24. Restriction on set off of loss against income of units in Special Economic Zones [S. 10AA]:
24.1 Under ITA, if any person is undertaking business in SEZ, profits related to exports of the SEZ undertaking are exempt from payment of Income-tax. The relief applies to the income of the “unit” in the SEZ.
24.2 In many cases, companies have units in SEZ as well as in areas outside SEZ (Non-SEZ units). Tax payer is one. Business units are two or more. Relief for profit of SEZ unit is available as per the provisions of S. 10AA. Losses if any of other units are carried forward.
24.2.1 The issue is – Can the loss be carried forward without setting it off against the income of SEZ unit? This results in higher losses being carried forward and being set off against taxable income of subsequent years.
24.2.2 The tax department is of the view that exemption is available only after setting off of losses of non-SEZ units. A circular (No. 7 of 2013) was also issued stating the view of tax authorities. The courts have taken a view in favour of assessee providing exemption for entire income of the SEZ unit, i.e., the losses of Non-SEZ can be carried forward.
24.3 Finance Bill provides to clarify that deduction for profits of SEZ units will be provided only on the net income after setting off of losses and not for the entire income of individual SEZ unit.
Refer to Example 4.
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Example 4:
An Indian company has total 3 units – Unit 1 in SEZ and Units 2 and 3 outside SEZ (non-SEZ units). The profits/(losses) of SEZ undertaking is Rs. 250 and of non-SEZ units are (Rs. 450) and Rs. 300.
An evaluation of taxable income in the scenario before clarification and after clarification is explained below.
Scenario I – Before Finance Bill 2017
Sr. No.
Particulars
Amount (Rs.)
1
Unit 1 – SEZ
250
2
Less: Deduction u/s 10AA
(250)
3
Unit 2 – Non-SEZ
(450)
4
Unit 3 – Non-SEZ
300
5
Total taxable income (1+2+3+4)
(150)
6
Losses to be carried forward
(150)
Scenario II – After Finance Bill 2017
Sr. No.
Particulars
Amount (Rs.)
1
Unit 1 – SEZ
250
2
Unit 2 – Non-SEZ
(450)
3
Unit 3 – Non-SEZ
300
4
Less: Deduction u/s 10AA - restricted to
(100)
5
Total taxable income (1+2+3+4)
NIL
6
Losses to be carried forward
NIL
This will result in higher tax burden for the tax payer in future years.