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June
1 , 2006
Where
do you want to go - STP or SEZ?
The
recently constituted empowered group of ministers ("eGoM")
has suggested to the Finance Ministry that the existing tax exemption
available to a unit set up in a Software Technology Park ("STP")
should be extended beyond 2009, when it is scheduled to expire,
to bring it on par with the tax benefits available to a unit set
up in a Special Economic Zone ("SEZ"). This suggestion
was made to eGOM by the Prime Ministers Office ("PMO"),
whose earlier suggestion of scraping the minimum land requirement
for an Information Technology SEZ ("IT SEZ") has been accepted
and is being implemented now.
Currently
under section 10A of the Income Tax Act, 1961 ("ITA"),
an STP unit can avail of a 10 year tax holiday on export profits,
while under section 10AA of the ITA, an SEZ unit (including an
IT unit set up in SEZ) can avail of a 15 year tax holiday on export
profits, which is 100 per cent for the first five years, 50 per
cent for the next five years, and up to 50 per cent for further
five years, subject to creation of a SEZ Re-investment Reserve
account. Further, section 10AA states that STP units, which have
availed of a complete tax exemption under section 10A, cannot
avail of any SEZ tax benefits. It is pertinent to note that the
exemption available to an SEZ unit is open-ended and has no sunset
clause as in the case of an STP unit.
Apart
from the direct tax benefits, both STP and SEZ units enjoy similar
indirect tax benefits such as exemption from excise, Value Added
Tax ("VAT") and local state level taxes. However, an STP
unit provides more locational flexibility as opposed to an SEZ
unit, which needs to be located in an identified area designated
as SEZ. The call for the extension of the tax exemptions for an
STP unit comes in the wake of the fear that STP units may migrate
to an SEZ, post 2009, when the exemption available to STP units
is scheduled to expire. However, there is ambiguity on whether
STP units will be allowed to migrate to an SEZ, and the same has
to be clarified foremost in order to assess the benefits of the
current proposal.
It
seems that the proposed extension of tax benefits would be available
only to "new" STP units and thus such a move would provide IT
companies an opportunity of two different avenues with similar
tax benefits to set up IT units. Thus, the PMO's suggestion, if
implemented by the Finance Ministry, would open up more opportunities
for the IT companies to set up their operations.
However,
certain ambiguities remain in this proposal. The status of granting
the SEZ tax holiday to the existing STP units, which by 2009 would
not have availed of the full 10 year tax exemption, is not clear.
Also, their status vis-à-vis the proposed extension of
SEZ tax benefits to STP units, which seem to be made available
only to "new" units, remains uncertain.
It
remains to be seen whether the Finance Ministry accepts the proposal
of eGOM of extending such SEZ benefits to STP units.
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