The cup of woes for stakeholders of SEZs never ceases to overflow. The finance ministry is in no mood to relent on concessions to developers of SEZs — be it the minimum alternate tax or the dividend distribution tax. Be as it may, there was a feeling that there is status quo notwithstanding the proposed amendment in the Finance Bill 2016 to insert a sunset clause ending March 2017.
However, even the SEZs notified thus far — which have not begun any development work — will be hit if development activities do not begin before April 1, 2017.
The original section 80-IAB of the Income-tax Act, 1961, provides for a deduction equal to 100 per cent to a developer of profits and gains derived from any business of developing a SEZ notified on or after April 1, 2005.
A ‘developer’ is defined by the SEZ Act, 2005, as a person who has been granted a letter of approval by the Centre. An ‘SEZ’ is defined as one duly notified under the SEZ Act, 2005.
Thus, the way the section reads suggests that the deduction under the section is available to any developer who earns profits and gains derived from the business of developing an SEZ. When the Finance Bill 2016 was introduced, the sense people is general gathered was that if a developer notified a zone before April 1, 2017, it would not be hit by the sunset clause proposed by the Bill.
The Bill provides for a sunset to all those assessees, being developers, where the development of SEZ begins on or after April 1, 2017. If the Bill were to be passed and the amendment were to become law, the only consideration for denying the deduction is that development begins after April 1, 2017 or, in other words, before March 31, 2017. There is no mention of any notification criteria.
A clear interpretation of this, therefore, is that if a developer had the approval to develop a notified zone but does not begin any development by the stipulated date, it will not be able to claim any deduction under section 80-IAB regardless of whether the SEZ is notified in FY 2016-17 or earlier.
There are currently 352 notified zones thus far and only 196 of them claim to have undertaken any development activity.
Cuts that hurt
The other possible interpretation is that the notification does not appear in the proposed proviso and it may be possible for a developer who has an approval to develop a proposed SEZ that is not notified, to claim the benefit of deduction even if the SEZ is notified after April 1, 2017.
That may not hold water since the proviso specifies “development of SEZ...” and SEZ is defined by the section to mean only notified SEZs. The opening lines of the existing section 80-IAB are very clear in stating that the deduction is available to developers deriving profits and gains from a business of developing a notified SEZ.
Therefore, as long as a developer begins to develop before April 1, 2017, an area that may perhaps subsequently get notified due to the long-winded governmental process, there is a case to be made that deduction could be claimed after the SEZ gets notified although the period between the approval and notification would not be covered.
This fact is irrelevant, since profits and gains can only be derived after the developer begins to earn revenues. This can only happen after the zone is notified. And so the sequel shall continue!
Vikram Bapat is a partner at Grant Thornton India