SEZ update from Hindu business line

Investment-linked sops to SEZ developers proposed
Our Bureau
New Delhi, Aug 10
The Finance Ministry said on Tuesday that the Direct Taxes Code (DTC) proposes to substitute the currently available profit-linked incentives with investment-linked deductions for specified sectors including developers of Special Economic Zones (SEZ).
This is because profit-linked sops are inherently inefficient and regressive as it could lead to money laundering and shifting of profits to the exempted activity, the Minister of State for Finance, Mr S.S. Palanimanickam, said in a written reply in Rajya Sabha.
The revised DTC draft also seeks to protect the profit-linked deduction for the unexpired period only for those SEZ units beginning operations before March 31, 2011, he said. The DTC is expected to come into force from April 1, 2011.
Since profit is the basis for exemption in all profit-linked incentives, there is no incentive for investment and upgradation during the period of tax holiday, the Minister said. Such profit-linked incentives also lead to significant loss of revenue and encourage rent-seeking behaviour, he said.
Investment-linked incentives are better directed instruments since they are performance based and target the incentive specifically to the capital investment, the Minister said.
Therefore, the Code moots the substitution of profit-linked sops with investment-linked deductions for specified sectors including SEZ developers, he said.
However, the DTC proposes a provision for profit-linked deduction currently available to developers of SEZs for the unexpired period only for all SEZs that are notified on or before the commencement of DTC, he said.
The DTC also moots a provision for an investment-linked deduction for all SEZ developers notified on or after the commencement of the DTC. Besides, it seeks to levy Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on SEZ developers. The DTC draft also specifies that there will not be any tax benefits for SEZ units set up on or after the date of commencement of the DTC, adding that SEZ units will also attract MAT.
The special tax benefits enjoyed by SEZ units include: Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units; total Income-Tax exemption on export income for SEZ units for the first five years, 50 per cent exemption for the next 5 years thereafter and 50 per cent of the ploughed back export profit for next five years; exemption from MAT as well as permission for external commercial borrowing by SEZ units up to $500 million in a year without any maturity restriction through recognised banking channels.
Besides, SEZ developers are exempted from customs/excise duties for development of SEZs for authorised operations approved by the Board of Approvals; I-Tax exemption on income derived from the business of development of SEZs in a block of 10 years in 15 years; exemption from MAT and DDT.
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