The finance ministry is considering granting an open-ended income tax exemption under Section 10 A of the IT Act to units in Special Economic Zones (SEZs) this year, in its amendments to the finance bill. The original budget proposal sought to introduce a sunset clause, stipulating that the tax holiday for units in SEZs will not be given if they start production after March 31, ’09. However, the open-ended tax benefit will be denied if units in these zones fail to furnish income tax returns within a stipulated time.

The scrapping of the sunset clause means that a unit set up in a SEZ would now enjoy the tax benefits even if it starts production after ’09 (i.e., irrespective of the period in which it is set up).

The idea is to give a boost to the development of SEZs and attract more investments into India. The draft SEZ bill has proposed allowing units in SEZ a deduction equivalent to 100 % of the export profits for the first five years. A deduction equivalent to 50 % of the export profits is available for the next five years.

A further deduction of up to 50 % of the export profits is available for the next 10 years, subject to re-investment conditions. Hence, IT concessions to SEZs are available for 20 years.

However, such an open-ended exemption is not available to EOUs, EHTPs or software technology parks. The sunset clause under 10 A and 10 B of the IT Act expires in ’09-10- which means that these units will have to be set up before ’09-10 to avail of the tax benefit for 10 years.