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EVEN as the Finance Ministry has agreed to income-tax sops and service tax exemption to special economic zones (SEZs), it has rejected the Commerce Ministry's proposal to allow the setting up of an international financial centre in one of the zones.
According to top officials, the Finance Ministry rejected the proposal apprehending that the establishment of an international financial centre coupled with the income-tax holiday could turn these zones into tax havens.
Indian banks have only been allowed to set up overseas banking units (OBU) to enable SEZ units to access international finance at international rates.
The major tax concessions to SEZs - apart from the sops announced in the Exim policy - include the easing of the time limit on the graded income-tax holiday for SEZ units set up after 2005 and exempting services rendered within the zone from the purview of service tax.
The income-tax relaxation will enable SEZ units qualify for a tax holiday of at least five years under Section 10 A and 10 B of the Income-Tax Act 1961.
Under the present dispensation, a graded tax holiday is available to units set up in SEZs, 100 per cent export-oriented units, electronic hardware technology parks and software technology parks up to 2010. ccordingly, the income of a unit set up, say, in 2001 will be exempt from tax for a nine-year period. Since the cut-off year for the exemption under Section 10 A and 10 B of the I-T Act is 2010, a unit set up after, say, 2006 will be eligible for a tax holiday of just four years.
The Finance Ministry has now given its consent to allow SEZ units set up after 2005 to enjoy a tax holiday even after 2010.
A unit set up, say, in 2007 will qualify for a tax holiday up to 2012.
"The idea is to ensure at least a five-year tax holiday on incomes accruing to the units or the developers of the SEZ," said a senior Commerce Ministry official. The relaxation will not be extended to STPs, EHTPs and EOUs. The Finance Ministry has not yet taken a final view on the Commerce Ministry's proposal to restrict tax exemption under Section 10 A and 10 B to 90 per cent of the profits earned by SEZ units during the ensuing fiscal.
The process of making amendments to the Customs Act and the Income-Tax Act to treat transactions from the Domestic Tariff Area (DTA) to the SEZ as physical exports (instead of deemed exports) had also been initiated, said official sources.
The amendment will bring about a change in the definition of export and enable DTA suppliers to avail of Duty Entitlement Pass Book scheme and drawback benefits.
SEZ units have also been permitted to raise external commercial borrowings of less than three years maturity and given freedom to invest their export earnings abroad.
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