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Welcome changes made by SEZ Act

The existing concessions will continue for Central excise, import duties

It is understood that the Special Economic Zones Act, 2005 incorporates amendments to the Income-tax Act. Kindly indicate the effect of such amendments?

The Special Economic Zones Act, 2005 is a self-contained code relating to Special Economic Zones, recognising those notified by the Central Government for special privileges and concessions in respect of direct and indirect taxes. As for Central excise and import duty, the existing concessions will continue.

Transactions as between units in the domestic tariff area (DTA) and those in the SEZs are also covered for the benefit of indirect taxes though not for income-tax. SEZs notified on or after April 1, 2005 are directly governed by the Act, but then, the definition of Special Economic Zones includes existing SEZs as well and those in Free Trade and Warehousing Zones.

The First Schedule makes amendments to different Acts in consequence of this new Act, while modifications have been made to the Income-tax Act as well by this Act, which came into force on the assent of the President on June 23, 2005.

The developer of SEZs, who was hitherto getting a deduction under Section 80IA(4)(iv), will get such exemption under Sec. 80IAB.

The units located in SEZs, hitherto getting deduction under Sec. 10A(1A), will continue to get the deduction under the new Sec. 10AA. Additional tax on dividend distributed out of the profits from units in SEZs will not be levied in view of the amendments to Sec. 10(34) and 115-O.

The financiers being an infrastructure capital fund or infrastructure capital company for such projects, hitherto exempt under Sec. 10(23G), will continue to get the same exemption in respect of projects covered by SEZs by an amendment made in 10(23G) by substituting Sec. 80IA(4) by Sec. 80IAB(3).

Tax on capital gains on shifting of assets to an SEZ is spared by insertion of Sec. 54GA. The benefit of the above concessions would be for ten consecutive years out of the first 15 years.

Banking units — scheduled banks in India, foreign banks having offshore banking units in an SEZ and units of International Financial Services Centre — are entitled to a 100 per cent deduction of income for the first five consecutive years and 50 per cent thereafter.

This is secured by insertion of Sec. 80LA, while a consequential amendment to Sec. 197A ensures that no deduction of tax at source will be made for any payment of interest on deposits or borrowings made to a non-resident or a resident not ordinarily resident, while Sec. 10(15)(viii) exempts such non-residents themselves who will not be liable to tax.

Tax immunity has, therefore, been secured for the developer, the units and the financiers by a series of amendments relating to income-tax which, along with concessions in Central excise and import duty, besides facilities available in the SEZs should constitute a welcome package for entrepreneurs at a time of sunset or dilution of many other concessions.

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