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Research Paper Volume 2 Issue 3 November 2014 International Journal of Informative & Futuristic Research ISSN (Online): 2347-1697 Migrating Software Units from STPI to SEZ Paper ID IJIFR/ V2/ E3/ 020 Page No. 521-531 Research Area Special Economic Zones Key Words Economic, Park, Software, Special, Technology, Zone Dr. Sunil Taneja 1 Dr. Ramesh Kumar 2 Associate Professor & Head Department of Computer Science Government College, Chhachhrauli, Yamunanagar, India Assistant Professor, Department of History Government College, Chhachhrauli, Yamunanagar, India Abstract The Special Economic Zones ( SEZ ) were announced in India in 2000. They provide a noble playing field with infrastructure to the domestic enterprises and manufacturers, so that they could compete with the global players. The SEZs are a separate, demarcated region governed by economic laws that are more liberal than the typical economic laws. A SEZ unit provides companies with tax exemptions, and business incentives, which in turn promote Foreign Direct Investment ( FDI ) and technology into the country. Software companies are in a quandary whether they should setup new software units within a Software Technology Parks of India (STPI) or a Special Economic Zone. Companies in the IT sector enjoyed tax benefits within the STPI scheme, which ended in 2009 and SEZ promised the advantage of beneficial regime beyond that. For developing countries, SEZs traditionally have had both a policy and an infrastructure rationale. In terms of policy, the SEZ can be a useful tool as part of an overall economic growth strategy to enhance industry competitiveness and attract Foreign Direct Investment. Through SEZs, government aim to develop and diversify exports while maintaining protective barriers, to create jobs, and to pilot new policies and approaches (for example, in customs, legal, labour, and public private partnership aspects). www.ijifr.com Copyright IJIFR 2014 521

1. Introduction 1.1 Software Technology Parks of India [1, 2, 3] It is a government agency in India, established in 1991 under the Ministry of Communications and Information Technology that manages the Software Technology Park (STP) scheme. It is an export oriented scheme for the development and export of computer software, including export of professional services. The STP Scheme provides various benefits to the registered units, which include 100% foreign equity, tax incentives, duty-free import, duty-free indigenous procurement, CST reimbursement, DTA entitlement, deemed export etc. STPI has played a seminal role in India having earned a reputation as an information technology superpower. STP units exported software and information technology worth Rs. 215264 crore in FY 2010-11. The state with the largest export contribution was Karnataka followed by Maharashtra, Tamil Nadu and Andhra Pradesh. STPI has a presence in many of the major cities of India including the cities ofbangalore, Mangalore, Mysore, Hubli, Trivandrum, Bhilai, Bhubaneswar, Chennai, Coimbatore, Hyderabad, Gurgaon, Kak inada, Pune, Guwahati, Noida, Mumbai, Nagpur, Kolkata, Kanpur, Lucknow, Dehradun, Patna,Rourkela, Ranchi, Gandhinag ar-gujarat, Surat, Imphal, Shillong, Nashik etc. Besides regulating the STP scheme, STPI centers also provide variety of services, which includes high speed data communication, incubation facility, consultancy, network monitoring, data center, data hosting etc. STPI provides physical hosting for the National Internet Exchange of India. The tax benefits under the Income Tax Act Section 10A applicable to STP units has expired since March 2011. While the Government has chosen not to extend the Sec 10A benefits against the demand by the IT units, most of the STP registered SME units shall be affected, who now will have to pay Income Tax on profits earned from exports. STP Scheme is a 100% export oriented scheme for undertaking software development for export using data communication links or in the form of physical media including export of professional services. The scheme was setup to contribute to the prosperity of the national economy through promotion of exports from the software & services Industry by facilitating all the statutory services of the Govt., strengthening the Communication Infrastructure and by increasing the quality consciousness in the Industry. The benefits under the STPI Approvals are given under single window clearance mechanism. Re-Export of capital goods are permitted. Simplified minimum export performance norms i.e. net foreign exchange earnings to be positive. Domestic purchases by STP unit are eligible for the benefit of deemed exports to the equipment suppliers. Use of computer system for commercial training purpose is permissible subject to the condition that no computer terminals are installed outside the STP premises. Call center permitted under the STPI scheme. The sales in the Domestic Tariff Area (DTA) shall be permissible up to 50% of the export in value terms. STP units are exempted from payment of corporate income tax for a block of 10 years (up to 2009-10). An STP project may be set up anywhere in India. Jurisdictional Directors have the powers to approve import of capital goods (net of taxes) not more than US$ 20 million. 100% foreign equity is permitted. 522

All the imports of hardware & software in the STP units are completely duty free, import of second hand capital goods also permitted. The capital goods purchased from the DTA are entitled for the benefits like levy of Excise Duty & Reimbursement of Central Sales Tax (CST). Capitals invested by foreign entrepreneurs know - how fees, royalty, dividend etc., can freely repatriate after payment of income taxes due on them if any. Depreciation on capital goods above 90% over a period of five years and also the accelerated rate of 7% per quarter during the first two years subject to an overall limit of 70% in the first three years. 1.2 Special Economic Zone [4, 5, 6, 7] Conceptually, Special Economic Zone [4] is a geographical region that has economic laws different from a country s generally applicable economic laws, with the underlying objective being an increase in economic growth and activity through increased foreign investment. The concept of SEZs which are specified delineated duty free territories and deemed to be foreign territories for the purpose of trade is not new to India. India was one of the first in Asia [8] to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones Policy was announced in April 2000. This policy was first introduced as a part of the export-import policy of the country. To provide a long-term and stable policy, and signal the government s commitment to increase economic activity in the country, a comprehensive SEZ legislation, the Special Economic Zone Act, 2005 ( SEZ Act ) was passed in June 2005. SEZs have been established in several countries across the globe including the People s Republic of China, India, Jordan, Poland, Kazakhstan, Philippines and Russia. Globally, establishment of SEZs have revolved around achieving the following basic objectives [4]: Economic growth and development through exports and backward integration Foreign Investment Infrastructure development Employment generation Up-gradation of managerial and technical skills Achievement of the above objectives through SEZs is typically facilitated through the following [4] - Income tax Holidays Hassle Free Environment Exemption from Indirect duties and taxes No currency restrictions Relaxed foreign investment norms Excellent infrastructure facilities In India, the major benefits offered to the units in SEZs for attracting investments into the SEZs, including foreign investment have been listed below and shown in figure 1. a) Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units 523

b) 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. c) Exemption from minimum alternate tax under section 115JB of the Income Tax Act. d) External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels. e) Exemption from Central Sales Tax. f) Exemption from Service Tax. g) Single window clearance for Central and State level approvals. h) Exemption from State sales tax and other levies as extended by the respective State Governments. i) Enhanced limit of Rs. 2.4 crores p.a. allowed for Managerial Remuneration Figure 1: SEZ Benefits The major benefits available to SEZ developers include:- a) Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. b) Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. c) Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act. d) Exemption from dividend distribution tax under Section 115O of the Income Tax Act. e) Exemption from CST. f) Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act). 524

2 Statutory Compliance For STP Units Important statutory compliance [3] for STP units is listed as under:- 1) Each of such unit is required to maintain separate accounts for its operations. Separate annual balance sheet will have to be made for each such unit which would become a part of the main balance sheet of the company. For maintaining separate accounts the following will have to be done: Maintenance of Separate Cash & Bank book and corresponding vouchers. Maintenance of sales invoices. Maintenance of Fixed Assets Registers. Maintenance of Foreign Inward Remittance Certificate file (FIRC's) & Bank Realization Certificate file where the original of the FIRC's and BRCs are kept. Maintenance of contract file, where copies of contracts received from buyers are maintained. Preparation of yearly balance sheet for the unit which would ultimately become a part of the balance sheet of the company. 2) Each unit is required to maintain separate bank accounts for its operations. The units is free to have as many bank accounts as it desires but shall have to designate a single branch of bank whom all export documents will be submitted. In other words the work of handling of all shipping documents and realization of export proceeds will have to be entrusted to this designated bank branch. 3 Evolution Of SEZ - Focus On Export Promotion SEZs represent the latest, and best, thinking so far on India s export policy. Since the 60s, India has seen the emergence of several initiatives to boost exports, some good, some bad, some indifferent. Notable amongst these are [4]: a) Export Processing Zone (EPZ) Scheme b) Export Oriented Units (EOU) Scheme c) Software Technology Park (STP) Scheme d) Electronic Hardware Technology Park (EHTP) Scheme e) Export Promotion Capital Goods (EPCG) Scheme f) Advance Licensing and Deemed Exports Scheme g) Free Trade Zone (FTZ) Scheme Past schemes of promoting exports have hardly paid off. All India has to show after a decade and a half of export processing zones, export-oriented units and other measures outlined above is a measly share of less than 1% of world exports. This, as is widely accepted within the Government, is quite insignificant for a country of our size and capabilities. It was early 2000 when the then Union Commerce and Industry Minister, the late Murasoli Maran, undertook a trip to China to get first-hand experience of how China had come to become the darling of foreign investors. Included in his itinerary was a visit to SEZs, which led the announcement of SEZs in India through the annual Export-Import (EXIM) Policy of March 2000. The country not only has Greenfield SEZs, but also has the erstwhile export processing zones / Free trade Zones converted into SEZs. The SEZ policy not only represents the most ambitious of export boosting efforts, but it goes much further, in that it seeks to radically change the environment for exports and FDI, by offering a trouble-free business-friendly 525

environment and world class infrastructure. It allows the Government to experiment with radical economic reform on a localized basis, introducing reforms that are difficult to implement at the national level, given the country s large size and social disparities. India s SEZ policy can be looked at as the logical outcome of developments in India s export-import policy in recent years. Trade policy reforms over the last decade have moved towards providing an export-friendly environment simplified procedures better input availability quality / technology up gradation Improved competitiveness. Underlining this, recent modifications in the EXIM policy (over the last 4-5 years) have focused on four major areas [4]: a) In the first place, efforts have been made towards removing restrictive export import regulations. An important first step in this regard was the proposal to set up SEZs. b) Secondly, conscious steps have been initiated to ensure that the process of trade liberalization in India remains aligned to the norms of multilateral trading agreements. Thus, the incentive structure for exporters has been recast to make it consistent with India s commitments to WTO. Tariff changes and Quantitative Restriction (QR) reforms in accordance with WTO commitments have been made. c) Thirdly, measures have been initiated to simplify and decentralize the procedures associated with the administration of foreign trade. The current SEZ framework brings this factor to the fore. d) Lastly, policy announcements have been made to provide special incentives to certain categories of Indian Exports. Importantly, the EXIM policy (now the Foreign Trade Policy) also seeks to motivate and involve State Governments in export-promotion efforts. 4 Setting Up Of SEZ With SEZs acting as the engines of growth, the underlying policy objective of the Central Government was to increase India s economic growth and activity through increased foreign investment. For achieving this objective, the Government encouraged and enabled the establishment of SEZs by the State governments themselves, or in the private or joint sector in association with the State governments. Meanwhile, a lot of time was spent in evolving an all-encompassing legislation called the Special Economic Zones Bill, which was introduced in Parliament and passed subsequently. The Special Economic Zones Act, 2005, got the Presidential imprimatur on June 23, 2005 and got notified on 10th February 2006. This led to a tremendous surge in interest for the launch of SEZs, as is evident from the growing number of big industrial houses applying to the Board of Approval for putting up SEZs in many areas. A SEZ can be set up [3] by the following a) Central Government b) State Government c) Private Limited Company d) Public Limited Company e) Foreign Company f) Jointly by any of the above The procedure [1] for setting up a unit in SEZ is demonstrated in fig. 2. 526

Figure 2: Procedure for Setting up a Unit in SEZ 527

5. Regulatory, Compliance And Litigation Support: SEZ 5.1 Regulatory Support [3] Approval of SEZ Approval of Letter Of Permission (LOP) / renewal of letter of permission Approval of green card Approval of Import Export Code Number Permission for inter-unit transfer of capital goods Permission for disposal of waste and scrap Approval for enhancement of production capacity Permission for additional location / change of location Permission for sale of rejects Permission for sale of DTA sale Assisting in claiming Duty Drawback Assisting in claiming DEPB NOC for de bonding of materials / de bonding of premises 5.2 Compliance Support [3] Structuring of contracts/transactions to optimize indirect tax incidence Formulating indirect tax efficient business models Conducting VAT impact assessment studies Harmonizing customs valuation Undertaking comprehensive reviews of business operations Conducting indirect tax specific due diligence reviews Advice on classification, valuation, applicability of taxes on transactions and admissibility to tax benefits/exemptions Opinions on indirect tax issues Identification of innovative tax planning opportunities Preparations of customized compliance manuals on all taxes Single point contact & centralized coordination for tax payments, filing of returns & compilation of documents 5.3 Litigation Support [3] Drafting appeals & submissions Appearances & arguments before adjudication & appellate authorities Briefing Senior Counsel on need basis Representation before relevant Government authorities on tax & trade policy issues Developing economic justification for tariff/non-tariff concessions 6 SEZs: Emphasis By It Companies Under the umbrella of the SEZs, software services companies can provide information-enabled services such as back office operations, call centres, content development or animation, data processing, engineering and design, graphic information system services, human resources services, insurance claim processing, legal data bases, medical transcription, payroll, remote maintenance, revenue accounting, support centres and website services. 528

6.1 Information Technology SEZ [10] In recognition of the potential of the IT sector to transform the Indian economy, and to provide the requisite impetus, special concessions have been afforded under the SEZ policy for this sector. 6.2 Plugging the loopholes [10] While the new SEZ Act has definitely won the hearts of many in the IT industry, there are certain shortcomings/grey areas in the legislation that need to be addressed. One of the key gaps in the new SEZ legislation is that, while the existing section 10A of the Act provides for computing the deduction on the basis of the total turnover of the unit, the newly introduced section 10AA of the Act provides for computing the deduction on the basis of total turnover of the business of the assesse. In this regard, clarification from the government is required on what constitutes business of the assesse, since in its current form a lower deduction/exemption is available to SEZ units, based on the formula provided. With a view to promote Greenfield investment and catalyse employment generation, the policy makers have finally indicated that conversion/relocation of existing STP/EOU/EHTP units into SEZ units would not be permitted under the SEZ policy. However, the industry is of the opinion that the mere creation of SEZs without extending similar advantages to units registered under the Software Technology Parks of India Scheme would be detrimental to the interests of companies located in the latter. 7 STPI vs. SEZ While comparing the incentives offered by each, it has to be kept in mind that the STPs are sector specific. They only facilitate to the needs of the computer software market. As for the SEZs, they cater to a variety of industries, ranging from gems and jewellery to electrical appliances, and even computer software [9]. The dilemma is whether software units should migrate from STPI to SEZ. The difference from an income tax perspective is given below:- STPI units enjoyed a 10-year complete tax exemption on export profits against a 15-year tax holiday for SEZ units SEZ units have 100 per cent tax exemption for the first five years, 50 per cent for the next five years, and up to 50 per cent for further five years, subject to creation of reserves For both, exemption is available only on profits earned through actual physical exports out of India and on-site services. Further, while the tax-holiday regime for STPI units expired in 2009, the regime for SEZ units is open-ended. Additionally, SEZ units are also eligible for capital gains tax exemption on relocation from urban area to SEZ. The difference from an indirect tax perspective is as under:- Both enjoy exemption from many indirect taxes in respect of procurements of capital goods and goods/services for operations. These include exemption from central excise, customs duty, CST (Central Sales Tax, as reimbursement to STPI units on inter-state purchases), service-tax(as refund/rebate of input tax to STPI units, subject to output services being exported out of India and covered under a taxable category). Apart from these, there can be benefits accorded under State legislations. SEZ units too get exemption from VAT (value-added tax) / LST (local sales tax), besides other Statelevel taxes and levies. In the absence of any `business reconstruction restrictions, if an STPI unit shifts into any SEZ, the consequences are as under:- 529

It may become entitled to an increased income-tax holiday, that is balance of 10 + 5 years, get exemption (as against reimbursement) from service-tax and CST, get entitled to exemption from VAT, LST and other local levies depending upon VAT legislation of the States. Additionally, it can do netting-off of import and export payments, without prior Reserve Bank of India approval. 8 Conclusions Following conclusions, in the form of table 1 and table 2, have been withdrawn after through study of STPI and SEZ Table 1: STPI vs. SEZ (Benefits Table 2: STPI vs. SEZ (Obligations) 530

References [1] Moving from STPI to SEZ, B.C. Shetty & Co. Chartered Accountants, www.bcshettyco.com, 2014. [2] STPI & SEZ, http://www.stylus.in, 2011. [3] STPI vs. SEZ, Ashok Maheshwary & Associates, http://www.akmglobal.com/stpi-and-sez.html, 2014. [4] SEZs in India: Major Leap Forward, Maharashtra Economic Development Council, PricewaterhouseCoopers, 2008. [5] Special Economic Zones: Performance, Lessons Learned, and Implications for Zone Development, The Multi-Donor Investment Climate Advisory Services of the World Bank Group (FIAS), The World Bank Group, Washington DC, USA, 2008. [6] Aggarwal, A, Export Processing Zones in India: Analysis of the Economic Performance, Indian Council for Research on International Economic Relations, Working Paper No. 148, 2004. [7] Graham, E.M, Do Export Processing Zones Attract FDI and Its Benefits? The Experience from China, [8] International Economics and Economic Policy, 1:87 103, 2004. [9] Special economic Zones in India, Ministry of Commerce & Industry, Department of Commerce, http://sezindia.nic.in/about-introduction.asp, 2014. [10] Divij Kumar, Special Economic Zones versus Software Technology Parks A Critical Analysis, PSA, E-Newsline, 2010. [11] SEZs: A Window for the IT Sector, Goa Chamber of Commerce & Industry, Goa, India, http://www.goachamber.org, 2008. 531