Income Tax Query

Income Tax Benefits for Special Economic Zones


Section 10AA: Special Provisions in respect of units in Special Economic Zones:


1.    To Whom allowable: Assessee who is an entrepreneur referred to in Section 2(j) of the SEZ Act, 2005.

Note: Meaning of Entrepreneur as per SEZ Act: “entrepreneur” means a person who has been granted a letter of approval by the Development Commissioner under sub-section (9) of section 15.


2.    Deduction in respect of which income: Total income of entrepreneur from his unit referred to in Section 2(zc) of SEZ Act. The Unit need to be located in a Special Economic Zone.


Ø  As per SEZ Act, "Unit" means a Unit set up by an entrepreneur in a Special Economic Zone and includes an existing Unit, an Offshore Banking Unit and a Unit in an International Financial Services Centre, whether established before or established after commencement of this Act;

Ø  As per SEZ Act, “Special Economic Zone” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone;


3.    Time period for commencement: Unit should commence manufacture or produce articles or things or provide any services on or after 1.4.2006 but before 1.4.2021.

4.    Quantum of deduction:


Amount of deduction

For five (5) consecutive assessment years beginning with the assessment year relevant to the previous year in which unit commences production, rendering of services etc.

100% of profits and gains derived from the export of such articles or things or from services.

Next 5 assessment years

50% of profits and gains derived from the export of such articles or things or from services

Next 5 assessment years

Not exceeding 50% of the profit as is debited to the profit and loss account and credited to a reserve account called “Special Economic Zone Re-investment Reserve Account” to be utilised for the purpose of the business of the assessee.


5.    Conditions for utilisation of Special Economic Zone Re-investment Reserve Account: To be utilised for the purpose of acquiring machinery or plant which is first put to use before the expiry of a period of 3 years following the previous year in which the reserve is first created.

6.    Other Conditions:

Ø  Deduction also to on-site development of computer software outside India.

Ø  Deduction only to new units and not formed by splitting up, or reconstruction of a business already in existence. Unit is not formed by the transfer to the new business of machinery or plant previously used for any purpose. (Not applicable for units relocated due to flood, typhoon, riot etc as referred to in Section 33B of the Income Tax Act.

7.    MAT and DDT: Minimum Alternate Tax and Dividend Distribution Tax are applicable to units in SEZs.



Section 80-IA: As per Section 80-IA(4)(iii), an undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zones for the period from 1.4.1997 to 31.3.2006 (31.3.2011 in case of industrial parks) is eligible for deduction of 100% of profits for 10 consecutive assessment years. Hence, the sunset clause is already in operation.


Section 80-IAB: Allowable to an assessee being a developer, whose gross total income includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone notified on or after 1.4.2005.


However, the provisions of this section shall not apply to an assessee, being a developer, where the development of SEZ begins on or after 1st day of April 2017.


Tax Benefits for SEZ under GST


Ø  Supply to /from SEZ is treated as inter-state supply and hence, IGST Act is applicable.

Ø  As per section 16 of IGST Act, the supply of goods or services or both to a Special Economic Zone Developer or a Special Economic Zone unit are considered as Zero-rated supplies, meaning no GST is to be charged on such supplies.

Ø  Hence, the suppliers can supply to SEZ under bond/letter of undertaking and not charge any GST. Else, they can charge GST, pay the same by themselves and claim refund.

Ø  SEZ is treated as territory outside India. Hence, any supply from SEZ to Domestic Tariff Area is considered as Imports and is taxable under reverse charge basis.