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Special Economic Zone (SEZ) and Software Parks under Income Tax Act

The government of India to promote trade and software development and export has come up with SEZ or Special Economic zone and Software Technology Parks. These are special designation geographical location where trade laws are not the same as the remaining country. They are built in favor of the manufacturer, developer or the corporate owners. The difference is in terms of Investing, Trading, Labor Laws, Taxation, Customs, and Quotas etc. this has enhanced foreign investment and given a boost to export from the country.

SEZ UNDER INCOME TAX ACT

Special Economic Zone also called the trade free zones are the specified locations where as per the SEZ Act 2005 Section 27.This has been done to provide tax relaxation to the SEZ units. Various forms of tax exemptions are enjoyed by manufactures or service providers in the SEZ. With the introduction of Section 10AA in the Income Tax Act all guidelines have been clearly put across for these units.

Tax deduction eligibility and period for which deduction is sanctioned as per Section 10AA of the Act:

Eligible units:

Deductions will be granted as per section 10AA to an entrepreneur for manufacturing or providing services during 1st April 2005 to 21st March 2020 with regards to export turnover from an entity located in SEZ.

Timeline of Deduction:

Entities eligible for deduction as per Section 10AA of the Act will be getting such deductions for the below mentioned time periods.

  • Those entities having 100% gains and profits from an export’sunit in SEZ shall continue to be eligible for such deductions for the first five years.
  • Those entities having 50% gains and profits from an export’s unit in SEZ shall continue to be eligible for such deductions for the coming five years.
  • Those entities having 50% gains and profits from an exports unit in SEZ shall continue to be eligible for such deductions for the coming five years only if it has been deducted from P&L statements and credited to an account reserve by the name of “SEZ Re-Investment reserve account”.

Summary:

  1. An entity can avail deductions for maximum of 15 years starting from the date of commencement of manufacturing activities.
  2. The assessee is allowed for deductions as per section 10AA as per the Act on the entire income being computed according to provisions of income tax. Therefore deduction is authorized on the entire income of the assessee.
  3. Those entities that have by now availed deductions for 10 consecutive years under section 10A are not entitled for deductions.
  4. Entities providing services with regards to computer software are also entitled for deductions. Profits from development projects taking place on site i.e. overseas shall be considered as profits from computer software export.

Computation of deduction amount according to Section 10AA of the Act:

Computation of deduction amount as per Section 10AA of the Act is given below.

 

Data Amount
1.Profits resulting from entitled unit XX
 2.Turnover from exports of entitled unit XX
3.Entire Turnover of eligible Unit XX
4.Deduction amount as per Section 10AA 1/3*2

 

Notes:

  1. Consideration with respect to exports being brought inside the country by the assessee (excluding freight, insurance for delivery of goods outside India, expenses incurred of foreign exchange, if any, for providing services related to software overseas )is termed as export turnover.
  2. As per section 10AA of the Act and judgment of Supreme Court in Liberty India’s case, income in relation with benefits from exports is not allowed for deduction.

Requirement for utilization of Special Reserve formed:

Allowed functions:

Section 10AA (2) mentions about how the amount which is  credited to the SEZ Re-investment Reserve Account is to be made use of:

  • It can be used to buy plant or machinery which has to be used before expiry of third year after the past year when the reserve account was created. Meaning that the machine has to be used within three years of being acquired.
  • It can be used till the time plant and machinery has been acquired for business purpose other than distribution of dividends and profits as remittance overseas or for making an asset in foreign country.
  • It is mandatory to file Form 56FFwith the department of Income Tax and this has to be accordingly verified by a CA.

 

In case the reserve amount is not brought to use within given time given or has been used for a purpose which is not permitted then the amount which is not made to use shall be considered as profit.

The amount shall be deemed as profit in the year of consumption if the amount has been used for non permitted purposes.

The amount shall be deemed as profit in the year next to three years of completion in case the amount is not made to use in the given time frame.

 Other Conditions:

  • Already existing unit cannot be split or reconstructed for formation of a SEZ.
  • 50% of technical manpower can be moved from the old unit or old SEZ to a new SEZ unit OR
  • If the unit is able to demonstrate that the entire addition being made to technical manpower is at least 50% of the entire technical manpower being required in the new SEZ then any number of technical manpower can be transferred from old unit to the new unit.
  • New SEZ should not be made by taking machines from old unit but second hand machines can be imported to be brought to use in the new SEZ and not further than 20% of the entire machinery in the plant can be old machines.
  • As per section 35AD there can be no deduction with regards to particular business for ongoing or any other assessment year.
  • Deductions will not be debarred if SEZ unit is being relocated from one area to a new one. There is no compulsion to maintain books of accounts separately but the A.O. can ask for separate accounts for both the SEZ units.
  • The  buyer can avail the deduction for the unexpired period even if the SEZ unit has been sold as lump sum sale.
  • R&D being done with regards to “Engineering and Design” of computer software shall be treated as “computer software”.
  • According to section 115JB of the income tax act, 1961, SEZ units have to pay minimum alternate tax(MAT).

 Frequently Asked Questions (FAQ)

Do SEZ come under GST?

Goods and services which are supplied to a SEZ are considered as exports and have an exemption from GST.

How can a SEZ be set up?

Central government, State Government, joint Government of state and centre or any other individual in to manufacturing of goods or services can set up a SEZ following the guidelines of the SEZ Act 2005.

What are SEZ schemes’ features?

  • SEZ is treated as a duty free land outside India .
  • Imports to SEZ do not require any licenses.
  • Service as well as manufacturing activities is allowed in SEZ.
  • SEZ have to show net foreign exchange as positive when it is a cumulative calculation for 5 years period since date of commencement of production.
  • Custom duty and import policy shall be levied on domestic sales from SEZ
  • SEZ shall have freedom to sub contract.
  • Customs authority shall not conduct routine inspections for import and export of goods.
  • Indirect and Direct Tax benefits to SEZ as per SEX Act 2005.

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