Body blow for special economic zones

With the government deciding to end the income tax holiday for special economic zones (SEZs), it is the end of the road for them. Most of these SEZs have become real estate with promoters planning to use the land for redevelopment, say tax experts.


In the Monday’s Budget, the government said it would not allow any deduction to units commencing manufacture or production on or after April 1, 2020, in an SEZ. Units are allowed to claim 100 per cent deduction of profits derived from exports from SEZs for five years beginning with the year of manufacturing and deduction of 50 per cent of the profit for the next five years.

The change in the latest Budget will impact the sale and rent of SEZ units of companies like Adani Port, which has large SEZs in Mundra, Gujarat, say analysts. The Mukesh Ambani-owned SEZ near Mumbai will also lose tax benefits but as it is situated in proximity to Mumbai, it will become a real estate play, say tax experts.

The SEZs were initially set up to take on competition from Chinese SEZs, which were exporting to the rest of the world with special tax incentives from the local government. The Indian SEZs, especially those in  manufacturing, failed to take advantage of the scheme due to a combination of factors. Many Indian companies, including the Mukesh Ambani-owned Reliance Industries, decided to set up SEZs but later curtailed plans due to opposition from landowners.

For SEZ developers, abolishing tax sops which provide for deduction of profits derived from development of SEZ infrastructure means bad news.  According to the Budget, the government will provide deduction of 100 per cent of the profits on investments made by companies on infrastructure and development of SEZs, provided the facility commences commercial operation and starts claiming deduction on or before March 31, 2017.  

This will impact companies like Concor, Gateway Distriparks, Allcargo, Gujarat Pipavav Port and Adani Port, which claim Section 80IA benefits on the capital expenditure repeatedly, says a Kotak analysis of the Budget.

The sunset clause will also impact IT services companies operating in SEZs. In the last Budget, the Finance Minister had stated his intention to remove tax incentives.

This means all Indian IT companies will be taxed post 2020.  "We maintain our positive outlook on the IT sector (the current revenue growth slowdown is temporary) and our preference remains companies with the most beaten down valuations and the lowest expectations," says an Ambit report.