The income-tax department on Wednesday clarified that businesses running Special Economic Zones (SEZs) in the IT and ITeS sector would not be eligible for income-tax sops if these export units have more than 20% of their employees deputed from other units by way of business restructure.
For SEZ units, which were disappointed with the government not removing the minimum alternate tax (MAT) and dividend distribution tax (DDT) in the first full-year Budget of the Modi government, the tax department’s move brings added woes, said industry experts.
The finance ministry that examined the quantum of exports from SEZ units and from the domestic tariff area as part of its budget-making exercise then concluded that exports from these duty-free enclaves were actually the business that got shifted from domestic tariff area in order to claim tax benefits and that tax sops had actually failed to create fresh exports or quality infrastructure.
The Income-Tax Act mandates that benefit of allowing a business to deduct SEZ export profits from their total taxable income shall be available only if these units are not formed by splitting up, or reconstructing an existing business. The norm is applicable for plant and machinery too, but the law was silent on redeployment of manpower, which is the most important resource in the IT and ITeS industry.
The circular issued on Wednesday clarified that mere transfer or re-deployment of existing technical manpower to a new SEZ unit in the first year of business will not be construed as splitting up or reconstruction of existing business if the transferred technical manpower does not exceed 20% of the total technical manpower engaged in the business. The rider is applicable at all times of an assessment year.
Experts said that in the case of disputes, courts had earlier held that manpower was not covered by the rider preventing restructured business availing the tax benefit. Some criticised the move saying the circular was not in sync with the Income-Tax Act provision.
Analysts pointed out that the Rangachary Committee that examined taxation of the IT sector, had in its 2013 report, said that there was no requirement regarding appointing new employees in a unit eligible for profit-linked deduction. It had also suggested that assigning existing staff in a new SEZ cannot be considered reconstruction of existing business for tax purposes.
The panel, however, proposed a prospective change in norms by way of having a threshold of 50%