FM comes through for SEZs, allows them to carry forward losses

NEW DELHI: Accommodating the demands of the commerce department, Finance Minister Jaswant Singh has showered more concessions on special economic zones (SEZs). The concessions incorporated in the modifications proposed to the Finance Bill ’03 include permission to carry forward losses and a reinvestment allowance to the extent of 50% of the ploughed back profits.
Supplies from domestic tariff area to SEZ units have also been provided income tax benefits under Section 80 HHC of the Income Tax Act.
Offshore banking units (OBUs), considered a key factor for the success of SEZs, have been provided a fiscal incentive in the form of total income tax exemption for three years on the earnings from loans disbursed to units located in the zones. For the next two years, 50% tax exemption would be available for these OBUs.
These concessions were demanded by commerce & industry minister Arun Jaitley to make SEZs more attractive. Mr Singh seems to have cleared the concessions in view of the need to support the expansion of SEZs and setting up of new zones with world class infrastructure. Now that the Finance Bill has been cleared by the Lok Sabha, the concessions have become a reality for SEZ units.
The permission for carry forward of losses would help SEZ units when the benefits provided under Section 10 A and 10 B of the Income Tax Act are phased out. As of now, SEZ units are not allowed to carry forward accumulated depreciation since they are exempt from payment of income tax. The permission to carry forward losses would encourage large investments, which result in high levels of depreciation, officials said. Domestic units are allowed to carry forward losses for eight years, and the facility extended to SEZ units would be on similar lines.
The tax breaks provided to OBUs would enable them to lend to SEZ units at competitive rates. This concession is over and top of the benefits provided by exempting OBUs from mandatory stipulations like SLR and CRR. The re-investment allowance cleared by the finance minister is also aimed at strengthening export production infrastructure. This will help in upgradation of technology as well as capacity expansion in the long term, commerce department officials said while welcoming the measures announced by Mr Singh. If an SEZ unit invests a particular sum out of its profits to boost its business, tax exemption will be available on 50% of this amount.
Sourcing of products from DTA units would become cheaper for SEZ players with the income tax exemption cleared by the finance minister. Earlier treated as deemed exports, supplies from DTA to SEZ units have already been classified as exports. Therefore, extension of Section 80 HHC benefits is considered a logical step to help SEZ units procure raw materials at cheaper rates.
Regulations governing excise and sales tax already recognise such transactions as exports. The Exim Policy has also provided DEPB benefits to such supplies since they are now considered exports.