SEZs remain attractive even as time ticks down for sunset clause

V Rishi Kumar Hyderabad | Updated on October 20, 2019 Published on October 20, 2019

An aerial view of IT SEZ in Andhra Pradesh. Representative image   -  The Hindu

Companies and units availing themselves of benefits under the special economic zone scheme will continue to find SEZs to be attractive proposition even as the time ticks for the sunset clause.

Considering that March 2020 sunset clause has a meagre impact on the direct tax benefits and substantial benefits continue to remain available from the indirect tax perspective, setting up an SEZ still remains attractive, according to Maulik Doshi, Partner and Senior Executive Director, SKP Business Consulting LLP.

Section 10AA of the Income Tax Act provided for a phased tax-holiday for SEZ units for a period of 15 years and this benefit would be available to units which commence activity before March 31, 2020.

Liable to pay tax

This resulted in many companies accelerating either the setting up or expansion of their plans to meet the cut off date of March 2020 to be eligible for tax holiday. However, SEZ units were liable to pay tax under Minimum Alternate Tax at 18.5 per cent plus surcharge and cess. The MAT was creditable in future whenever the company would start to pay tax under normal provisions after they exhaust their tax holiday period.

The government announced corporate tax cuts on September 20, reducing the effective tax rate for domestic companies and incentivising setting up new manufacturing units,. Also the tax rate has been reduced to 15 per cent for companies formed after October 1, 2019 and commencing manufacturing on or before March 31, 2023.

Doshi told BusinessLine, “Units set up prior to April 1, 2020 will continue to enjoy the benefit in a phased manner for balance period of 15 years. Despite the sunset benefit, incremental tax is meagre, ranging from 0.75 per cent to 1.35 per cent of total turnover. This is by presuming low probability of utilisation of MAT credit being contingent.”

He said corporates are free to opt for lower tax regime subject to condition that such companies would not avail specified tax incentives/deductions, brought forward losses pertaining to such incentives and deductions. It has also been clarified that companies cannot set off any brought forward MAT credit against normal tax as well as brought forward loss on account of unabsorbed depreciation.

Earlier, the gap between tax rates for normal companies and tax exempted companies in SEZ was significant. Hence, the direct tax benefit for SEZ units was attractive. However, since the overall tax rates have reduced now, the companies will not miss out on substantial tax benefits from direct tax perspective as compared to units set up in SEZ.

As of September 2019, about 419 SEZs have been approved of them 277 are in the IT/ITES/Electronic Hardware/Semiconductor/telecom equipment and related segments. Of the approvals, 351 have been notified, and 234 are operational. More than 5,141 units have been approved in these SEZs.

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Published on October 20, 2019
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