SEZs receive set back from the government measures
The spirits of the IT/ITeS sector had risen upon the finance minister’s announcement in the Budget speech that the government would take measures to revive the SEZs. Many companies started even planning to take up new space in the SEZ units.
However all does not seem to be rosy. The first blow came with the clarification that the minimum alternate tax (MAT) exemption that the SEZs and SEZ units enjoyed till a few years ago will not be restored.
Now comes another blow with the recent circular issued by the Central Board of Direct Taxes (CBDT) on transfer of employees from an existing unit to an SEZ unit.As a background, one of the main litigation areas around setting up of new SEZ units, especially in the IT/ITeS sector, has been the satisfaction of the ‘formative conditions’.
Some of these conditions are that the SEZ unit should not be formed by splitting up and reconstruction of an existing business, and the SEZ unit should not be formed by transfer of used plant and machinery to the SEZ unit exceeding 20 % of the total plant and machinery of the SEZ unit. There is an 80:20 rule for assets which needs to be followed diligently.
“Splitting up and reconstruction of an existing business” is not defined in the Income-tax Act, but as per judicial precedents is understood to mean “substantially the same business being carried on by substantially the same persons”.
In case the ‘formative conditions’ are not satisfied by the SEZ unit, it is not eligible to claim the tax holiday under section 10AA of the Income-tax Act. Now all these new situations have again dampened the sentiments of the corporates and they are speculating whether they want to open new units in India or look for greener pastures in other countries.
Source- The Financial Express
