Saturday, 4 January 2020

Unit 7: Deductions: For Special Conditions

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Unit 7: Deductions: For Special Conditions 


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 1st April 2000 to 31st 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 1st April 2005 i.e. Year ended 31st 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, telecom 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 1st April, 1995 but on or before 31st 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 1st 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
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 fi rst 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 fi rst fi ve assessment years and 25% (30% in the case of a company) for the next fi ve 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.


Section 80-IE provides for an incentive to an undertaking which has during the period between 1st April, 2007 and 1st April, 2017, begun or begins, in any of the North-Eastern States (i.e., the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura) – to manufacture or produce any eligible article or thing; to undertake substantial expansion to manufacture or produce any eligible article or thing; and to carry on any eligible business.


Eligible article or thing means the article or thing other than the goods falling under Chapter 24 of the First Schedule to the Central Excise Tariff Act, 1985 which pertains to tobacco and manufactured tobacco substitutes; pan masala as covered under Chapter 21 of the First Schedule to the Central Excise Tariff Act, 1985; plastic carry bags of less than 20 microns; and goods falling under Chapter 27 of the First Schedule to the Central Excise Tariff Act, 1985 produced by petroleum oil or gas refi neries.


Where the gross total income of an assessee includes any profits and gains derived by such an undertaking, a deduction of 100% of the profits and gains derived from such business for 10 consecutive assessment years commencing with the initial assessment year shall be allowed in computing the total income of the assessee.

Initial assessment year means the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things, or completes substantial expansion.


Arms length price: The price at which two unrelated and non-desperate parties would agree to a transaction.

Assessing officer: He or she is an officer of the Income tax department who has been given jurisdiction over a particular geographical territory or class of persons.

Co-developer: It implies a person who, or a State Government which has been granted a letter of approval by the Central Government under section 3(12) of the SEZ Act, 2005.

Deduction: Any item or expenditure subtracted from gross income to reduce the amount of income subject to tax.

Developer: It is a person who, or a State Government which has been granted a letter of approval by the Central Government under section 3(10) of the SEZ Act, 2005.

Domestic satellite: It is a satellite owned and operated by an Indian company for providing telecommunication services.

Market Value: It is the price at which an asset would trade in a competitive auction setting.

Special Economic Zones (SEZs): These are free trade zones, having completely different set of administrative and taxation laws outside the purview of customs authorities.

Substantial expansion: It means increase in the investment in the plant and machinery by at least 25% of the book value of plant and machinery as on the first day of the previous year in which the substantial expansion is undertaken.

Telecom undertakings: 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 1st April, 1995 but on or before 31st March, 2005.


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