Budget puts check on misuse of SEZs

BUDGET IMPACT

In an effort to prevent any revenue leakage, the government has introduced anti-Special Economic Zones (SEZ) abuse provisions in the Budget 2007 which would prevent any existing businesses to migrate to the SEZs from other parts of the country.

The SEZ Act enacted last year did have any anti-SEZ abuse provisions. The Budget 2007 has now introduced two measures to curb any tax avoidance: The existing units will not be allowed to split up or reconstruct an existing business and they will not allowed to transfer old plant and machinery with the threshold limit being 20 percent of total assets.

"When the SEZ Act was enacted there was no anti-SEZ abuse provisions," says Mukesh Butani, Partner of BMR and Associates. "With this, the government is encouraging genuine SEZs and preventing misuse of SEZs," he adds

The finance ministry had projected that it would lose close to Rs 100,000 crore in revenues between 2004-05 to 2010 due to the mushrooming of SEZs all over India. It was also feared that in order to take 15-year tax holidays, many units would shift to SEZs by closing down their existing units.

The new provisions say only a new unit or an enterprise in a SEZ can claim tax benefits under the Section 10A and Section 10B (which deals with tax holidays) of the I-T Act

Says Rohan Phatarphekar, Partner & Head of Tax & Regulatory Services in Grant Thornton, "This would stop to a large extent the movement of assets/business from the existing units, for instance migration from the Software Technology parks of India to the SEZs."

"But if a company having a unit in a STPI decides to move the unit/business to a SEZ, just because its tax holidays are coming to an end, then it would not get tax exemption," says Phatarphekar.