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AMT v/s. SEZ units

Madhuri Jain 
on 23 April 2012

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Has the Finance Act, 2012 tried to make illusionary the exemption benefits available to SEZ units u/s. 10AA of the Income Tax Act?

First of all, let us briefly go through the provisions of exemption u/s. 10AA of the Income Tax Act and the Alternate minimum Tax as proposed in the Budget, 2012.

Sec. 10AA - Special provisions in respect of newly established Units in Special Economic Zones.

In computing the total income of an entrepreneur of SEZ Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after 1st April, 2006, a deduction of-

(i )100% of profits and gains derived from the export of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services;

(ii) and 50% of such profits and gains for further five assessment years and thereafter;

(iii) for the next five consecutive assessment years, again 50% of the profit provided it is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account ("Special Economic Zone Re-investment Reserve Account") to be created and is to be utilized-

(a) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and

(b) until the acquisition of the machinery or plant, for business purposes of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.

ALTERNATE MINIMUM TAX (AMT) ON ALL PERSONS OTHER THAN COMPANIES:

(Applicable from 1st April, 2013)

It is proposed to levy AMT on all persons other than company and LLP i.e. Individual, HUF, Partnership firm, AOP, BOI etc. at the rate of 18.5% (plus cess) on the adjusted total income i.e. income before deductions under any section (except section 80P) included in chapter VI-A under the heading ‘C-Deduction in respect of certain incomes’ and deduction claimed if any u/s. 10AA.

‘Adjusted total income’ shall be computed as under:

Total Taxable Income as per regular provisions of the Act

xxx

Add:

Deductions under any section (except section 80P) included in chapter VI-A under the heading ‘C-Deduction in respect of certain incomes’ i.e. section 80H to 80TTA

xxx

Add:

Deductions under section 10AA

xxx

Adjusted Total Income

xxx

AMT shall be applicable if:

-  The tax on the total taxable income as per the regular provisions of the Act is less than.

-  The tax @ 18.5% (plus cess) on the adjusted total income.

The tax credit can be carried forward for 10 succeeding assessment years.

However, the provisions of AMT shall not be applicable to individual, HUF, AOP/BOI and every artificial juridical person if the adjusted total income is less than or equal to Rs. 20,00,000/-.

The above amendment is explained herein after in form of a hypothetical example assuming the person is a partnership firm having a manufacturing unit in SEZ and has commenced manufacturing in FY 2011-2012.

Particulars

Tax as per

regular

Provisions.

Alternate

Minimum Tax

(AMT)

Profits / gains in SEZ unit.

20,00,001

20,00,001

Less: Exemption u/s. 10AA (@100%)

20,00,001

--

Total Taxable Income / Adjusted Total Income

--

20,00,001

Tax Rate (including cess)

0%

19.055%

Tax payable

NIL

3,81,100

Final tax payable

3,81,100

Example 1

Admissible tax credit to be carried forward for 10 years (3,81,100 - 0) Rs. 3,81,100/-.

Taking another hypothetical example assuming the above firm has commenced manufacturing in FY 2005-2006.

Particulars

Tax as per

regular

Provisions.

Alternate

Minimum Tax

(AMT)

Profits / gains in SEZ unit.

20,00,001

20,00,001

Less: Exemption u/s. 10AA (@50%)

10,00,001

--

Total Taxable Income / Adjusted Total Income

10,00,000

20,00,001

Tax Rate (including cess)

30.90%

19.055%

Tax payable

3,09,000

3,81,100

Final tax payable

3,81,100

Example 2

Admissible tax credit to be carried forward for 10 years (3,81,100 - 3,09,000) Rs. 72,100/-.

Now, coming back to our question;

Has the Finance Act, 2012 tried to make illusionary the exemption benefits available to SEZ units u/s. 10AA of the Income Tax Act?

From example 1, we can see that the unit eligible for no tax had to pay tax of Rs. 3,81,100/-. In example 2 we can see that the unit had to pay Rs. 72,100/- more as tax; i.e. 23.33% more.

Though carry forward of tax credit is available for 10 years but the alluring benefits of exemption u/s. 10AA have become more illusionary.

Similar is the case with undertakings eligible for deductions under any section (except section 80P) included in chapter VI-A under the ‘Heading C’ i.e. section 80H to 80TTA

The Finance bill 2012 has just widened the tax bracket over all the persons (Individual, HUF, Firm, AoP, BoI, Local authority & Artificial Juridical person) which were earlier not covered by MAT.

What I don't understand is what was the need of covering all assessees under Alternate Minimum Tax. Yes, this proposal would definitely increase the revenue, but it is very much against the interest of the people in general and the economy on the whole as far as following aspects are considered;

Allured by the tax saving benefits of exemption u/s. 10AA and various deductions covered under Heading - C of Chapter VI - A of the Income Tax Act, following business sectors boomed & blossomed;

- Infrastructure facilities

- Telecommunication services

- Development of Special Economic Zones, Industrial parks

- Export units in SEZ

- Power generation, transmission & distribution

- Small scale undertakings

- Processing, preservation, packaging, handling, transportation or storage of fruits, vegetables, meat, poultry, marine or dairy products

- Operating & maintaining a hospital in rural areas / in certain areas excluding the urban agglomerations of Greater Mumbai, Delhi, Kolkata, Chennai, Hydrabad, Bengaluru, Ahmedabad, Faridabad, Gurgaon, Ghaziabad, Gautam Budh Nagar, Gandhinagar & Secundrabad

- Certain specified undertakings in the states of Himachal Pradesh, Sikkim, Uttaranchal, Jammu & Kashmir, Arunachal Pradesh, Assam, Manipur, Mizoram, Meghalaya, Nagaland and Tripura.

- Hotels / Convention centres in NCR area

- Collection & processing of biodegradable wastes

- Offshore banking units & International Financial Services Centre

- Software development

- Book authoring & royalty on copyright thereof

- Royalty on patents

(This is not an exhaustive list)

Together with the development of aforesaid business sectors, not only employment but self employment also increased leading to generation of income for business owners, managers, workers, labors, buyers, suppliers & all others, associated directly / indirectly.

Generation of income has its own other benefits like improvement in life style, increase in literacy rate, curbing of social evils & uplifting of society on the whole.

The tax holidays covered under Heading C of Chapter VI-A of the Income Tax Act contributed remarkably in the overall economic development of the Northern & North Eastern states. These benefits also boosted the exports of our country by small & medium scale enterprises (other than Companies)

What I perceive is that the proposed levy of Alternate Minimum Tax (AMT) would demotivate people (other than Companies) from setting up new undertakings in aforesaid business areas. It might even lead to winding up of pre-existing undertakings/units (other than Companies) if AMT would eat away their net earnings.

- The exporters have to keep the profit margins very small to compete in the global market. Tax savings on account of exemptions & deductions was the motivation that interested many to enter into exports & set up units in SEZs. Levy of AMT would do away with tax savings thereby reducing their net earnings on hand.

- The development of Northern & North Eastern states, which were developing rapidly only after introduction of tax holidays; would be hindered.

- The business areas of processing, preservation, packaging, handling, transportation or storage of fruits, vegetables, meat, poultry, marine or dairy products also gives less margin on account of  various economic & non-economic factors. The tax saved as a result of deduction from taxable income was the added profit earned by such units. Levy of AMT would reduce the net earnings of people directly / indirectly associated with these business areas.

It is a general phenomenon that people like to save taxes rather than pay taxes. Levy of AMT might increase tax evasion.

With the levy of AMT, the tax holidays & exemption benefits appear more like lollipops to first lure people & then indirectly tax them. Although the proposal allows tax credit & carry forward of the tax credit, but AMT at first instance creates burden on the working capital.

Although the number of persons/undertakings getting affected by the said proposal may be small, but dilemma faced by them is not small.

I welcome your comments, suggestions & feedback on this issue.

CA Madhuri Jain

B.Com., ACA, DISA

Prop. of Patwa and Associates

F-10, FF, Green Park Main  

New Delhi - 110016.

House no. 10, GF,

New Navratna Complex

Udaipur.

Email: m1g1in@yahoo.co.in  and patwaandassociates@yahoo.com




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