Govt to cut corp. tax to 15% in revamped SEZs

The proposal, part of the Development of Enterprise and Service Hubs (DESH) Bill that will overhaul SEZs, are scheduled to be tabled in the ongoing monsoon session. The commerce department plans to implement the law by October, a government official said.

The new law aims to make the SEZ Act, enacted in 2006 to boost export and manufacturing, compliant with World Trade Organization norms and boost manufacturing and job creation. A WTO dispute settlement panel in October 2019 ruled that subsidies given to entities located in the special trade zones violated the agreement on subsidies and countervailing measures.

The concessions offered in the proposed law would be a huge incentive for the industry to consider moving to the development hubs and help achieve scale, said Pratik Jain, a partner at Price Waterhouse & Co LLP.

While newly incorporated manufacturing companies pay a corporation tax rate of 15% even now, the concessional rate is only available to units that will manage to start operations by March 2024. Other companies have to pay a tax rate of 22%. In 2019, finance minister Nirmala Sitharaman slashed corporation tax rates to 22% from 30% for all companies and to 15% from 25% for new manufacturing units that start production before 31 March 2023. That deadline was extended by a year to compensate for the lost pandemic years.

“In this bill, we are saying, this limited window of concessional tax should be enhanced for development hubs for some more years. We have proposed that the window should be available for new manufacturing units in development hubs for 10 years as against the current scheme, which ends in March 2024," the official said, requesting anonymity.

The bill may be taken up by the cabinet committee on economic affairs for consideration next week.

“We are targeting the bill to be tabled in this current session of the Parliament; so ideally, it should come before the cabinet next week. But it is not certain," a second official said, also requesting anonymity.

Queries emailed to the department of commerce on Thursday remained unanswered till press time.

The draft DESH Bill, reviewed by Mint, proposes that states and the Centre be allowed to give incentives in the form of tax rebates, exemptions, and duty drawbacks to support the development hubs. It also talks of the option to provide access to credit and working capital for developers or units besides financial subsidies or schemes in relation to any goods or services and measures for providing expedited clearances to developers or units and simplifying compliance.

However, units located in SEZs used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years and 50% of the ploughed back export profit for another five years. In the 2016-17 budget, the government said that the income tax benefits to new SEZ units would be available only to those units which commence activity before 31 March 2020 as it wanted to do away with exemptions. With the sunset clause over, there isn’t much incentive left for entities to set up manufacturing facilities in these zones.

“The income tax concession in SEZs was linked to exports, and it would be interesting to see the parameters on which the proposed concession if permitted, would be dependent," Jain said.

The DESH legislation goes beyond promoting exports and has a much wider objective of boosting domestic manufacturing and job creation through the proposed development hubs. These development hubs will no longer be required to be net foreign exchange positive as mandated in the SEZ regime and will be allowed to sell in the domestic area more easily, according to the draft bill reviewed by Mint. With that, the new development hubs will comply with World Trade Organization rules.

Saloni Roy, a partner at Deloitte India, said the bill intends to create enterprise and service hubs for economic activities and develop infrastructure facilities.

According to the draft bill, the hubs will be allowed to sell in the domestic market with duties only to be paid on the imported inputs and raw materials instead of the final product.

Besides, the draft legislation also provides an online single window portal for the grant of time-bound approvals for establishing and operating development hubs, including the single application forms and returns.