The Hindu Business Line : Deduction dilemma

That a company should be denied deduction merely because of a faux pas between the regional STPI and the Central Government seemed incongruous to many.

Tax breaks for companies Software Technology Parks of India (STPI),

The Income-Tax Act, in general, has encouraged individuals and corporates to utilise tax-breaks subject to the fulfilment of certain conditions. Right from the enactment of the erstwhile I-T Act of 1932, such tax breaks were considered the done thing. Over the last few years however, the encouragement seems to be waning — the sunset year for the marquee Section 80HHC, as also for a couple of other Sections, is over.

Section 10A of the I-T Act, which provided a tax-break for 10 years for units located in free trade zones (FTZs) and exported software or other such articles, though still on the statute book, has had its fair share of litigation. The primary problem in this Section is its restriction of the definition of FTZ to the Kandla and Santacruz Export Processing Zones. All other EPZs have had to obtain separate sanction to enjoy the exemption.

Similarly, software technology park was defined as any park set up in accordance with the Software Technology Park Scheme notified by the Commerce and Industry Ministry. While one assumed that this would mean the ubiquitous Software Technology Parks of India (STPI), in reality it turned out to be different.

The STPI Scheme, 1995 talks of approval of the STPI by the Inter-Ministerial Standing Committee of the Department of Electronics. A Hyderabad-based software company lost its case for a deduction under this Section on the grounds that the STPI was not one notified by the Ministry of Commerce and Industry. This spread to other software companies to the extent that the very purpose of the Section was being questioned. Why a company could be denied the deduction after fulfilling all the conditions required just because of a faux pas between the regional STPI and the Central Government seemed incongruous to many.

Welcome Notification

The Central Board of Direct Taxes (CBDT), in the last week of March, decided to break the ice on this issue by notifying that STPI units should not be denied tax exemption under this Section merely on the grounds that approval to such units has been granted by the jurisdictional STPI but has not been approved by the Union Government.

Other conditions in the Section should be fulfilled though, which is akin to saying that you need to be an assessee to obtain a tax-break. In cases where the assessments have already been completed and the claim under Section 10A has been disallowed only on the grounds that the approval to the STPI has not been granted by the Inter-Ministerial Standing Committee, it is stated that the demand so arising should be kept in abeyance until further orders.

This should rattle those who have received the order with the disallowance, while those who have not received the order should be keeping their fingers crossed. One hopes that the CBDT is not thinking of bringing this provision into play only prospectively, as that would deny the benefit to many companies; the last decade saw the growth of a number of companies eligible for, but denied, this benefit. This is all the more important since 2010 has been declared as the sunset year for deduction under this Section.

While this is a welcome move, other provisions in the Finance Bill, 2006 proclaim the intent of the Government in continuing whatever little is left of the tax-breaks for some more years. While Section 801A of the I-T Act — again a specific notification-based Section — has been kept on the statute book till 2010, the industrial parks scheme under this Section can go on till 2009 undeterred. However, there is a requirement that all entities that claim these deductions, as also others, need to file their I-T returns on or before the due date specified. If one does some crystal gazing, post-2010 could perhaps see a full-fledged EET system of taxation.

(The author is a Hyderabad-based chartered accountant.)