To spread out industrialisation, the Centre has drastically reduced the mandatory built-up processing area for small cities  The proposed direct tax code (DTC), which comes into effect from April 1, 2011, has led to debates, discussions and disappointments among industry associations, developers, investors and even ministries as it scraps the substantial tax benefits. The current scenario: Developers of special economic zones (SEZs) enjoy 100% tax exemption on profits for 10 years and are even allowed to choose the said time period from the block of first 15 years. On the other hand, SEZ units also get 100% tax exemption on profits but for first 5 years, followed by 50% tax concession for the next 5 years and another 50% exemption on re-invested profits for the following 5 years.
In an endeavour to ease the tensions, finance minister Pranab Mukherjee recently announced to provide certain extra time beyond the aforementioned cut-off date, from the time the proposed DTC gets implemented. Committing to keep all the promises made, the FM further clarified that the proposed DTC, which would be introduced in the monsoon session of the Parliament, would only pull out profit-linked tax benefits and would continue with investment-linked tax concessions to SEZ units and developers.
The reason for uproar
As the proposed DTC draft replaces the Income Tax Act of 1961, after being approved by the Parliament, only existing SEZ units will continue enjoying tax exemptions. Obviously, tax benefits would be denied to the new units. In other words, this means all units that commence operation by the cut-off date will enjoy tax concessions.
In order to consider an operational SEZ, a minimum of one unit has to start exports. According to current statistics available, a meagre 111 SEZs are operational out of the approved 580.
In addition, developers may also be required to pay 18% minimum alternative tax (MAT) under the proposed DTC regime.
Till now, SEZs have attracted Rs 1.5 lakh-crore worth of investment and there are strong apprehensions that investors may shy away as tax concessions are revoked.
The proposed DTC may severely impact sectors like IT where investments are usually low. Therefore, IT industry body Nasscom[i] president Som Mittal has urged the government to continue with the tax benefits to new SEZ units for few more years, proposing the Centre to define a period for making the SEZs operational. Mr Mittal added, “There are SEZs that are yet to be operational but are notified.”
Commerce Ministry’s solution
Striving hard to remove uncertainties and retain investments, the country’s Commerce Department has recently shared some effective proposals with the Revenue Department over a letter, claiming to provide investors who have already put in money in the zones with the tax incentives promised under the current rules. However, the Ministry refused to divulge further details on the ground that the suggestions will have to be discussed with the FM.
In another significant move, the government has halved the mandatory built-up processing area for SEZs to 250 hectares for small cities and 125 hectares in smaller towns from the earlier 500 hectares. This step has been taken to decongest bigger cities and spread industrialisation.
Jeeta Bandopadhyay
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