India’s largest information technology companies received a morale-boosting assurance from finance minister Pranab Mukherjee when he accepted that the income tax law that prevented their subsidiaries in special economic zones from getting full tax benefits was discriminatory and needed to be removed.
However, the companies including India’s top three software exporters, TCS, Infosys and Wipro, will have to wait for the new government to bring about the change through an amendment to the Income Tax Act in the budget.
Mr Mukherjee made the much-awaited statement on Tuesday in reply to a question in Parliament. This is certain to soothe the jangled nerves in the information technology industry that faces a squeeze on margins with their major markets reeling under the impact of a recession, the worst since 1930s.
“This (section 10 AA) has resulted in discriminatory treatment of assessees having units located both in SEZ and the domestic tariff area vis-à-vis assessees having units located only within the SEZs. It has now been decided to remove this anomaly through necessary changes in the Act,” Mr Mukherjee said.
Section 10 AA (7) of the Income-Tax Act states that only a proportion of profits of an SEZ unit, based on the proportion of export sales from the unit to the total turnover of the parent company, will be exempt from taxation.
This means that if an SEZ unit exports 40% of the company’s total turnover, then it will be given tax exemption on only 40% of the profits earned instead of 100% as promised under the SEZ Act. According to commerce secretary GK Pillai, the finance minister’s statement holds weight as it is a commitment made in parliament.
“The statement has been made to let the industry know what is coming. There can be no back-tracking on the commitment as it has been made on the floor of the house,” he said. Infosys director TV Mohandas Pai said companies will no longer need to set up subsidiaries to enjoy the tax benefits of operating in an SEZ.