The Central Board of Direct Taxes (CBDT) has raised the limit for transferring technical manpower from existing units to a new unit in a Special Economic Zone (SEZ), a move that will benefit the software industry.

“It has now been decided that the new transfer or re-deployment of technical manpower from existing unit(s) to a new unit located in SEZ, in the first year of commencement of business, shall not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred as at the end of the financial year does not exceed 50 per cent of the total technical manpower actually engaged in development of software or IT enabled products in the new unit,” a CBDT circular said. Earlier, the limit was 20 per cent.

Further, if the company is able to prove that that the net addition of the new technical manpower in all units of the said firm is at least equal to the number that represents 50 per cent of the total technical manpower of the new SEZ unit during such previous year, deduction would not be denied, said the circular.

The board revised the limit after receiving representations from the industry, which said that the 20 per cent limit was inadequate and restrictive since it impacts the competitiveness of Indian software industry in global market in terms of quality of product and delivery timelines. “Global competitiveness can be ensured only when highly skilled and experienced manpower is deployed for software development,” it said. The industry requested to enhance the limit in line with the recommendations of the Rangachary Committee, which was set up to review the taxation of the IT sector and Development Centres.

Welcoming the move, the software industry body Nasscom said the circular allows the flexibility to account for the total manpower at the enterprise as-well-as unit level, which is a great step to ease the technicalities involved in the process. “The decision to not apply the ruling to cases which have completed assessment is also a great help to the industry. This is a great step forward by the Government and we are hopeful that other such matters which have been long up for discussion are taken up and worked towards achieving swift closures,” it said.

Echoing similar sentiments, Rajiv Chugh, tax partner, EY, said the Rangachary Committee, formed by the Government, has come to certain conclusions after taking into consideration the views of CBDT and a cross-section of the IT industry that up to 50 per cent of manpower can be considered fungible within units and tax holiday should not be denied.

“This re-clarification is a welcome step and reflects the progressive thinking of the new leadership, which is able to adapt itself to the business nuances and make positive changes for the well-being of the IT sector,” he said.

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