Tax Framework for Special Economic Zones set for a change?

The Government of India is focused and determined to increase the forex reserves of the country. For this, the Government has introduced various schemes for promoting exports of both goods and services and granted various tax incentives to exporters over the years.

SEZ scheme stands foremost amongst others when it comes to income-tax incentives for exporters. In a city like Bangalore, there are many SEZs catering to the IT and ITES sector.

In fact, many more are planned and they will give a great employment boost in addition to generating valuable foreign exchange. Income-tax incentives are important for SEZs, since, they make them attractive for developers to build and tenants to occupy.

Initially, income-tax holidays were provided to SEZ developers and SEZ units without any expiry (i.e. sunset). Further, specific exemptions were provided from the applicability of Minimum Alternate Tax (‘MAT’) and Dividend Distribution Tax (‘DDT’).

However, subsequently, in 2011, exemptions available to SEZ developers and SEZ units from applicability of MAT and DDT were withdrawn. Further, in 2016, tax holiday for SEZ developers were withdrawn if the SEZ was developed say after April, 2017. Similarly, tax holiday for SEZ units was withdrawn if the SEZ unit commences business operations after April, 2020.

In current scenario, employment generation and foreign exchange earnings, being the key focus areas for the Government, SEZ developers and SEZ units have an important role to play. Therefore, the following can be done:

Granting exemptions to both SEZ developer and SEZ units from levy of MAT and DDT;

Re-introduce the tax holiday benefit to SEZ Developer; and

Remove the sunset clause for tax holiday to SEZ units.

Recently, the US Government has reduced the corporate tax rate from 35 Per cent to 21 Per cent. It has also introduced levy of additional taxes on payment to overseas group companies for work outsourced. This is likely to have an impact on various work outsourced by US companies/ tax payers to overseas jurisdictions including India.

In conclusion, the IT and ITES and the infrastructure sectors will be served well if Government can provide any of the above incentives.

Authored by Vikram Doshi, Partner & Tax Head-South, KPMG in India