SEZs get their tax holiday at last, albeit a truncated one

The much-publicised package for special economic zones has fallen short of expectations. While making the time limit for commencement of operation open-ended, the government has offered full income-tax exemption to SEZ units for five years.

The trade and industry was expecting full tax exemption for 10 years.

The government has also offered SEZ units 50 per cent I-T exemption for two years, extending the waiver to seven years. The concession is available to units commencing after April 1, 2002.

As of now, the I-T holiday is available to SEZ units only till April 1, 2009. The concession offered by Finance Minister Yashwant Sinha ex-tends the benefit beyond this to enable new units to avail of at least five years of full exemption under 10A.

The decision to do away with the time-limit for availing I-T holiday is in view of the long time needed to establish greenfield SEZs.

Not even a single new private sector SEZ has come up till now and current estimates say it will take at least five years for greenfield units to become operational. Going by this estimate, units in new SEZs are unlikely to start commercial pro-duction before 2007.

The decision to award I-T exemption to new SEZ units under Section 10A of the Income Tax Act is in line with the new Exim policy.

The concession will be available to all SEZ units coming up ‘on or after’ April 1, 2002. The existing SEZs are converted EPZs and the units located in these units are covered by the current dispensation which aims at phasing out of these concessions by 2009.

Another major concession for SEZs is export status for supplies to SEZs from the domestic tariff area (DTA). Till now, such supplies from the domestic market were eligible only for physical export benefits.

But now all goods and services sourced by SEZs would be free of taxes. Customs, excise and central sales tax (CST) will not be applied on supplies to SEZs. The government plans to move amendments in the Finance Bill 2002 to make changes in the Customs Act, Central Excise Act and the CST Act to give effect to this policy.

The government has also offered a lolly to export-oriented units (EOUs) in the form of undisturbed tax holiday even if the ownership changes hands.

Under current rules, tax holiday provided under Sec-tion 10A and 10B of the I-T Act is withdrawn if there is a change in beneficial ownership of an EOU.

The government has now proposed that this norm will not apply if an EOU owned by a firm or a sole proprietary concern is transferred to a company by way of succession to a business.

However, this flexibility would be subject to conditions which will be announced by the government later.

While the concessions will accelerate the pace at which greenfield SEZs like the ones planned at Positra and Nanguneri are set up, units planning to set up shops in these zones are likely to seek more concessions.