Section 10AA Deduction

Section 10AA Deduction

Section 10AA could be a provision under the Income-tax Act which allows taxpayers to require deductions for businesses that are established in Special Economic Zones (SEZ). In April 2000, to attract foreign investment in India, the govt announced that tax concessions would be provided for entrepreneurs who founded the desired businesses in Special Economic Zones. Accordingly, initially, SEZs were instituted to function under the provisions of the Foreign national trading policy.

However,  the SEZ Law and SEZ Regulations were gradually enacted and came into effect in 2006. revenue enhancement benefit or Section 10AA deduction is accessible to SEZ and also the corresponding provisions are contained under section 10AA of the tax Act. the current article highlights the assorted conditions for claiming the deduction under Section 10AA, the number of tax benefits/deductions available under the section, and other salient features of the section.

Eligibility For Section 10AA Deduction

To say a deduction under section 10AA of the Income-tax Act, SEZ units are required to satisfy the subsequent conditions:

  1. Entrepreneurs must meet the provisions of Section 2 (j) of the Special Economic Zones Act of 2005.
  2. SEZ unit should have commenced its manufacturing activity or provision of service, because the case could also be, during the previous year relevant to any assessment year commencing on or after 1st April 2006;
  3. SEZ unit isn’t formed by any splitting up, or the reconstruction of the business that’s already in existence;
  4. SEZ unit isn’t formed by any transfer of plant or machinery, previously used for any purpose, to a replacement business; and
  5. Units who have already enjoyed the good thing about deduction under section 10A of the taxation Act for an endless period of 10 years don’t seem to be eligible to assert deduction under Section 10AA of the Act.

Amount Of Deduction

The deductions available in this section are:

  • 100% of export profit is eligible for the deduction for the primary five years.
  • 50% of export profit is eligible for the deduction for the following five years.
  • Amount not exceeding 50% of export profit is eligible for the deduction for the following five years.

The condition for allowance of the deduction is that the identical needs to be debited from the Statement of Profit and Loss and credited to the ‘Special Economic Zone Reinvestment backlog’. Also, Section 10AA deduction is allowable from the assessment year relevant to the previous year within which the SEZ unit commences its manufacturing process or commences provision of service because the case could also be.

Special Economic Zone Reinvestment Reserve Account

There are certain conditions to be followed by the assesses, to assert a deduction of the last 5 years (i.e. amount not exceeding 50% of the export profit), as detailed above. The conditions for utilization of the quantity credited within the ‘Special Economic Zone Reinvestment Reserve Account’ are summarized hereunder:

  1. The amount credited to the ‘Special Economic Zone Reinvestment Reserve Account’ is required to be utilized just for the aim of purchasing of plant or machinery. Such newly acquired plant or machinery should be first put to use before the expiry of three years following the previous year within which the said reserve has been created.
  2. Further, the number credited to the ‘Special Economic Zone Reinvestment Reserve Account’, until the acquisition of the plant or machinery as mentioned in point 1 above, may be used for the aim of the business of the undertaking. However, the identical can’t be used for distribution by way of dividend or profits or for remittance of profits outside India, or the creation of any assets outside India.

The following are the consequence just in case the reserve isn’t used as per the directions of the revenue enhancement Act:

The amount credited to the ‘Special Economic Zone Reinvestment Reserve Account’ would be deemed to be profitable within the year immediately following the amount of three years just in case the number isn’t utilized for the acquisition of plant or machinery as directed. Further, the number credited to the ‘Special Economic Zone Reinvestment Reserve Account’ would be deemed to be profitable within the year within which the number has been utilized for a purpose apart from directed.

Calculating Section 10AA Deduction

Section 10AA Deduction

Section 10AA Deduction has got to be calculated on the idea of the subsequent formula:

(Profit of business of the unit x Export turnover of the unit) / Total turnover of the business.

Export turnover of the unit means consideration regarding export by the undertaking received in or brought into India. Such turnover/consideration doesn’t include freight, telecommunication charges, or insurance expense incurred for the delivery of a product or consumable item outside India or the other expense incurred in interchange for the rendering of services outside India.

Amalgamation Or Merger

Following would be the consequence just in case the unit entitled for deduction under section 10AA has been transferred to a different undertaking, before the expiry of the deduction period, in a very scheme of amalgamation or demerger –

  1. The deduction won’t be available under section 10AA to the amalgamating or demerged unit, because the case is also, for the previous year within which the amalgamation or demerger has taken place; and
  2. In addition, the provisions of Section 10AA must apply to the amalgamation or demerger entity only if the amalgamation or demerger did not occur.