If you are an entrepreneur or a small businessman and have invested in a special economic zone (SEZ) project, there is bad news for you. With the Union budget imposing the minimum alternate tax, or , at 18.5%, SEZs are not as profitable as they used to be.
Moreover, the proposed Direct Taxes Code, which is to be implemented from 1 April 2012, doesn’t specify any exemptions that SEZs enjoy at present. SEZs will continue to enjoy tax exemptions only till 31 March 2014, when the 10-year deadline for exemption set in place by the Special Economic Zones Act, 2005, expires.
What are SEZs?
SEZs are specifically developed duty-free zones meant for trade operations. The SEZ Act provides for the establishment, development and management of SEZs for the promotion of exports and for matters connected to commerce with other countries. At present, formal approval has been given to 531 SEZ proposals. Out of this, 260 SEZs have been notified for various sectors such as engineering, leather, IT/ITeS and manufacturing.
Tax edge that SEZs enjoy at present
SEZ units get 100% income-tax exemption on export income under section 10AA of the Income-tax Act for the first five years and 50% for the next five years.
Under the section, SEZ units also get 100% tax exemption on profit earned for the first five years, while developers get exemption for 10 years. Additionally, units get a 50% exemption for the next five years and another 50% exemption on reinvestment of any gain amount in the next five years.
The operating units have also been exempted from payment of central sales tax on the sale or purchase of goods, provided the goods are meant for undertaking authorized operations. The government has also exempted SEZ units from payment of stamp duty and registration fees on the lease/licence of plots.
The exemption deadline
Under section 10AA, exemptions on SEZs will be extended only if the occupier begins manufacturing or producing articles or products or provides any service from the SEZ unit on or before 31 March 2014.
What to do
If you already have a functional SEZ unit and are making profits, the tax burden may not bite you and you may be able to sustain it.
However, if you have invested in an under-construction SEZ and are unlikely to get possession before this date or it’s not possible for you to start operations on or before this date, get ready to pay more tax.