SEZ & Shared Services – brief discussion on Tax Issues.

PPC SEZ & Shared Services – brief discussion on Tax Issues. Puneet Puri Partner, International Taxation Puneet Puri & Company CEO, Research & Strategies

SEZ Special Economic Zones (SEZ)— The Next Frontier for India

Why SEZs The drivers of Economic Growth are: Investment & Capital Formation Improved Export Competitiveness Need for: World-class infrastructure Hassle free taxation laws and procedures Competitive fiscal package Limitations in achieving this all over the country Special Economic Zones (SEZs) as vehicle to create environment for investments and exports.

Legislative framework

SEZ Act & Rules-Main Features • Simplification of procedures • Single window clearance for setting up SEZ; • Single Window clearance on matters relating to Central as well as State Governments for setting up units in a SEZ; • Simplified compliance procedures and documentation with an emphasis on self certification; • One Stop Shop; • Tax concessions for both Developers & Units.

SEZ FORMATS

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 Development Commissioner 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

Tax Framework

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 services also. • Exemption from MAT to SEZ Developers and SEZ Units. • SEZ Developers exempted from Dividend Distribution Tax.

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 or services provided from SEZs or Unit to any place outside India. • Exemption from Central excise duty on goods brought from DTA to SEZs or Unit • Exemption from service tax on taxable services provided to SEZ developer or Unit for their authorised operations. (However such exemption on exports made by unit need to meet criteria of “Export of Service Rules”) • Central sales tax exemption on sale/purchase of goods for authorised operations other than newspapers where such sale takes place in the course of interstate trade or commerce • Tax exemption on electricity and power consumption

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

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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SEZ & Shared Services – brief discussion on Tax Issues.