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Sun may set on SEZ rush sans extension

MUMBAI: With the budget not extending the Sunset Clause beyond March 31, the recent rush seen among corporate tenants to operate out of Special Economic Zones (SEZ) in order to avail tax benefits is likely to abate.

Experts, however, said that the government may announce a new framework, as SEZs have proved their employment generation and export potential over the last decade or so.

According to Section 10AA of the Income Tax Act, units in SEZs get a phased tax-holiday for a period of 15 years.

The benefit is available to only those units that start operations before March 31 this year.

Around one third of India’s office market supply comes from SEZs, and Information Technology SEZs form a major chunk of exports, valued at more than $43 billion annually. Technology, engineering and manufacturing companies are the most represented in SEZ facilities.

“The Sunset Clause, which comes into effect from April 1, gives occupiers an opportunity to explore cost savings over the longer term as the indirect tax benefits in SEZs will continue,” said Ramita Arora, managing director (Bengaluru), Cushman and Wakefield.

Units in SEZs that start operations from April will not be eligible for direct tax benefits. The Sunset Clause will, however, not impact their indirect tax calculations, as they will continue to receive benefits such as exemptions on GST and incentives on exports, as long as they are operational. “Expansion or relocation can be explored by occupiers having existing SEZ units post the sunset clause,” Arora added.

Out of total 64 operational IT SEZs in the country, Bengaluru leads with a share of 32%, followed by Hyderabad at 16%, Pune at 14% and Chennai at 14%.

Since the SEZ Act came into force in 2005, over 2 million jobs have been created, with an incremental annual growth rate of 25.2%.

The share of SEZ exports in India’s total exports value has grown to around 30% in 2018-19, according to a recent joint report by Cushman and Wakefield India and Dhruva Advisors.

“Out of total SEZ exports, services and particularly IT services have contributed the largest share. This fact will be given due attention when the government contemplates a new framework to boost both exports as well as employment in these hubs,” one SEZ developer said.

February 08, 2020

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