SEZ & Shared Services – brief discussion on Tax Issues.

PPC

Puneet Puri

Partner, International Taxation

Puneet Puri & Company

CEO, Research & Strategies

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SEZ

Special Economic Zones (SEZ)—

The Next Frontier for India

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Why SEZs

The drivers of Economic Growth are: Investment & Capital Formation Improved Export Competitiveness

Need for:World-class infrastructureHassle free taxation laws andproceduresCompetitive fiscal package

Limitations in achieving this all over the country

Special Economic Zones (SEZs) as vehicle to create environment for investments and exports.

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Legislative framework

SEZ Act 2005

Basic framework for construction,development, operation & maintenance of SEZs prescribed under the Act & prescribes the tax and other fiscal incentives Available.

SEZ Rules 2006

Rules & regulations defining guidelines & procedures for effective operation of the SEZ Act 2005.

State SEZ Policy

Prescribes guidelines & various policies for giving effect to SEZ Act 2005 & provides for substantive & procedural benefits offered by the State to SEZ developers & units

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SEZ Act & Rules-Main Features

Simplification of procedures

• Single window clearance for setting up SEZ;

• Single Window clearance on matters relating toCentral as well as State Governments for settingup units in a SEZ;

• Simplified compliance procedures and documentation with an emphasis on self certification;

• One Stop Shop;

• Tax concessions for both Developers & Units.

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SEZ FORMATSType of SEZs Minimum Area Requirement

(in hectares)MinimumProcessingArea (presentlypermitted)

Multi Product 1,000 hectares to 5000 hectares (maximum) 50% (To promote widespread development, in certain states and union territories the minimum area requirement has been reduced to 200 hect.)

50%

Multi Services/Sector Specific

100 (To promote widespread development, in certain states and union territories the minimum area requirement has been reduced to 50 hectares)

50%

IT/ ITES, Gems &Jewellery, Bio-Techand Non-Conventional Energy

10 with minimum built up area of:- 100,000 sq meters for IT- 50,000 sq meters for Gems & Jewellery- 40,000 sq meters for Bio-Tech and Non-Conventional Energy

50%

Free TradeWarehousing Zone

40 with minimum built up area of 100,000 sq.meters

50%

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Regulatory Framework – An overview

SPECIFIC CONDITIONS:

Land in SEZ cannot be sold

Development Commissioner to demarcate processing area –subsequent to which proposals for setting up of units will be entertained

Only units with valid Letter of Approval from DevelopmentCommissioner can set up operations

Land may be allotted for development of infrastructure facilities for use by Units - specific approval may be obtained for lease of land for creation of facilities such as canteen, PCOs, first aid centres, creche,etc for exclusive use of unit

Only authorised persons with identity cards permitted to enter processing area

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Tax Framework

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Direct Tax Incentives…for SEZ Developers & Units• SEZ developers given IT exemption for 10 consecutive

assessment year out of first 15 years of its operations.Exemption from Corporate Tax to SEZ units for 15 years(5 + 5 + 5).•100% for first 5 years;•50% for next 5 years; and•50% for next 5 years to the extent of profits ploughed

back

• Corporate Tax exemption extended to export of servicesalso.

• Exemption from MAT to SEZ Developers and SEZ Units.

• SEZ Developers exempted from Dividend Distribution Tax.

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Indirect Tax Incentives Customs duty exemption for goods imported into or

services provided in SEZs or to Unit

Customs duty exemption on goods exported from orservices provided from SEZs or Unit to any place outsideIndia.

Exemption from Central excise duty on goods brought fromDTA to SEZs or Unit

Exemption from service tax on taxable services provided toSEZ developer or Unit for their authorised operations.(However such exemption on exports made by unit need tomeet criteria of “Export of Service Rules”)

Central sales tax exemption on sale/purchase of goods forauthorised operations other than newspapers where suchsale takes place in the course of interstate trade orcommerce

Tax exemption on electricity and power consumption

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Special Economic Zones

SEZs are the latest buzzword in the industry today

Benefits under the SEZ scheme are high

Transition from STP to SEZ Not allowed to migrate a unit/business registered with

STPI into an SEZ Issue is whether majority of the employees of a STP

unit can be transferred into SEZ unit In effect, the business, assets and employees of the

SEZ unit would have to be different and distinct from those of an existing STP unit of the assessee

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Special Economic Zones

Computation of benefit under Section 10AA Similar to section 10A, the benefit is computed

by a formula Formula for computing the benefit is

Profits of the business of the undertaking X export turnover in respect of articles or things or services / total turnover of the business carried on by the assessee

The above formula seems to be another challenge which the tax payers would face

If it is interpreted to mean that the denominator in the formula is the entire turnover of the business of the assessee, the benefit would be much lesser if the assessee carries on more than one businesses

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