The government is understood to have cleared the long standing controversy on the tax holiday status of IT special economic zones (SEZs). The finance ministry has now agreed to a proposal of commerce ministry, which aims at providing 100% tax exemption to IT SEZs which are being set up under the parent companies.
The controversy had stem out of a clause in the SEZ Act, which states that only a proportion of profits of SEZ unit depending on the proportion of exports from the SEZ units in total sales of the parent company, will be exempt from tax. This means that if a SEZ unit exports 50% of the company’s total turnover, it will get tax exemption on 50% profit only.
While this is not a big issue for most SEZs as they are being set up by separate companies, in case of IT companies, SEZs are being set up under the parent companies. As a result, while counting the tax exemption, proportion of export sales from SEZ would have been counted against total turnover of the company, which will work out to be rather small. Even if an IT company exported 100% output of SEZ, it would not have been able to get 100% tax exemption as total turnover of parent company would have a large chunk of domestic sales.
The anomaly however stands clear now and the finance ministry will soon issue a notification in this regard. The move will benefit significantly Indian tech giants like Infosys, TCS and Wipro which will be able to claim 100% tax exemption now based on proportion of exports in their SEZ turnover.