Section 10AA Of Income Tax Act: Eligibility, Limit, Example And Calculation For Deduction Under Section 10AA

To promote exports and attract foreign investment, the Government of India introduced Section 10AA under the Foreign Policy Act. However, it became fully functional in 2006, after which tax concessions were offered to specific businesses. On fulfilling certain conditions, Section 10AA of the Income Tax Act allows new businesses or units offering services in Special Economic Zones (SEZs) to enjoy income tax exemption and holidays. This zone is generally a part of the nation’s diverse business and trade legislation and is located within a nation’s borders. 

Here's more about Section 10AA of the Income Tax Act.

Eligibility For Section 10AA Deduction

Entrepreneurs, firms, companies, individuals and other categories of assessees can claim a deduction under Section 10AA. However, to claim a deduction under this section, SEZ units need to meet the following conditions or criteria:

• The entrepreneur should enrol within the provisions of Section 2(j) of the Special Economic Zone Act, 2005.
• The company should not have been established by relocating previously used plants or machinery. However, in certain cases, SEZ units can use second-hand machinery.
• The SEZ unit must commence its production on or after April 1, 2006.
• The SEZ unit should not be incorporated by reconstructing or splitting an existing business.
• If SEZ businesses have already reaped the deduction benefit under Section 10AA for 10 years, they are ineligible to claim this deduction. 

10AA Exemption Limit

The amount of deduction available under this existing section is as follows:

• 100% of the profit coming from export is entitled to a tax deduction for the first 5 consecutive years (1st to 5th year).
• 50% of the export profit is entitled to a deduction for the next 5 years (6th to 10th year).
• 50% of Export Profits (or) the amount credited to the SEZ Reinvestment Allowance reserve, whichever is lower (11th to 15th year)

Section 10AA Limit

Take a look at the following conditions that apply to the exemption amount under this section:

• Business owners of units in SEZs need to create a reserve account (Special Economic Zone Reinvestment Reserve Account) after claiming the deductions for the first 10 years. Businesses can use the amount only for buying new machinery and plants.
• Owners need to use the newly purchased plant or machinery for 3 years from the date of creating their reserve account.
• Owners need to provide the necessary particulars of the purchase of machinery in Form No.56FF for taxable income calculation.

If the amount in the said reserve account is not utilised within 3 years or mis-utilized, then the amount deduction claimed shall be added to the profit of the year after the completion of 3 years or the year in which it is mis-utilized and shall be charged to tax.

Section 10AA Amendment

The existing provision of Section 10AA of the Income Tax provides 15 years of tax benefit to newly established businesses or units located in SEZs. However, the deduction claimed under this section is time-bound. For instance, it is only available if the SEZ unit began operation on or after 1 April 2005 but before 1 April 2021.

Moreover, with the recent amendment, no deduction will be allowed to an assessee who does not file a return of his income on or before the due date as mentioned under section 139(1).

Also, this section did not provide any time limit for timely remittance of the export proceeds from sales of goods or provision of services under Section 10AA. So, it has been amended and a new sub-section (4A) has been introduced to provide tax deduction on the proceeds from sales of goods that are brought into India in convertible foreign exchange within a time of 6 months from the end of the previous year.

Calculation For Section 10AA Deduction Under Income Tax

In order to compute the deduction under Section 10AA, you can use the formula below:

Profit from export = (Profit of the unit’s business X Unit’s Export Turnover) / Total Turnover of the Business.

Here, export turnover refers to the amount that a business receives for its exports. This turnover does not include insurance expenses, telecommunication charges, etc.

Final Word

SEZS are eligible to enjoy an income tax advantage and other associated provisions under Section 10AA of the Income Tax Act. However, it should be kept in mind that these provisions are only applicable to companies that operated from April 1, 2006, to April 1, 2021.