Tax Holiday : SPECIAL ECONOMIC ZONE [Section 10AA]

Special Economic Zone (SEZ)- Special Provisions in respect of newly established units in special economic zone.

1. Assessees who are eligible for Deduction under Section 10AA:

Deduction under this section is available to all categories of assessees being entrepreneurs viz., individuals, firms, companies, etc. who derive any profits or gains from an undertaking being a unit engaged in the export of articles or things or providing any service.

2. Essential conditions to claim Deduction under Section 10AA:

The deduction shall apply to an undertaking which fulfils the following conditions:

  1. It has begun or begins to manufacture or produce articles or things or provide any service during the previous year relevant to any assessment year commencing on or after 1.4.2006 but before 1.4.2021 in any Special Economic Zone.

  2. It should not be formed by the splitting up or reconstruction of a business already in existence. However, deduction is provided if the unit is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of the undertaking as is referred to and satisfying the conditions in section 33B.

  3. It should also not be formed by the transfer of machinery or plant, previously used for any purpose, to a new business. However, the following are the two exceptions to this condition:

    1. Machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled:

      1. The machinery or plant should not be previously used in India.

      2. The machinery or plant should be imported into India from a foreign country.

      3. No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act to any person previously.

    2. Deduction under section 10AA will, be available if the total value of the second hand machinery or plant transferred to the new undertaking does not exceed 20 per cent of the total value of the machinery or plant used in the industrial unit.

  4. The assessee should furnish in the prescribed form [Form No. 56F], alongwith the return of income, the report of a chartered accountant certifying that the deduction has been correctly claimed in accordance with the provisions of this section.

  5. The provisions of section 80-IA(8) (relating to inter-unit transfer) and section 80-IA(10) (relating to showing excess profit from such unit) shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. Similarly, owing to the close connection with any other person, the business of the eligible assessees so arranged that it produces to the assessee more than ordinary profits, the Assessing Officer shall have a right to recompute the profits by taking the reasonable profits which could be derived. In other words, if the assessee has more than one business and there is a transfer to or from the undertaking eligible for deduction under section 10AA the Assessing Officer shall have a power to recompute the profits of such undertaking if such transaction has not been recorded at market value.

3. Period for which Deduction is available under Section 10AA

The deduction under this section shall be allowed as under for a total period of 15 relevant assessment years.

1For the first 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which the unit begins to manufacture such articles or things or provide services100% of the profits and gains derived from the export of such articles or things or from services
2Next 5 consecutive assessment years50% of such profits or gains
3Next 5 consecutive assessment yearsSo much of the amount not exceeding 50% of the profits as is debited to profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to Special Economic Zone Reinvestment Reserve Account to be created and utilised for the purpose of the business of the assessee

Example:

An undertaking is set up in a Special Economic Zone and begins manufacturing on 15.10.2017. The deduction under section 10AA shall be allowed as under:

  1. 100% of profits of such undertaking from exports from assessment year 2018-19 to assessment year 2022-23.
  2. 50% of profits of such undertaking from exports from assessment year 2023-24 to assessment year 2027-28.
  3. 50% of profits of such undertaking from exports from assessment year 2028-29 to assessment year 2032-33 provided the conditions mentioned in section 10AA(2) given below are satisfied.

(a) Conditions to be satisfied for claiming deduction for further 5 years (after 10 years) [Section 10AA(2)]

  1. The amount credited to the Special Economic Zone Reinvestment Reserve Account is to be utilised—
    1. for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of 3 years following the previous year in which the reserve was created; and
    2. until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.
  2. The particulars, as may be prescribed in this behalf, should be furnished in Form No. 56FF, by the assessee in respect of machinery or plant along with the return of income for the assessment year relevant to the previous year in which such plant or machinery was first put to use.

(b) Consequences of mis-utilisation/non-utilisation of reserve [Section 10AA(3)]:

Where any amount credited to the Special Economic Zone Re-investment Reserve Account:

  1. has been utilised for any purpose other than the purchase of machinery or plant as mentioned above, the amount so utilised shall be deemed to be the profits of the year in which it was so utilized and shall be charged to tax; or
  2. has not been utilised before the expiry of the aforesaid period of 3 years, the amount not so utilised shall be deemed to be the profits of the year immediately following the period of said 3 years and charged to tax.

4. How to Compute Profit and Gains derived from Exports of such undertakings [Section 10AA(7)]:

For the purpose of the exemption under this section, the profits derived from export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the unit, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the assessee.

In other words it will be as under:

Tax Holiday Section 10AA
Tax Holiday Section 10AA

Explanation under Section 10AA(1)

For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.

In other words, it has been clarified that the amount of deduction referred to in section 10AA shall be allowed from the total income of the assessee computed in accordance with the provisions of the Act before giving effect to the provisions of the section 10AA and the deduction under section 10AA shall, in no case, exceed the said total income.

5. Conversion of EPZ/FTZ into “special economic zone” [Proviso 2 to section 10AA]:

Where a unit initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of 10 consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone.

However, where a unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone and has completed the period of 10 consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect from the 1.4.2006.

6. Ban on enjoyment of other Tax Benefits:

  1. The following allowances or expenditure shall be deemed to have been allowed and absorbed during the course of the relevant assessment years ending before 1.4.2006:
    1. depreciation allowance under section 32;
    2. expenditure on scientific research under section 35; and
    3. expenditure in relation to family planning under section 36(1)(ix). 

      The aforesaid expenditure/allowance even if, unabsorbed during the relevant assessment years ending before 1.4.2006, shall be deemed to have been fully claimed and allowed. However, unabsorbed depreciation, unabsorbed expenditure on scientific research and capital expenditure on family planning pertaining to assessment year 2006-07 or any subsequent assessment year shall be allowed to be carried forward and set off.
  2. No portion of the losses pertaining to business under section 72(1) or capital gains under section 74(1) or section 74(3) with respect to any assessment year ending before 1.4.2006 forming part of the tax holiday period, to the extent pertaining to the undertaking, being the unit shall be claimed in any assessment year subsequent to the last of the assessment year forming part of the tax holiday period. However, as per section 10AA(6), losses referred to in section 72(1) or section 74(1) and (3) in so far as such losses relate to the business of the undertaking being the unit, pertaining to assessment year 2006-07 or any subsequent assessment year shall be allowed to be carried forward and set off

7. WDV after tax holiday period:

It shall be presumed that during the tax holiday period under section 10AA, the assessee had claimed and had been allowed depreciation allowance, and hence the written down value of the depreciable assets shall be computed accordingly, after the conclusion of the tax holiday period.

8. Deduction allowable in case of amalgamation and demerger [Section 10AA(5)]:

Where any undertaking, being the unit of an Indian company which is entitled to the deduction under this section is transferred to another Indian company under a scheme of amalgamation or demerger, the deduction shall be allowable in the hands of the amalgamated or the resulting company. However, no deduction shall be admissible under this section to the amalgamating company or the demerged company for the previous year in which the amalgamation or demerger takes place.