Section 10AA of the Income Tax Act, 1961, provides deductions for enterprises operating in Special Economic Zones (SEZs) in India. This section aims to promote exports and attract foreign investment by offering tax concessions to businesses located in SEZs. It became fully functional in 2006, granting income tax exemptions and holidays to eligible new businesses or units within SEZs. To qualify for these benefits, certain conditions must be met. SEZs are designated areas within a country's borders that are subject to specific business and trade regulations, encouraging economic growth and international trade.
Eligibility for claiming deduction under Section 10AA
The conditions collectively determine the eligibility for claiming deduction under Section 10AA of the Income Tax Act are :
- Entrepreneurial Status: The assessee must qualify as an entrepreneur under Section 2(j) of the Special Economic Zones Act, 2005.
- Commencement of Operations: The SEZ unit should initiate the manufacturing of articles, provision of services, or other relevant activities during the assessment year commencing on or after 1.4.2006.
- Non-Splitting or Reconstruction: The SEZ unit should not be formed through the splitting up or reconstruction of an existing business, with an exception for re-establishment, reconstruction, or revival under Section 33B.
- Non-Transfer of Plant and Machinery: The SEZ unit should not be formed by the transfer of plant and machinery previously used for any purpose to a new business.
Deduction allowed under section 10AA
The deduction allowed under Section 10AA are:
- First 5 Consecutive Years (1 to 5 years): Deduction available is 100% of Export Profits.
- Next 5 Years (6 to 10 years): Deduction available is 50% of Export Profits.
- Next Consecutive 5 Years (11 to 15 years): Deduction available is 50% of Export Profits or the amount credited to the SEZ Reinvestment Allowance reserve, whichever is lower.
How is the deduction under Section 10AA calculated?
The deduction under Section 10AA is calculated based on the formula:
Export Profit = (Profits of business of SEZ unit* Export turnover of SEZ unit) / Total turnover of SEZ unit
What is "Export 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.
The amalgamation provisions in the context of Section 10AA specify the following:
- Amalgamating or Demerged Unit: The deduction under Section 10AA is not available to the amalgamating or demerged unit for the previous year in which the amalgamation or demerger has taken place.
- Amalgamated/Resulting Company: The deduction under Section 10AA is available to the amalgamated or resulting company for the remaining period, starting from the year following the amalgamation or demerger.
Is the deduction under Section 10AA available for an assessee who file return after due date ?
To avail the deduction under Section 10AA, it is a prerequisite that the taxpayer must file their income tax return on or before the specified due date. If the taxpayer fails to file their return by the due date, they will not be eligible to claim the deduction under Section 10AA for that assessment year.
What is Form No. 56F?
The Central Board of Direct Taxes (CBDT) has introduced Form No. 56F for reporting under section 10AA(8) of the Income Tax Act. This form requires essential details such as the accountant's information, report date, and specifics of the deduction claimed under section 10AA.
Taxpayers claiming a deduction under section 10AA are required to submit the accountant's report using Form No. 56F by the due date for filing their income tax returns. This ensures compliance with reporting requirements and facilitates a smoother process for claiming the deduction.