Special Provisions in respect of Newly-established Units in Special Economic Zones (SEZ) [Section-10AA] – Direct and Indirect Taxes with Tax Ready Reckoner

Special Economic Zones (SEZs) have emerged as key drivers of economic growth and development in many countries. In India, SEZs have played a significant role in attracting investment, promoting exports, and creating employment opportunities. To provide further impetus to SEZs, the Indian government has introduced various special provisions, including Section-10AA of the Income Tax Act.

Section-10AA of the Income Tax Act, 1961 provides special tax benefits to newly-established units in SEZs. These units are eligible for a deduction of 100% of their profits and gains for the first 5 consecutive assessment years. This deduction is available to both manufacturing and service units.

Table of Contents

(1). Assessees who are eligible for Deduction:

Deduction under this section is available to all categories of assessees being entrepreneurs viz., individuals, firms, companies, etc. who derive any profits or gains from an undertaking being a unit engaged in the export of articles or things or providing any service.

Notes. –

If an individual or HUF opts to be taxed under section 115BAC, he/it shall not be entitled to any deduction under section 10AA.
If a company opts to be taxed under section 115BAA or 115BAA or 115BAB as the case may be. it shall not be entitled to any deduction under section 10AA.
If a co-operative society opts to be taxed under section 115BAD, it shall not be entitled to any deduction under section 10AA.

(2). Essential conditions to claim Deduction:

The deduction shall apply to an undertaking which fulfils the following conditions:

(i) It has begun or begins to nanotecture or produce articles or things or provide any service during the previous year 2005-06 or thereafter but before 1.4.2020 in any Special Economic Zone.

(ii) It should not be formed by the splitting up or reconstruction of a business already in existence. However, deduction is provided if the unit is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of the undertaking as is referred to and satisfying the conditions in section 33B.

(iii) It should also not be formed by the transfer of machinery or plant, previously used for any purpose, to a new business. However, the following are the two exceptions to this condition:

(1) Machinery or plant which was used outside India by any person other than the assesses shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled:

(a) The machinery or plant should not be previously used in India.

(b) The machinery or plant should be imported into India from a foreign country.

(c) No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act to any person previously.

(2) Deduction under section 10AA. will be available if the total value of the second-hand machinery or plant transferred to the new undertaking does not exceed 20 per cent of the total value of the machinery or plant used in the industrial unit.

(iv) The assessee should furnish in the prescribed form [Form No. 56F], along with the return of income, the report of a chartered accountant certifying that the deduction has been correctly claimed in accordance with the provisions of this section.

(v) If there is any inter unit transfer of goods or services, it should be done at the market value.

(3). Period for which deduction is available

The deduction under this section shall he allowed as under for a total period of 15 relevant assessment years:

1	For the first 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which the unit begins to manufacture such articles or things or provide services	100% of the profits and gains derived from the export of such articles or things or from services
2.	Next 5 consecutive assessment years	50% of such profits or gains
3.	Next 5 consecutive assessment years	So much of the amount not exceeding 50% of the profits as is debited to profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to Special Economic Zone Reinvestment Reserve Account to be created and utilised for the purpose of acquiring new machinery or plant which should he put to use before the expiry of a period of 3 years next following the previous year in which the reserve was created.

Example:

An undertaking is set up in a Special Economic Zone and begins manufacturing on 15.10.2019. The deduction under section 10AA shall be allowed as under:

(a) 100% of profits of such undertaking from exports from assessment year 2020-21 to assessment year 2024-25.

(b) 50% of profits of such undertaking from exports from assessment year 2025-26 to assessment year 2029-30.

(c) 50% of profits of such undertaking from exports from assessment year 2030-31 to assessment year 2034-35 provided the conditions mentioned in section 10AA (2) given below are satisfied.

(4). How to compute deduction for such undertakings [Section 10AA (7)]:

Deduction under this section shall be calculated as under:

1. Profit from business is to be computed as per provisions of computing the income under the head profits and gains of business or profession’.

2. “Export Turnover” means the consideration in respect of export by the undertaking, being the unit of articles or things or services received in, or brought into, India by the assessec but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India. [Explanation 1(i) to section 10AA]