SEZ Tax Exemption — Section 10AA

Section 10AA of the Income Tax Act 1961 provides a deduction to newly established units in Special Economic Zones in respect of profits derived from the export of articles or things or from providing services from such units. The deduction is 100% of profits and gains derived from exports for the first five consecutive assessment years from the year of commencement of manufacture or production or provision of services, 50% for the next five assessment years, and 50% of the profit transferred to a Special Economic Zone Re-investment Reserve Account (to be utilised within three years) for the subsequent five assessment years under Section 10AA(1). The deduction is available only if the unit began manufacturing, production, or provision of services on or after April 1, 2005, and holds a letter of approval from the Development Commissioner of the SEZ.

The deduction under Section 10AA of the Income Tax Act 1961 is computed as: (Export Turnover of the Unit ÷ Total Turnover of the Unit) × Profit of the Business of the Unit. Export turnover is defined in the Explanation to Section 10AA(7) as the consideration in respect of export received in, or brought into, India by the assessee in convertible foreign exchange within six months from the end of the previous year or such further period as the Reserve Bank of India allows. Freight, telecommunication charges, and insurance incurred in delivering articles outside India are excluded from export turnover. The total turnover of the unit is the total revenue of that specific SEZ unit, not the consolidated turnover of the entire enterprise.

Section 10AA of the Income Tax Act 1961 requires that the unit must have begun manufacture, production, or provision of services in the SEZ on or before March 31, 2020, to be eligible for the deduction under Section 10AA(1). Units that commenced operations after March 31, 2020, are not eligible for the Section 10AA deduction — this sunset was introduced by the Finance Act 2017. For eligible units, the 15-year deduction window runs from the year of commencement of the unit and is not linked to the sunset date for new entrants. Units that obtained Letters of Approval and commenced operations before March 31, 2020, continue to receive the deduction for the balance of their 15-year window.

To claim Section 10AA deduction under the Income Tax Act 1961, the unit must (i) hold a valid Letter of Approval from the Development Commissioner of the SEZ, (ii) maintain separate books of accounts for the SEZ unit as required by Rule 18BB of the Income Tax Rules 1962, (iii) file a report of a Chartered Accountant in Form 56F along with the return of income certifying that the deduction has been correctly computed, and (iv) ensure that export proceeds are received in convertible foreign exchange within the prescribed period. The unit must be in compliance with SEZ Rules 2006 framed under the Special Economic Zones Act 2005, including net foreign exchange earning requirements. Failure to file Form 56F by the due date has been held by several High Courts to be fatal to the claim, though the issue is litigated.

No. Section 10AA(8) of the Income Tax Act 1961 explicitly provides that where a deduction has been allowed under Section 10AA, no deduction in respect of the same profits and gains shall be allowed under any other provision of Chapter VI-A or under Section 10A or Section 10B. This means that a unit claiming Section 10AA cannot simultaneously claim deductions under Section 80IC (for units in Himachal Pradesh or Uttarakhand), Section 80IB, or any similar profit-linked deduction for the same profit. The assessee must make a deliberate choice at the time of filing the return of income as to which deduction regime is more beneficial, since once a deduction is claimed under Section 10AA, the Chapter VIA benefit is foreclosed for those profits. Tax planning is critical at the time of setting up operations in an SEZ versus other special category areas.