Impact of Direct Tax Code on Special Economic Zones

Hey,

Today, I decided to take a break from normal accounting and decided to put forward a research on taxation. As many of us are aware that in a short period of time Direct Tax Code will be implemented instead of Income Tax Act,1956, I decided to put forward a research how such new Code will affect the Special Economic Zones.

Now, we all know Special Economic Zones are treated most times for the places situated out side India for Tax purposes. Be it Income Tax or Customs.

Income Tax Act:

Income Tax incentives for SEZ units

Tax exemption for SEZ units engaged in manufacture or providing services- A new section 10AA has been introduced in the IT Act by SEZ Act, 2005 which provides that the units in SEZ which start manufacturing or producing articles/ things or which start providing services on or after April 1, 2005 will be eligible for a deduction of 100 percent of export profits for the first five years from the year in which such manufacture/ provision of services commences and 50 percent of the export profits for the next five years. Further, for the next five years a deduction shall be allowed of upto 50 percent of the profit as is debited to the profit and loss account and credited to the Special Economic Zone Reinvestment Reserve Account (subject to conditions).

       Tax exemption for Offshore Banking units in SEZ- A deduction in respect of certain incomes would be allowed under the new section 80LA, to scheduled banks or foreign banks having an Offshore Banking unit in SEZ or to a unit of IFSC. The deduction shall be for 100 percent of income for five consecutive years beginning from the year in which permission/ registration has been obtained under the Banking Regulation Act or the SEBI Act or any other relevant law and 50 percent of income for next five years.

       Interest received by non-residents and not ordinary residents on deposits made with an Offshore Banking Unit on or after April 1, 2005 shall be exempt from tax.

       Exemption from Minimum Alternate Tax ("MAT")- Income arising or accruing on or after April 1, 2005 from any business carried on, or services rendered by SEZ unit would be exempt from MAT under section 115JB.

       Exemption from Capital Gains- Capital gains arising on transfer of assets (machinery, plant, building, land or any rights in buildings or land) on shifting of the industrial undertaking from an urban area to any SEZ would be exempt from capital gains tax. The exemption would be allowable if within one year before or three years after such transfer:

       Machinery or plant is purchased for the purposes of business of industrial undertaking in SEZ by the assessee.

       Assessee has acquired land or building or has constructed building for the purposes of business in SEZ.

       The original assets are shifted and establishment of the industrial undertaking is transferred to SEZ; and other specified expenses are incurred.

       The amount of exemption for capital gains would be restricted to the costs and expenses incurred in relation to all or any of the purposes mentioned above.

 Income Tax incentives for SEZ Developer

Tax holiday for SEZ developers- Section 80-IAB of  IT Act gives a deduction of 100 percent of profits derived from the business of developing SEZ (notified on or after April 1, 2005) would be available to developer of SEZ for any 10 consecutive years out of 15 years beginning from the year in which SEZ has been notified.

       Exemption under section 10(23G) that was available to infrastructure capital fund or a cooperative bank on interest and long term capital gains investment had been extended to investment made by SEZ developers qualifying for tax holiday under section 80-IAB. However, this exemption has been withdrawn with effect from assessment year 2007-08.

       Exemption from Dividend Distribution Tax ("DDT")- No DDT would be payable by a developer of SEZ on dividend declared, distributed or paid on or after April 1, 2005 out of current income.

       Exemption from MAT- Any income earned on or after April 1, 2005 by a SEZ developer would be exempt from MAT under section 115JB of the Act.

        

Now What DTC proposes?

DTC has proposed to bring a  shift in granting tax incentives to SEZ developers.DTC proposed to substitute the word Profit Based incentive prevalent under the existing provisions of the act with Expenditure/Investment based deductions for SEZs notified on or after April 1,2012.It has also provided for grandfathering of existing profit based deduction to SEZs notified on or after March 31,2012 for unexpired deduction period, However irrespective of the date of notification of their SEZs.SEZ developers will no longer enjoy the exemption from MAT liability and DDT under DTC.

SEZs notified on or before March 31, 2012:

1.    Profit based deductions under Sec.80 IAB of Income Tax Act would be grandfathered under DTC for the balance unexpired period out of prescribed 10 years.

2.    For computation of eligible profit, the methodology prescribed under schedule 12 of DTC Act is applicable.

3.    Capital expenditure as well as expenditure incurred prior to the commencement of business shall not be allowed.

4.    MAT and DDT exemptions shall not be allowed.

5.    Conditions under Sec.80 IAB for availing tax deductions shall continue to be applicable.

6.    SEZs notified on or after April1, 2012, SEZ developers shall be eligible for claiming Expenditure/Investment based deduction.

7.    Profits shall be gross earning less business expenditure in accordance with Schedule 12 of DTC.

8.    Capital Expenditure and expenditure incurred prior to commencement of business shall be allowable as business expenditure, except expenditure incurred on purchase/Acquisition of any land, or long term lease, goodwill, or financial instrument.

The total SEZ exports in the first quarter of this fiscal year (2010-11) has been at Rs. 58,685.46 crore which shows a growth of 68 percent over the corresponding year. The export in SEZ in the year 2009-10 has been at Rs. 2,20,711.39 crore which shows a growth of 121.40 percent.
As on June 30, an investment of Rs. 1,66,526 crore has been made in SEZs and direct employment for 5,50,323 persons have been generated.

• Tax incentives

Under the DTC, the developers of new projects post the DTC would be entitled to a tax incentive, albeit on an investment linked basis. For the existing projects, the DTC provides for grandfathering of profit-based deduction for the unexpired period

On the other hand, for new SEZ units, there are no incentives available for units set up after the DTC comes into effect.

• Financial impact

The introduction of investment linked incentive as a substitute for profit linked incentive is a striking shift in the government's thinking of granting incentives. The rationale quoted by the Ministry of Finance for such a move is that profit linked deductions are distortionary in nature as they create an incentive to inflate profit as well as to transfer profits from a taxable entity to a non-taxable one. Under the investment linked tax incentive, the benefit would be available to developers in the form of upfront deduction of capital expenditure (at par with the treatment of revenue expenditure), subject to certain exceptions. The financial impact of shift to investment based incentive vary from one developer to another depending upon the investment and income model of the developers.

However, even with this shift in incentive methodology, there continues to be a lack of clarity in taxation of SEZ units and developers. The government is providing with the Income-Tax exemption to those SEZ units which will be operational by March 31, 2014  as provided in the present SEZ Act. And, the units which will become operational after March 2014 they are being provided with the investment-linked exemptions, it is difficult because the time period which has been provided to the SEZ units is insufficient. The units which will be operational by 2014 (which means the SEZ units which will become operational after 2012) they are getting two years time. However, a SEZ developer gets three years time for developing the SEZ units as per the SEZ Act and it can also be extended further.

Therefore, developers which have become or will become eligible to claim deduction between this period could face some difficulty in claiming benefits as per the present draft of the DTC.

• Again, as far as units are concerned, the revised discussion paper on DTC simply states that units already operating in SEZs will be protected for the unexpired period. However, there is no guidance on the meaning of the term 'operating' thereby leaving some room for doubt.
  
  Clearly, the revised incentive methodology as well as the open tax issues are beginning to have a bearing on the decision of corporates seeking to invest in SEZ. One must not lose sight of the fact that the government had heavily promoted SEZs to Indian economy with its most prominent 'tax free' character. However, with a lack of basic clarity on some income tax issues is now causing a rethink from several corporates.
  
  Those developers who had proceeded to make huge investments or commitments on the basis of income tax benefits. They now find that while they may continue to get an exemption even under the DTC, albeit under a changed methodology, no corresponding benefits would be available to new units. Since new units may not be adequately incentivised after the DTC comes into force, the developers may potentially be left with developed land and costly infrastructure with little or no takers. This could significantly impact the profitability of several developers who are yet to complete their projects.

• If tax benefits are withdrawn, no new unit will come up in SEZs, adding that developers will lose huge investments made in land and infrastructure if companies do not set up units.

• From being tax free, to suddenly now be taxed at around 20 to 21% would surely hurt the smaller SEZs.

Conclusion:

It has been clear from above discussions that

The New Direct Tax Code, the survey shows overwhelming support for the code, with over three-fourth of respondents saying the code is simple and easy to understand, it will avoid litigation. The proposed reduction of tax rates, the end of incentives are other positives, although 72% respondents fear the new rules could lead to witch hunting, while MNC respondents are unhappy with the treaty override provision. Most of the aspects are positive. But you still have 20-25% of people who believe that there are negatives with respect to tax holidays, simplicity.In Short:

1. Efficiency with which fund is utilized will improve.
2. The tax collection will go up.
3. By not allowing credit of tax paid by way of minimum alternate tax, this tax is in the nature of     wealth tax and not on income at all;
4. This type of tax will clearly be an additional burden to loss making companies and will make their survival more difficult.

BIBLIOGRAPHY / WEBSITES:

1.     http://taxguru.in/direct-tax-code/sez-developers-step-up-demand-for-continued-income-tax-exemptions-seek-centre-states-intervention.html

2.     http://www.forum4finance.com/2010/07/08/sez-developers%E2%80%99-demands-continuation-of-tax-sops-under-revised-dtc/

3.      http://www.indianrealtynews.com/real-estate-india/sez-developers-concerned-over-adverse- impact-of-dtc.html

4.     http://www.premiuminvestments.in/cover-feature/53293p106/53255.html

5.     http://www.dnaindia.com/india/report_now-one-more-sez-wants-to-withdraw-from-gujarat_1565979

6.     http://www.suite101.com/content/impact-of-dtc-reforms-on-sezs-in-india-a356099

7.     http://www.inhouselawyer.co.uk/index.php/india/8302-impact-of-direct-tax-code-on-special-economic-zones

8.     http://www.business-standard.com/india/news/dtc-bill-to-impact-employment-investment-in-sezs-epces/107180/on

9.     http://catuts.com/minimum-alternate-tax-mat/

10.  governancenow.com/.../india-inc-wary-dtc-want-sez-sops-continue

11.  http://www.eximguru.com/exim/special_economic_zone_sez/ch_9_sez_incentives.aspx

12.  www.scribd.com/doc/38936751/Impact-of-DTC-on-SEZ

13.  http://www.projectsmonitor.com/SEZ/sezs-face-tax-hurdles-in-the-direct-taxes-code

14.  http://www.suite101.com/content/impact-of-direct-tax-code-dtc-reforms-in-india-a350221

1.CAtuts Newsletter [Article] / auth. Poddar Hemant Karnani and Madhusudan. - 2011.

2. DTC bill to impact employment, investment in SEZs: EPCES [Report] / auth. India Press Trust of. - New Delhi : Business Standard, August 31, 2010.

3.Impact of direct tax code on special economic zones [Report] / auth. Mangaldas Amarchand. - [s.l.] : The In -House Lawyer, 11 February 2011.

4. Effect of DTC on SEZ Policy : A Major setback for the Industry growth [Journal] / auth. Research RNB. - [s.l.] : TODAY’S CHANAKYA POLL:, 19 July 2010.

5. IMPACT OF UNION BUDGET 2011-12 [Journal]. - [s.l.] : Asia Pacific Tax Notes, 2011.

Revised Discussion Paper on the Direct Taxes Code [Journal].

6.Incentives to SEZ under the Direct Tax Code [Journal] / auth. Rao Sharath and N Krishna. - [s.l.] : BMR Advisors, August 11, 2010. - Issue 8.6 : Vol. Vol.4.

7.Revised discussion paper on Direct Tax Code, released by Ministry of Finance / auth. SEZs EXPORT PROMOTION COUNCIL FOR EOUs & // EPCES CIRCULAR NO. 112 DATED 16-6-2010. - New Delhi : [s.n.],

8.K.R.Girish. (2009). Direct Tax Code-Key Issues. BSR & Co. , 1-11.

9.Advisors, B. (June 16, 2010). Direct Taxes Code V2.0 – Analysis by BMR Advisors. BMR Advisors , Vol.4 (Issue.6.3), 1-9.

10.Dhomse, J. D. (2011, July 15). Now, one more SEZ wants to withdraw from Gujarat. Daily News And Analysis .

11.Ruma Dubey. (2011, March 18). SEZs – GETTING OFF THE ‘MAT’.

12.Tax Guru. (2010, July 9). SEZ developers step up demand for continued Income-Tax exemptions, Seek Centre, States intervention. Tax Guru .

13. Sonthalia, E. C., & Singhal, E. D. (2010, August 31). EPCES: DTC to impact investment in SEZs. (forum4finance, Interviewer)

14. Services, E. F. (2010, August 31st). DTC Bill will affect employment, investment in SEZs’. (EPCES, Interviewer)

15. Indian Realty News. (July 13, 2010). SEZ Developers Concerned Over Adverse Impact of DTC. Indian Realty News.

Accounting Cycle

Hello,

Accounting is a tricky business. It is important to know from where its implication basically starts taking place. If the origin point is missed then the same could lead to a lot of complications later on. Now this accounting process follows a certain pattern which forms a cycle pattern and we call the same accounting cycle.

taken from http://www.google.co.in/imgres?um=1&hl=en&safe=off&sa=N&biw=1024&bih=677&tbm=isch&tbnid=gq0TCbrnXKt26M:&imgrefurl=http://www.dummies.com/how-to/content/the-eight-steps-of-the-accounting-cycle.html&docid=5zib297_GR-6AM&imgurl=http://media.wiley.com/Lux/89/239189.image0.jpg&w=448&h=400&ei=RYesT-nBEonTrQeizMmEAw&zoom=1&iact=hc&vpx=108&vpy=304&dur=1739&hovh=212&hovw=238&tx=134&ty=143&sig=109851938189174260709&page=1&tbnh=153&tbnw=171&start=0&ndsp=15&ved=1t:429,r:5,s:0,i:83


Now what cycle does it exactly follow is important to know. Does it have any over lapping issues or can we skip certain steps of cycles is also a thing to know and understand. Now the simplest of accounting cycle looks something like this.

The point of origin of any accounting cycle is usually a monetary transaction or transfer or exchange. Whenever money changes hand or an exchange of any kind takes place that can have impact on business. Such exchange or transfer is a transaction and one such transaction is the point of origin of accounting. The other thing about this transaction is we can have many such transactions, so it is not possible to do accounting of every transaction every second. On the other hand we can not memorise each and every transaction as well. So what we do is keep it with us in a chit or note before it is entered in a voucher and then officially accounted for it. Though with the Rise of the Machine :-), record keeping procedure has become easier.

Next thing in the cycle is journal entry. Journal entry is very important pillar of accounting. And with the advent of ERP systems they have become even more important before. We'll see and talk about the rules of journal entries later on but one wrong entry could lead to faulty financial statements.

Now, when I was in school they said all the next phases of accounting cycles are more important and harder to master or even understand. So one can understand how hard it is to prepare them.But with ERP systems such tough tasks have become easier then before. The very next phase of accounting is Posting of Journal entries in its respective ledgers. Earlier it used to be very tedious and boring work that used to take up a lot of time. But now it has become simpler. The software it self posts entry in the ledgers based on the journal entries. That means if your  journal entry is wrong the system will put wrong entry in its ledger and after that consequences are just as heartbreaking as any failed love story in the world.

The next phase is called preparing Trial Balance. What is a trial balance? It is live in relationship of accounting. It checks the compatibility of accounting. If they are compatible with each other then we can go on marrying it. Trial balance is a statement that shows the closing balances of ledgers in an organised statement manner and points out if there is any difference. Such Trial balance must tally. If it doesn't then we have to find any mistake and rectify the same.

Now the next phases will be in continued manner....