Page 168 - DCOM301_INCOME_TAX_LAWS_I

Unit 6: Deductions: For Special Conditions

6.6 Summary Notes

A Special Economic Zone (SEZ) is a specified, delineated and duty-free geographical region
that has different economic laws from those of the country in which it is situated. In some
countries, such a region is even treated as a deemed foreign territory.

The Special Economic Zones and Tax Incentives offered as per the SEZ policy of India are
indeed alluring. The Special Economic Zones and Tax Incentives offered covers areas like
state and local taxes, levies, stamp duty and other duties. As per the Income-tax Act, 1961
there are a number of key tax benefits to be provided to SEZs and SEZ Units.
As per section 10A(7B) of the IT Act, deduction under section 10A can be claimed by the
unit in SEZ, which has begun to manufacture or produce articles or things or computer
software between 1 April 2000 to 31 March 2005. No deduction under section 10A will be
allowed to the SEZ unit, which has begun (to manufacture or produce articles or things) on
or after 1 April 2005 i.e. year ended 31 March 2006 (AY 2006-07).

As per the proviso to section 10AA(3) of the IT Act, if due to the application of 10A(7B),
deduction under section 10A is not available to the eligible unit in SEZ, then the said unit
shall be able to claim deduction under section 10AA for the unexpired period of
10 consecutive AYs.
Section 80-IA(1) provides a ten year tax holiday to an assessee, whose gross total income
includes any profits and gains derived by an undertaking or enterprise from an eligible
business i.e., business referred to in sub-section (4) including industrial undertaking, SEZ,
industrial parks, power generation, telecomm and firms engaged in reconstruction of
power unit.
Infrastructure facility means a road, including toll road, a bridge or a rail system, a highway
project including housing or other activities being an integral part of the highway project;
a water supply project, water treatment system, irrigation project, sanitation and sewerage
system or solid waste management system; and a port, airport, inland waterway or inland
port or navigational channel in the sea.
Any undertaking providing telecommunication services, whether basic or cellular,
including radio paging, domestic satellite service or network of trunking (NOT), broadband
network and internet services on or after 1 April, 1995 but on or before 31 March, 2005 can
avail tax deductions.
Sub-section (1) of Section 80-IAB provides for a deduction of 100% of profits and gains
derived by an undertaking or an enterprise from any business of developing a SEZ for
10 consecutive assessment years. The deduction is available to an assessee, being a
Developer, whose gross total income includes any profits and gains derived by an
undertaking or an enterprise from any business of developing a SEZ, notified on or after
1 st April, 2005 under the SEZ Act, 2005.

Section 80-IC allows tax holiday to the new undertakings or existing undertakings on
their substantial expansion in the states of Himachal Pradesh, Uttaranchal, Sikkim and
North-Eastern States. For this purpose, substantial expansion means increase in the
investment in plant and machinery by at least 50% of the book value of the plant and
machinery (before taking depreciation in any year), as on the first day of the previous year
in which the substantial expansion is undertaken.

The tax holiday in the states of Himachal Pradesh and Uttaranchal will be 100% for the first
five assessment years and 25% (30% in the case of a company) for the next five assessment
years. However, tax holiday in the states of Sikkim and North-Eastern States will be 100%
for ten assessment years commencing from the initial assessment year.

LOVELY PROFESSIONAL UNIVERSITY 163