In a move that could make it easier for eligible service sector units in SEZs, including IT/ITeS, to claim income tax exemptions, the Commerce Department is pushing a budget proposal seeking flexibility for such units in meeting the condition of ploughing back of export profit, sources said.
“The Commerce Department wants that Union budget for FY26 should allow services sector units in SEZs to plough back their export profit in expenditure on additional employment of workers, instead of just plant and machinery. They would then be in a better position to utilise the tax exemptions available,” a source told businessline.
As services units do not have the need to do substantial capital expenditure after their initial investments are made, often they are not in a position to gainfully re-utilise profit in buying machinery and hence run the risk of missing out on part of the income tax exemption allowed under the SEZ Act.
The SEZ Act allows 100 per cent income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50 per cent for next 5 years thereafter and 50 per cent of the ploughed back export profit for next 5 years.
sunset clause
Although the sunset clause on the direct tax exemptions set in on April 1 2020, all units approved before the date are eligible for the exemptions.
To claim the third tranche of the income tax exemption, SEZ units have to necessarily plough back their export profits into buying of machinery.
The Finance Ministry is not too eager to fall in line with the Commerce Department’s demand for flexibility as it contends that the SEZ rules are transparent and were put in place after a lot of thought and discussions.
The Commerce Department, however, argues that when the section for income tax exemption on reinvested profits was being built in, specific thought was not given to services units.
“In some cases, only when certain things are implemented that some areas of concern surface. It does not mean that these should go unaddressed,” the official said.
The move is unlikely to hold serious financial implications as the sunset clause on direct tax benefits for SEZ units has already set in, and the flexibility would only be accorded to units that came up before April 1 2020. “The financial impact of the proposed move of granting flexibility would be limited as those who would benefit from it are limited,” the source explained.
To top it all, the proposal would also gel completely with the government’s larger objective of employment generation as it would make SEZ services units to employ more workers, the source added.
Of the 423 SEZs granted formal approval so far in various parts of the country under SEZ Act 2005, as many as 272 are from the IT/ITES/electronic hardware and software sectors.
The SEZs attracted investments worth ₹6,92,914 crore up to December 31 2023. In FY 24, the SEZ units accounted for exports worth ₹13,55,220 crore.