Section 10AA of the Income Tax Act is a special provision allowing entrepreneurs to get income tax deductions for manufacturing or providing services in Special Economic Zones (SEZs). It 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.
Read along to know the provisions, eligibility, and amount of tax deductions u/s 10AA.
Section 10AA of the Income Tax Act offers deductions to newly-established businesses in SEZs engaged in manufacturing or providing services. SEZs are special regions in India offering high-grade infrastructure, tax incentives, no duty on exports, etc., to resident businesses.
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.
Also Read: Short Term Capital Gains Tax
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.
The formula for calculating this is as follows:
Profit from export = (Profits of business x Export turnover of the unit) / Total turnover of the business
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 u/s 10AA 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 Re-Investment 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 IT 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:
Also Read: Section 148 Of the Income Tax Act
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.
1. What is a special economic zone in India?
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.
2. What infrastructure facilities do SEZs in India provide?
Besides various financial incentives, SEZs offer plotted development, including infrastructure utilities for manufacturing SEZ units. Service sector SEZs must have ready-made office spaces which are fully furnished along with 24×7 power supply, water, gas, telecommunications, etc.
3. Why would companies want to set up offices and industries in Indian SEZs?
The following are some of the incentives to set up units in an SEZ:
4. What are the differences between the provisions of Section 10A and Section 10AA?
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.
5. What are the rules for carrying forward losses for business units u/s 10AA?
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.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
|Section 194IB||Section 44AA||Section 80E|
|Section 195||Section 80EEA||Section 80DD|
|Section 80CCC||Section 80GG||Section 80 G|
|Section 54F||Section 1941A||Section 10|
|Section 194Q||Section 192||Section 269SS|
|Section 80DDB||Section 44AD||Section 194C|
|Section 194A||Section 194H||Section 80D|
|Section 80C||Section 80C, 24(b), 80EE & 80EEA||Section 234A|
|Section 50C||Section 80C||Section 80EEA|
|Section 194B||Section 194J||Section 206C|
|Section 80CCG||Section 80 EEB||Section 24Q|
|Section 40b||Section 194C||Section 54EC|
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