EOUs, SEZs seek clarification on ending discriminatory taxes

New Delhi, Feb. 24 The Export Promotion Council for EOUs and SEZs (EPCES) on Tuesday hailed the Government decision to end discriminatory tax treatment in respect of those exporters with a unit outside the SEZ as well as a unit in the SEZ, vis-À-vis those operating only in the SEZ. However, it sought a clarification through a circular from the revenue department.

In his reply to the Interim Budget in Parliament the Finance Minister, Mr Pranab Mukherjee, said “it has been decided to remove this anomaly through necessary changes in the Act”.

In a statement issued here, the Director General of the Council said after almost three years of operation of SEZ Act, this discrimination in tax treatment has been recognised by Parliament. However, he said, the SEZ units would still have to wait till an actual amendment is carried out.

Meanwhile, the Federation of Indian Export Organisation President, Mr A. Sakthivel, hailed the cut in service tax from 12 to 10 per cent, continuance of 4 per cent reduction in central excise duty beyond March 31, 2009 and cut in central excise duty on cement from 10 to 8 per cent. He said this would help boost domestic economy albeit on a limited basis. He said that cut in service tax rates would add to export competitiveness by about 0.25 per cent, as refund of service tax is a long drawn out process and only a few exporters obtain refunds while a majority of them wait for more than a year.

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STPIs, 100% EOUs may enjoy tax holiday for 3 more years

NEW DELHI: The government plans to extend the tax concessions enjoyed by technology parks and 100% export-oriented units (EOUs) beyond March
2010, a government official said.

The commerce department and the IT ministry are jointly lobbying for a three-year extension of the tax concessions offered to the software & technology parks of India (STPI) to ensure a steady flow of investments into the sector. A case is also being made for the continuation of sops to 100% EOUs to make the country’s exports more competitive in the global market.

“We are hoping that the extension of sops to both STPIs and 100% EOUs will be made in the interim Budget,” said the official who asked not to be named. The interim Budget will be presented on February 16. The tax sops given to both STPIs and 100% EOUs were to end on March 31, 2009. Last year, the government extended the concession for another year to ensure that both STPIs and EOUs continued to enjoy tax benefits even if the interim Budget failed to provide an extension.

While there is ample time for giving another extension to the sops, the government wants to make room for it in this Budget to ensure continuity, the official said. “We have learnt from EOUs and STPIs that fresh investments have dried up since the tax benefits are slated to be removed. We want the extension in sops to be announced early so that it gives confidence to investors to carry on with their investment plans,” the official added.

Units in STPIs and 100% EOUs enjoy tax exemption on profits under section 10A and 10B of the Income-Tax Act. While section 10A of the Act provides for deduction of profits and gains derived by an enterprise from the export of any good and computer software, section 10B provides for deduction of profits and gains derived by a 100% EOU from the export of any good or computer software.

The global recession has started taking a toll on exports with total exports falling 22% in January 2009. Exports of IT and software services too are witnessing a slowdown. Nasscom has brought down its growth projection for software and services exports from 21-24% to 16-17%.

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Commerce ministry mulls 3-yr extension of EoU tax breaks

The commerce ministry has proposed a three-year extension of tax benefits given to Export-oriented Units (EoUs) in an attempt to encourage export industries at a time when global demand is expected to slump further.

The move will benefit more than 2,700 companies operating within the EoUs, like the Reliance Industries Ltd’s (RIL’s) 33-million-tonne-per-year petroleum refinery in Jamnagar, Gujarat.

Under Section 10(B) of the Income Tax Act, EoUs do not need to pay tax on profits provided they fulfil some conditions, including exporting not less than 50 per cent of their total production. This benefit is to expire at the end of next fiscal 2009-10.

“We have taken up the issue of extending the sunset clause by another three years,” said Commerce Minister Kamal Nath at the annual award function of Export Promotion Council for EoUs and Special Economic Zones (EPCES) here today. Sunset clause refers to a law that expires at a specified point of time.

Exports by these EoUs stood at Rs 1,54,428 crore in 2007-08, about 24.7 per cent of the total exports (in rupee terms). Chemical and pharmaceutical units account for about 18 per cent of the exports from the EoUs, followed by engineering companies at about 10 per cent.

Experts say the proposed extension will enable units in EoUs to plan better. “EoU exports have been increasing at an average rate of 20 per cent in the past 10 years, generating manufacturing activity and employment. Extending the scheme will add clarity to these units’ expansion plans, which will lead to additional manufacturing and exports as well as employment,” said L B Singhal, director general of EPCES.

Government sources, however, said a decision on this will probably be finalised only after a new government takes over after the general elections, likely to take place after April.

The EoU tax benefits were originally scheduled to expire on March 31, 2009. Last year, while releasing the foreign trade policy, Nath had announced that the scheme would be extended till March 31, 2010. This was after a committee headed by National Manufacturing Competitiveness Council headed by V Krishnamurthy had recommended the extension of the tax benefits to EoUs. A finance ministry-sponsored study, conducted by economic think-tank Indian Council for Research on International Economic Relations (Icrier) made a similar recommendation.

The EoU scheme, introduced in December, 1980, allows manufacturing units in the zones to enjoy 100 per cent income tax exemption on profits from overseas sale and also get to import raw materials duty free.

EoUs differ from Special Economic Zones (SEZs) in terms of the level and time-period of tax breaks to which they are entitled. SEZs get income-tax breaks for 15 years. They are also exempt from sales tax and excise, among other local imposts. The SEZs are governed by the SEZ Act of 2005.

EoUs are governed by the Foreign Trade Policy, which is supervised by the commerce ministry. Existing factories can be converted to EoUs, but not into SEZs.

Experts maintain that the extension of EoU benefits will not impact SEZs. “SEZs have their own benefits, which include a more comprehensive package of tax benefits as well as procedural benefits like single-window clearances. The extension will not have any impact on the zones,” Singhal added.

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EOUs protest hike in DTA sales duty

NEW DELHI: The Union Budget has dealt yet another blow to 100% export-orient units (EOUs).

Not only is the Budget silent on the issue of removing the sunset clause on the tax sops given to EOUs, which kicks in next year, it has doubled the Customs duty on sale of goods from EOUs to domestic tariff area (DTA) from 25% to 50% in addition to the 100% additional Customs duties paid on such sales.

According to export promotion council for EOUs and SEZ Units (EPCES) chairman T Vasu, non-resolution of the issue of removal of the sunset clause under Section 10B of the Income Tax Act was disappointing.

The V Krishnamurthy committee report’s suggestion that it should be at least extended for one year was not followed.
“If the sunset clause is not removed, no exporter will like to operate under EOU scheme,” Mr Vasu said, adding that the scheme, which has given a big boost to manufacturing activities, would collapse.

EOU exporters are also disappointed that while exports from the sector have also been affected adversely due to the rupee appreciation, the package announced to exporters on this account had not been extended to EOUs.

They feel that EOUs, which have exhausted their tax concessions, were as vulnerable as other exporters and thus there was no reason to exclude them from the package.

The doubling of Customs duty on sale of goods from EOU to DTA, which comes close on the heels of imposition of a minimum alternate tax of 12.5% in the last Budget, has also upset EOUs.

“There was no need for the hike as EOUs were in any case paying additional 100% duty, which is equivalent to full central excise duty. Moreover, the MAT introduced last year has also not been removed,” Mr Vasu said.

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‘Continue I-T sops for export-oriented units’ - Kamal Nath for removal of sunset clause

In the run-up to the Union Budget 2008-09, the Commerce and Industry Minister, Mr Kamal Nath, has sought continuation of the income tax benefits bestowed on 100 per cent export-oriented units (EOUs), which are set to be removed after March 31, 2009.

Sources in the Government told Business Line here that in an identical communication to the Prime Minister’s Office and the Finance Ministry, Mr Nath pointed out that the accent of the UPA Government was always on encouraging manufacturing activities and augmenting employment, and on which the 100 per cent EOU scheme precisely scores well ever since it was introduced in the early 1980s.

Encouraging Manufacturing

He said that the EOU scheme was meant only for carrying out manufacturing activities within the custom-bonded area, and no trading activity was allowed under the scheme. The Minister said the scheme facilitated creation of dedicated manufacturing capability for exports, which amounted to Rs 68.782 crore with exports during the last five years from EOUs clocking more than 31 per cent growth.

The net foreign exchange earning by the EOUs is over 60 per cent. In the current fiscal, exports from EOUs would cross the one-lakh crore mark.

When contacted, the Council for 100 per cent EOUs and SEZs, the Director General, Mr L.B. Singhal, said that among the plethora of issues currently plaguing the units under the scheme, the most important one affecting them is the sunset clause under Section 10B of the Income Tax Act, under which no income tax exemption would be available for the exports effected by the 100 per cent EOUs after March-end, 2009.

Urgent need

Hence there is an urgent need for removal of the sunset clause in the forthcoming Union Budget, as otherwise no fresh investment would flow under the scheme.

“If no income tax exemption is provided from March 2009 onwards, there is no reason why any industrialist will set up a unit under this scheme and accept vigorous custom bonding regulations, procedure of obtaining procurement certificate for every import consignment or CT3 procedure for every domestic procurement and other procedural hassles like repeated registration with customs.

“No industrialist would like to pay unnecessary cost recovery charges for the Central Excise Inspectors posted for these units even for discharge of their sovereign functions,” Mr Singhal said.

Tax exemption

Even as there is an unstated principle that exporters should be exempted from indirect taxes, EOUs have to bear the burden of a host of indirect levies from the State Governments and local bodies such as purchase tax, entry tax, electricity duty, property tax, works tax, mining royalty, water cess, education cess, mandi tax, commercial tax and local area development tax.

Underlining the importance of income tax benefits to the EOUs, the Council said the EOUs could also be asked to re-invest the portion of profits to make them comparable with SEZ units, so that their basic remit of enhancing manufacturing activity and employment would continue.

As the Finance Ministry and the Ministry of Information Technology are reportedly toying with the extension of income tax benefits to Software Technology Park of India (STPI) Scheme, the Council said that EOU/STPI/Electronic Hardware Technology Park Schemes are all part of the same chapter of the Foreign Trade Policy and are governed by the same customs/central excise notification. Hence the sunset clause needs to be removed for 100 per cent EOU scheme as well, along with the STPI Scheme, the Council argued.

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