Understanding Section 10A of Income Tax Act – Exemption for Newly Established Undertakings in Special Economic Zones

March 14, 2023

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The Indian government has been making consistent efforts to attract foreign investments and promote industrial development in the country. One of the significant steps towards this direction was the establishment of Special Economic Zones (SEZs) under the SEZ Act, 2005. These zones are designated geographical areas with specific economic laws that aim to boost exports and provide a conducive environment for businesses.

To further incentivize industrial growth and development, the government has introduced various tax exemptions and benefits for companies operating in SEZs. Section 10A of the Income Tax Act, 1961 is one such provision that offers tax benefits to newly established undertakings in SEZs.

Table of Contents

What is Section 10A of the Income Tax Act?

Section 10A of the Income Tax Act was introduced in 2005 to provide tax benefits to newly established undertakings in SEZs. The section allows for a deduction of 100% of profits and gains derived from eligible businesses set up in SEZs for the first five consecutive assessment years. The deduction is available to both Indian and foreign companies operating in SEZs.

Eligibility criteria for availing benefits under Section 10A

To avail benefits under Section 10A, the following conditions must be met:

The undertaking should be a new business set up in a SEZ on or after April 1, 2005.
The undertaking should derive profits and gains from the export of goods or services.
The undertaking should not have been formed by splitting up or reconstruction of an existing business.
The undertaking should not have been formed by transferring an old business to a SEZ.
The undertaking should not be formed as a result of the re-establishment, reconstruction, or revival of an erstwhile business.

Benefits under Section 10A

The benefits of Section 10A are as follows:

100% deduction of profits and gains for the first five consecutive assessment years.
The deduction is available to both Indian and foreign companies operating in SEZs.
The deduction is available for profits and gains derived from eligible businesses set up in SEZs.
The deduction is available only to new businesses set up in SEZs after April 1, 2005.

Conclusion

Section 10A of the Income Tax Act is a significant provision that incentivizes businesses to invest in SEZs and promote industrial growth and development. The deduction of 100% of profits and gains for the first five consecutive assessment years provides a substantial tax benefit to newly established undertakings. The eligibility criteria for availing benefits under the section are stringent and ensure that only new businesses set up in SEZs after April 1, 2005, and meeting certain conditions are eligible for tax benefits. Overall, Section 10A plays a crucial role in promoting the growth of businesses and exports from SEZs, ultimately contributing to the overall economic development of the country.

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Frequently Asked Questions (FAQs)

Q1. What is Section 10A of the Income Tax Act?

A1. Section 10A of the Income Tax Act, 1961 provides tax benefits to newly established undertakings in Special Economic Zones (SEZs) in India.

Q2. What are the benefits of Section 10A?

A2. The benefits of Section 10A are 100% deduction of profits and gains derived from eligible businesses set up in SEZs for the first five consecutive assessment years.

Q3. Who can avail benefits under Section 10A?

A3. Both Indian and foreign companies that meet the eligibility criteria can avail benefits under Section 10A.

Q4. What is the eligibility criteria for availing benefits under Section 10A?

A4. The eligibility criteria for availing benefits under Section 10A are:

The undertaking should be a new business set up in a SEZ on or after April 1, 2005.
The undertaking should derive profits and gains from the export of goods or services.
The undertaking should not have been formed by splitting up or reconstruction of an existing business.
The undertaking should not have been formed by transferring an old business to a SEZ.
The undertaking should not be formed as a result of the re-establishment, reconstruction, or revival of an erstwhile business.

Q5. How long is the benefit available under Section 10A?

A5. The benefit of 100% deduction of profits and gains is available for the first five consecutive assessment years.

Q6. Is there any cap on the amount of deduction under Section 10A?

A6. No, there is no cap on the amount of deduction under Section 10A.

Q7. Can existing businesses located outside SEZs avail benefits under Section 10A?

A7. No, only newly established undertakings in SEZs can avail benefits under Section 10A.

Q8. Is Section 10A applicable to businesses set up in Free Trade Zones (FTZs)?

A8. No, Section 10A is applicable only to businesses set up in SEZs and not in FTZs.

Q9. Are there any conditions to continue availing benefits under Section 10A?

A9. No, there are no specific conditions to continue availing benefits under Section 10A. However, the eligibility criteria must continue to be met in order to avail benefits under the section.

Q10. Is the benefit under Section 10A available to businesses engaged in all types of activities in SEZs?

A10. No, the benefit under Section 10A is available only to businesses that derive profits and gains from the export of goods or services.