Ordinance likely to give exporters tax respite

MUMBAI: The Centre is likely to promulgate an ordinance in the next few days to provide relief to loss-making exporters who are collectively facing an additional tax demand of Rs 4,000 crore.

The exporters were asked to pay additional tax by the Income-Tax department, which took the stand that loss-making exporters are not entitled to claim export benefits under the now defunct 80 HHC of the Income-Tax Act.

Since the Supreme Court too decided against loss-making firms claiming export benefits, an ordinance is the only means by which the government can settle the issue in favour of the exporters.

The Supreme Court decision was in the case of IPCA Laboratories. But the apex court���s decision did not put an end to the matter. It has spawned varied interpretations and to top it all, the I-Tax department has started reopening old assessments, giving retrospective effect to the apex court���s decision.

Following this, a special bench was set up by the Income-Tax Appellate Tribunal (ITAT), which gave a verdict last February against loss-making firms claiming such benefits.

The ordinance was expected to be issued by the end of October ���05. Though there has been a delay, sources said that it would be issued soon. Since an ordinance is in the offing, the tax administration too has not been active on recovering the dues arising from demands on loss making exporters.

Section 80 HHC of the I-T Act dealt with the exemption provided to profits arising from exports. If the export business ultimately results in a loss, the assessee is not entitled to claim any exemption under 80 HHC.

The question here is about how one calculates the profits attributable to exports in various situations, to determine whether the assessee has made a loss or profit. For example, exporters are entitled to certain benefits like DEPB, which can be sold at a price. The debate was whether such benefits also figure in calculating the profit or loss of an exporter.

The exporters argue thus: for a vast majority of the small and medium exporters, their only margins are the incentives such as duty drawback or DEPB made available to them as a reimbursement of the customs & excise duty incidence borne by them in the manufacture of the end products.

In cases where export incentives are more than profits directly derived from exports (excluding export incentives) of a particular firm, such firms are considered to have negative profits and thus not eligible for tax benefits.

For example, if the drawback rate for a particular export product is 15% and profits directly derived from exports (excluding export incentive is less than 15%) such transactions shall always be of negative profits.

In other words, if an exporter has even Rs 1 of profit from export activity, he will get full deduction by way of export incentive and if he incurs a loss of Rs 1 from export activity, he will get nil deduction under 80-HHC.

The problem arose when the I-T department re-opened several old files of exporters and denied the tax benefits claimed in the past under the section 80 HHC of the Income-Tax Act. The provision was phased out in five instalments by ���04.

The exporters then staged an agitation against the I-T department, which was reopening the assessment of the exporters. In some cases I-T officials even reopened returns filed six years ago, to levy additional tax by reversing the earlier decision to give export benefits under section 80 HHC of the Income-Tax Act. It is to rectify this situation that the government is issuing an ordinance.