The Software Technology Parks Scheme (“Scheme”) was launched on June 5, 1991 to provide much needed boost to the Indian IT sector. The Scheme, as expected, brought about a revolution in the sector. The small and medium IT companies in the sector, in particular, gained majorly from the Scheme over the years due to the numerous tax benefits available under the Scheme viz. exemption from payment of excise and customs duties, service tax rebate in cases where the units exported taxable services and re-imbursement of Central Sales Tax on inter-state purchase of goods.
However, the Union Budget 2011-12 has not extended the tax holidays available under the Scheme and thereby, the tax holiday stands expired since March 31, 2011. This implies that any profit earned by the IT companies will be taxed at the hands of STPI after March 31, 2011. This is a major setback for the small and medium IT companies as the going will be tough. Profits of such companies are not huge and if taxes are to be paid, then the companies will be left with no other option than relocating to greener pastures.
Under the circumstances, Special Economic Zones (“SEZ”) set up by the Government may provide a valuable alternative for small and medium IT companies. SEZ have been set up under the Special Economic Zones Act, 2005 for economic growth supported by quality infrastructure and complemented by an attractive fiscal package with the minimum possible regulations. There are several SEZs currently operational in India.
Benefits Available To SEZ Units
- Single window approval mechanism for establishment of units.
- 100% income tax exemption for first five years, 50% for next five years and for next five years 50% of the profit if such profit is reinvested to the SEZ unit.
- Exemption from payment of Minimum Alternate Tax.
- Exemption from payment of Dividend Distribution Tax.
- SEZ units are not charged Value Added Tax and Local Sales Tax, besides other State-levied taxes.
- Duty free import-export of all goods, viz. capital goods, raw materials, office equipment etc. without any license or specific approval.
- Exemption from payment of cess on goods exported out of SEZ or imported into SEZ.
- Upto 100% Foreign Direct Investment (FDI) is allowed through the automatic route for all activities except those that are specifically barred under the applicable FDI regulations.
- Exemption from payment of Central Sales Tax on sales made from domestic tariff area to SEZ units.
- Exemption from service tax on taxable services provided to a developer or unit in SEZ.
- Units in SEZ are allowed to raise External Commercial Borrowings for their own requirement.
- SEZ units may sub-contract part of production or production process through units in the domestic tariff area or through other EOU/SEZ units. SEZ units may also sub-contract part of their production process abroad.
- Flexibility to keep 100 % of export proceeds in Exchange Earner’s Foreign Currency Account. Freedom to make overseas investment from it.
Some issues to be considered before setting up SEZ unit
- Most SEZ developers do not provide an area below 50,000 sq ft.
- SEZ units can be established only within the specified SEZ area and not beyond it.
Student, Amity Law School, Delhi
[Submitted as an entry for the MightyLaws.in Blog Post Writing Competition, 2011]