Tax holiday for newly established units in SEZ units

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Taxation
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December 18, 2021

Section 10AA is a stipulation under the income tax act that allows taxpayers to take deductions for businesses established in special economic zones (SEZ). In April 2000, to attract foreign investment in India, the government announced tax concessions for businessmen who set up the defined businesses in special economic zones. Duly, at first, SEZs were instituted to function under the provisions of the foreign trade policy. However, the SEZ act and SEZ rules were gradually formed and made effective from 2006. As a result, income tax benefit or section 10AA deduction is obtainable to SEZ, and the corresponding provisions are accommodated under section 10AA of the income tax act.

Who can claim deduction u/s 10AA?
Deduction under this section is obtainable to all or any categories of assesses being entrepreneur viz., individuals, firms, companies, etc. who derive any profits or gains from an undertaking being a unit engaged within the export of articles or things or providing any service, provided the assessee has its units under special economic zones(SEZ).

Eligibility for section 10AA deduction
To assert deduction under section 10AA of the income tax act, SEZ units were required to satisfy the following conditions:

The entrepreneur should be covered within the provisions of section 2 (j) of the special economic zone act, 2005.
SEZ unit should have started its manufacturing activity or provision of service, as the case may be, during the foregoing year relevant to any assessment year beginning on or after 1^st April 2006;
SEZ unit is not formed by any splitting up or the reconstruction of the business that is already in existence.
SEZ unit is not formed by any transfer of plant or machinery, previously used for any purpose, to a new business; and
Units who have already enjoyed the benefit of deduction under section 10AA of the income tax act for a continuous period of ten years are not entitled to assert abstraction under section 10AA of the act.

Amount of deduction
The amount of deduction available under this section shall be as follows:

100% of export profit is eligible for the deduction for the first five years.
50% of export profit is eligible for the deduction for the next five years.
Amount not exceeding 50% of export profit is entitled for the abstraction for the next five years.

The state for allowance of the abstraction is that the same has to be debited from the statement of profit and loss and attributed to ‘special economic zone reinvestment reserve account.’ Also, section 10AA deduction is permissible from the assessment year relevant to the foregoing year in which the SEZ unit commences its manufacturing procedure or commences service provision, as the case may be.

Calculating section 10AA deduction
Section 10AA deduction has to be computated on the basis of the following formula:
(Profit of business of the unit * export turnover of the unit) / total turnover of the business

Export turnover of the unit intends contemplation relating to export by the undertaking acquired in or brought into India. Such turnover/ consideration does not involve freight, telecommunication charges or insurance cost contracted for the delivery of a merchandise or consumable item outside India or any other cost incurred in foreign exchange for the rendering of services outside India.

Amalgamation or merger
Following would be the result in case the unit authorized for abstraction under section 10AA has been moved to another undertaking, before the expiry of deduction period, in a scheme of amalgamation or demerger:

The abstraction will not be obtainable under section 10AA to the amalgamating or demerged unit, as the case may be, for the foregoing year in which the amalgamation or demerger has taken place; and
Additionally, provisions of section 10AA should be applied to the amalgamated or demerged unit, assuming no amalgamation or demerger has taken place.

At AJSH, we assist our clients with various income tax compliances, including income tax assessments, TDS returns, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about section 10AA SEZ units of the income tax act 1961, kindly contact us.