Section 10AA of the Income Tax Act is a special provision that allows newly-established businesses or units to enjoy income tax holidays and exemptions for offering services in Special Economic Zones (SEZs). The objective of this section is to promote exports and attract foreign investment by providing tax incentives to units established in SEZs. Section 10AA was introduced in April 2000 under the Foreign Policy Act and was fully formulated in 2006 under the SEZ Act to provide tax concessions to businesses in SEZ.
The amount of deduction applicable u/s 10AA of the Income Tax Act is as follows:
The provisions of this Act are applicable for companies that operated from April 1, 2006, to April 1, 2021. The amount of deduction applicable u/s 10AA is as follows:
A company may avail deductions from the year previous to the one in which it started manufacturing or providing services. These deductions cannot be more than the taxpayer’s total income and are applicable to the industrial undertaking’s total income.
Deduction under Section 10AA of the Income Tax Act is calculated via the following formula:
Point to Note:
Profits and gains from the export of articles, things or services determine a taxpayer’s total taxable income. Profit from export is equal to the profits from the undertaking multiplied by the ratio of its export turnover to total business turnover.
Export turnover refers to what a business operating in India receives for its exports. This amount does not include insurance, freight, telecommunication or foreign exchange expenses incurred for delivering items/products or rendering services.
Business owners of units in SEZ need to create this reserve account to receive deductions under Section 10AA of the Income Tax Act for 5 years after the initial 10 years of tax benefits. Up to 50% of their export profits is debited to their profit and loss account and credited to the SEZ ReInvestment Reserve Account.
The following conditions are applicable for utilisation of this amount:
If you use the reserve account for any other purpose, your utilised amount will be deemed to be profits and charged as per applicable I-T laws. Moreover, if you do not use this amount within 3 years, it will expire, and taxes will be applicable on it.
The following are the results when an SEZ unit has transferred to another business before the expiry of its deduction period u/s 10AA:
Under the existing provisions of Section 10AA, entrepreneurs operating in SEZ can claim deductions for profits and gains from exports. Eligible companies, firms, and individuals can claim 100% of their profits as deduction for 5 years and 50% of profits for the next 5 years. After this, they can receive tax deduction in a special reserve account and utilise it subject to certain conditions.
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A Special Economic Zone (SEZ) is a region where business, trade and taxation laws are different from the rest of India. These are tax havens within this country for attracting new investments and increasing the balance of trade.
The following are some of the incentives to set up units in an SEZ:
-Income tax exemption or tax holiday u/s 10AA
-Duty-free import and domestic procurement of goods required for operations
-Complete exemption from GST and other State-levied taxes.
-Exemption from MAT (Minimum Alternate Tax)
-Presence of customs officers for faster trade processing
Unlike Section 10AA, which is applicable for businesses in SEZ, Section 10A is applicable for all industrial undertakings related to export of certain things, articles or software. Currently, it allows 100% tax deductions in the first 5 years and 50% deductions for the next 2 years.
For the next three years, Section 10A allows 50% deduction subject to certain conditions. Moreover, a ‘SEZ Reinvestment Allowance Reserve Account’ is required to receive tax deduction.
SEZ units cannot carry forward business-related losses incurred before April 1 2006. However, after this period, they can carry forward and set off losses under Section 72(1) or capital gains under Section 74(1) and Section 74(3). For losses due to depreciation, Section 10AA presumes that the assessee has claimed depreciation allowance.
Newly-established companies that are set up in SEZ in India can avail the benefits under Section 10AA.
In this case, computation of tax deductions u/s 10AA will start from the previous assessment year, as in the year the business started operations in the free trade/export processing zone.
The conditions for availing benefits under Section 10AA are as follows:
-The company must be a new manufacturing company set up in a notified backward area in India.
-The company must commence production on or before 31st March 2023.
-The company must not be formed by splitting up or reconstruction of an existing business.
-The company must not be formed by the transfer of an old plant or machinery to a new business.
-The company must not be engaged in any business other than manufacturing or production of any article or thing.
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