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Published by: Leelavathi Ramalingam on Mar 20, 2011
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Amendments made by Special Economic Zone Act, 2005Dr. Vinod K. Singhania
 Object of the article
. Both houses of Parliament have passed The Special Economic Zone Act,2005 (³SEZ Act´). After its ascent by the President, the provisions of theSEZ Act will come into force on such date as the Central Government mayby notification in the Official Gazette, appoint. SEZ Act has made anumber of changes in the Income-tax Act. The article examines the impactof these changes.
Special provisions in respect of newly established units in Special Economic Zone [Sec.10AA]
A new section 10AA has been inserted to give income-tax concession to newly establishedunits in Special Economic Zone.
2.1 Conditions:
 The following conditions should be satisfied to claim deduction under section 10AA ± 
Condition 1:
 The assessee is an entrepreneur as defined in section 2(j) of SEZ Act, 2005. Entrepreneur is aperson who has been granted a letter of approval by the Development Commissioner to set aunit in a Special Economic Zone.
Condition 2:
The unit in Special Economic Zone begins to manufacture or produce articles or things or provide services during the financial year 2005-06 or any subsequent year. Manufacture for this purpose means to make, produce, fabricate, assemble, process or bring into existence, byhand or by machine, a new product having a distinctive name, character or use and shallinclude processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture,horticulture, pisciculture, poultry, sericulture, viticulture and mining.
Condition 3:
 The assessee has income from expose of articles or thing or from services from such unit. Inother words, the assessee has exported goods or provided services out of India from theSpecial Economic Zone by land, sea, air or by any other mode, whether physical or otherwise.
Condition 4:
Books of the account of the taxpayer should be audited. The taxpayer should submit auditreport in Form No. 56F along with the return of income.
2.2 Amount of deduction:
If the above conditions are satisfied, one can claim deduction under section 10AA.
Deduction depends upon quantum of profit derived from export of articles or things or services (including computer software). It is calculated as under ± 
rofits of the business of the undertaking × Export turnover ÷ Total turnover of thebusiness carried on by the undertaking
For this purpose, µexport turnover¶ means the consideration in respect of export bythe undertaking of articles or things or services received in, or brought into India bythe assessee, but does not include the following:a.
freight ;b.
telecommunication charges;c.
insurance attributable to the delivery of the articles or things or computer software outside India;d.
expenses, if any, incurred in foreign exchange in providing the technicalservices (including computer software) outside India.
Profits and gains derived from on site development of computer software (includingservices for development of software) outside India shall be deemed to be the profitsand gains derived from the export of computer software outside India.
2.2.1 Deduction for First Five Assessment Years:
100 per cent of the profit and gains derived from export of articles or things or from servicesis deductible for a period of 5 consecutive assessment years. Deduction for the first year isavailable in the assessment year relevant to the previous year in which the unit begins tomanufacture or produce articles or things or provide services.
2.2.2 Deduction for Sixth Assessment Year To Tenth Assessment Year:
50 per cent of the profit and gains derived from export of articles or things or from servicesis deductible for the next 5 years.
2.2.3 Deduction for Eleventh Assessment Year To Fifteenth Assessment Year:
For the next 5 years, a further deduction would be available to the extent of 50 per cent of theprofit provided an equivalent amount is debited to the profit and loss account of the previousyear and credited to Special Economic Zone Re-investment Allowance Reserve Account(hereinafter referred to as Special Reserve Account). The following conditions should besatisfied² 1.
The Special Reserve Account should be utilised for the purpose of acquiring newplant and machinery.2.
The new plant and machinery should be first put to use before the expiry of 3 yearsfrom the end of the year in which the Special Reserve Account was created. For instance, if the reserve account was created during the previous year ending March
31, 2007, it should be utilized for acquiring machinery or plant on or before March31, 2010.3.
Until the acquisition of new plant and machinery the Special Reserve Account can beutilised for the business purposes of the undertaking but it cannot be utilised for distribution of dividends/profits or for remittance outside India as profits or for creating an asset outside India.4.
Prescribed particulars [Form No. 56FF] should be submitted in respect of new plantand machinery along with the return of income for the previous year in which suchplant and machinery was first put to use.5.
If the Special Reserve Account is misutilised, then the deduction would be taken back in the year in which the Special Reserve Account is misutilised. If the SpecialReserve Account is not utilised for acquiring new plant and machinery within threeyears as stated above then the deduction would be taken back in the year immediatelyfollowing the period of three years. For instance, if Rs. 1,50,000 is transferred to thereserve account for the year ending March 31, 2007 and out of which only Rs. 96,000is utilized for acquiring plant and machinery up to March 31, 2010, then Rs. 54,000would be taxable for the previous year 2010-11.
2.3 Special provisions for existing units:
The following points should be noted ± 1.
In respect of an undertaking setup in Special Economic Zone on or after April 1,2003 a deduction is available under section 10A(1A). This deduction is available for 10 assessment years. If an undertaking is setup in a Special Economic Zone duringApril 1, 2003 and March 31, 2005, then such undertaking can claim deduction for thefirst then assessment years under the provisions of section 10A(1A). Suchundertaking can further claim deduction from eleventh year to fifteenth year under section 10AA as stated in para 2.2-3.2.
If deduction has already been claimed by an undertaking (other than the undertakingmentioned above) under section 10A for ten consecutive assessment years before thecommencement of SEZ Act, such Unit shall not be eligible for deduction under section 10AA.3.
Where a unit initially located in any free trade zone or export processing zone issubsequently located in a Special Economic Zone by reason of conversion of suchfree trade zone or export processing zone into a Special Economic Zone and hascompleted the period of 10 consecutive assessment years referred to above, it shallnot be eligible for deduction from income as stated 2.2-3.
rovision illustrated:
The following illustrations are given to explain the impact of aforesaid provisions ± 

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