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HC upholds withdrawal of SEZ tax exemptions – Blow For Cos As They Need to Pay MAT, DDT June 20, 2013

Posted by Khurana Khurana & Associates LLP Chartered Accountants in Tax Planning & Compliance.
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Courtesy The Times of India, New Delhi, Wednesday, June 19, 2013


Section 10AA – Special provisions in respect of newly established Units in Special Economic Zones inserted by the Special Economic Zones Act, 2005 provides that in computing the total income of an assessee, being an entrepreneur who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of:-

i.            100% of Profits and Gains derived from the export, of such articles or things or from services for a period of 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services and 50% of such profits and gains for further 5 assessment years thereafter.

ii.            For the next 5 consecutive assessment years, so much of the amount not exceeding 50% of the profit as is debited to the Profit and Loss account of the previous year in respect of which the deduction is to be allowed and credited to Special Economic Zone Re-investment Reserve Account to be created and utilised for the purposes of the business of the assessee in the manner laid down.


Sub section (6) 115 JB – Special provision for payment of tax by certain companies Inserted by the Special Economic Zones Act, 2005 w.e.f 10-02-2006 provided that the provisions of section 115JB shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.

Insertion by the Finance Act, 2011 w.e.f. 01-04-2012 provided that the provisions of this subsection shall cease to have effect in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012.

In the News-

A bunch of companies having units in SEZs and SEZ developers such as MindTree, Biocon, Opto, Circuits, Opto Infrastructure and Primal Projects to name a few had petitioned the Karnataka high court against the withdrawal of MAT and DDT exemption available to them earlier. The petitioners claimed that they had made heavy investment and established units in SEZs or developed SEZs on the basis of the tax holiday benefits available, which included MAT and DDT exemption. Thus withdrawalof the exemption was violative of various articles of the Constitution.

The Karnataka HC dismissed the petition on various grounds. It held that it is a settled position of law that every tax exemption should have a sunset clause. As the MAT and DDT exemption for SEZs did not have a sunset clause, the flaw was removed by an amendment. Second these exemptions created an inequality between SE companies and other companies, which was removed by the amendment.

The  HC pointed out that such exemptions also resulted in erosion of the tax base. It upheld the right of the government to make amendment to fiscal policies.