SEZ UNITS WILL HIT BY PROPOSALS IN THE FINANCE BILL 2011 RELATING TOINCOME TAX – tinkering long-terms fiscal policies is not justified.

[C.A. DEV KUMAR KOTHARI]

Proposals relating to SEZ and SEZ units about Income –tax:

This write-up covers only the proposals in the Finance Bill 2011 about income-tax payable by SEZ developers and units in SEZ. The proposals relating to SEZ units in relation to income tax are as follows:

From the Finance Bill with highlights:

4. In section 10 of the Income-tax Act,—

(a) in clause (34), the Explanation [as so inserted by the Special Economic Zones Act, 2005] 28 of 2005.

shall be omitted with effect from the 1st day of June, 2011;

17. In section 115JB of the Income-tax Act, with effect from the 1st day of April, 2012,—

(ii) in sub-section (6) [as so inserted by the Special Economic Zones Act, 2005], the following provison shall be inserted, namely:—

"Provided that the provisions of this sub-section shall cease to have effect in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012.".

19. In section 115-O of the Income-tax Act, in sub-section (6) [as so inserted by the Special Economic  Zones Act, 2005], the following proviso shall be inserted with effect from the 1st day of June, 2011, namely:—

"Provided that the provisions of this sub-section shall cease to have effect from the 1st day of June, 2011.".

Some  benefits will stand withdrawn:

From above proposals we find that some benefits allowed to assessee, by amendments of the income-tax act, 1961  through the Special Economic Zones Act, 2005 to  Developer or entrepreneur in SEZ  and units in SEZ will be withdrawn. Such assesses are exempted from paying dividend distribution tax on dividend paid or distributed. Even though dividend distribution tax in not paid, yet dividend received by assessee being a Developer or entrepreneur is not taxable in hands of such recipient. Certain SEZ units etc.  were also exempted from MAT under section 115JB.That exemption shall also be withdrawn from the previous year beginning 01.04.2011. The exemption of DDY will not apply to dividend declared or paid on or after 01.06.2011.

 There was no sunset clause provided for these benefits. Now the budget proposals are intended to provide for such sunset clauses.

From Memorandum explaining proposals – analysis with highlights of key words:

Provisions relating to Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) in case of Special Economic Zones (SEZ) .

Under the existing provisions of section 10AA of the Income-tax Act, a deduction of hundred per cent. is allowed in respect of profits and gains derived by a unit located in a Special Economic Zone (SEZ) from the export of articles or things or services for the first five consecutive assessment years; of fifty per cent. for further five assessment years; and thereafter, of fifty per cent. of the ploughed back export profit for the next five years.

Further, under section 80-IAB of the Income-tax Act, a deduction of hundred per cent. is allowed in respect of profits and gains derived by an undertaking from the business of development of an SEZ notified on or after 1st April, 2005 from the total income for any ten consecutive assessment years out of fifteen years beginning from the year in which the SEZ is notified by the Central Government.

Under the existing provisions of section 115JB(6), an exemption is allowed from payment of minimum alternate tax (MAT) on book profit in respect of the income accrued or arising on or after 1st April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone (SEZ), as the case may be.

Further, under the existing provisions of section 115-O(6), an exemption is allowed from payment of tax on distributed profits [Dividend Distribution Tax (DDT)] in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or after 1st April, 2005 out of its current income. Such distributed income is also exempt from tax under section 10(34) of the Act.

The above provisions were inserted in the Income-tax Act by the Special Economic Zones Act, 2005 (SEZ Act) with effect from 10th February, 2006.

Currently, there is no sunset date provided for exemption from MAT in the case of a developer of an SEZ or a unit located in an SEZ. Similarly, there is no sunset date for exemption from DDT in the case of a developer of an SEZ.

It is proposed to sunset the availability of exemption from minimum alternate tax in the case of SEZ Developers and units in SEZs in the Income-tax Act as well as the SEZ Act. 1st April, 2012 and will, accordingly, apply in relation to the assessment year 2012-13 and subsequent years.

It is further proposed to discontinue the availability of exemption from dividend distribution tax in the case of SEZ Developers under the Income-tax Act as well as the SEZ Act for dividends declared, distributed or paid on or after 1st June, 2011.

This amendment to section 115-O of the Income-tax Act will take effect from 1st June, 2011.

It is also proposed to make consequential amendments by omitting Explanation to section 10(34) of the Income-tax Act.

This amendment to section 10 will take effect from 1st June, 2011.

Consequential amendments have also been proposed in the Second Schedule of the SEZ Act by omitting clause (C) of paragraph (a) [w.e.f. 01.06.2011], paragraph (h) [w.e.f. 01.04.2012] and paragraph (i) [w.e.f. 01.06.2011] of the Second Schedule.

[Clauses 4, 17, 19, 76]

SEZ and units therein are long-term investments:

Benefits to SEZ developers and units in SEZ were granted with a set purposes in mind. The projects of SEZ and units in SEZ are generally long-term projects. Therefore, policies of allowing benefits should be considered as long-term fiscal policies. Accordingly these policies, particularly policies of allowing fiscal relief or benefits should not be changed frequently and that too at a short notice. The entrepreneurs who have invested money with these benefits in mind will be adversely affected. If these amendment are not protested properly, one should not be surprised, if gradually other benefits are also withdrawn.

Policy reversal – not justified:

Profit after Tax (PAT) is  major aspect in any business and financial decision. One has to consider PAT and not  profit before tax (PBT) while deciding about nature and location of investment and business. These are long-term decisions for any entrepreneurs. Therefore, withdrawal of such benefits is not at all justified. 

Too short a notice for Sunset:

From above analysis it is clear that certain benefits will stand withdrawn without much notice. The DDT will stand withdrawn w.e.f. 01.06.2011 therefore eligible assesses can take benefit of present relief by promptly declaring and paying dividend before 01.06.2011. This can only be say for one or two  dividends say for FY 2010-11 and interim dividend for FY 2011-12.

The MAT exemption will stand withdrawn for the previous year beginning 01.04.2011 (w.e.f.01.04.2012 means assessment year 2012-13).

Thus we find that notice to place the  sun-set clause in effective mode is also very short.