'Move to end sops for SEZs not right'

Commerce ministry is not happy with new DTC plan

The Finance Ministry in its Revised Discussion Paper (RDP) on the Direct Tax Code (DTC) has proposed doing away with the present provision under which companies set up in SEZ enjoy a 15-year tax exemption.

Under Section 10 AA of the Income Tax Act, SEZs are given 100 per cent Income Tax exemption for first five years, 50 per cent for next five years and 50 per cent of ploughed back export profit for remaining five years.

While soliciting comments on tax proposals made in the RDP on draft DTC, the Finance Ministry has proposed that existing units and those which would be approved before March 31, 2011 would continue to enjoy tax holiday according to present norms.

But it has not mentioned anything about tax incentives for SEZ units once the DTC, which seeks to replace the archaic Income Tax Act, 1961, comes into effect from the scheduled date of April 1, 2011.

The RDP noted “profit-linked deductions are distortionary in nature as they create an incentive to inflate profit as well as to transfer profits from a taxable entity to a non-taxable one.”

Such exemptions also lead to tax evasion and avoidance, the Finance Ministry has contended.  But the Commerce Ministry is understood to be not convinced with this argument.

“Withdrawal of current Income Tax benefits to units in SEZ will affect flow of investment into SEZ zone,” an official said.

“It is the existing Income Tax exemptions benefits, which are playing a big role in attracting investment into SEZ. With the removal of these tax exemptions SEZ units will be at par with units set up outside SEZ, where regular taxes and duties are applicable.
This will affect flow of investment into SEZ zone,” he said, adding “We will take up the matter with the Finance Ministry.”