India has always promoted exports to boost economic growth, & to encourage this, the Income Tax Act offers a range of exemptions. One of the significant tax incentives is provided under Section 10A of the Income Tax Act, 1961. This section offers special provisions in respect of newly established undertakings in free trade zones or export-oriented units (EOUs) that are engaged in the export of articles or computer software.
What Is Section 10A of the Income Tax Act?
Section 10A aims to provide relief to industrial undertakings engaged in exports by allowing tax exemptions on profits & gains derived from such export activities. Originally, this benefit was extended to units established in free trade zones, software technology parks (STPs), & special economic zones (SEZs).
This section helps startups & businesses by offering them a strong initial push, exempting profits & gains derived by an assessee for a specific number of years from the total taxable income.
Objective Behind Section 10A
The primary goal of Section 10A is to:
- Encourage exports, particularly in the IT & software services sector.
- Promote employment through industrial activity in free trade zones & special economic zones.
- Provide a globally competitive platform for Indian exporters by giving them tax-free growth for the initial years."
Eligibility Criteria for Claiming Exemption
To avail of the deduction under Section 10A:
- The undertaking must be a newly established unit.
- It should operate in a free trade zone, SEZ, or STP.
- It must be engaged in the export of articles or computer software.
- The business should not be formed by the splitting or reconstruction of an existing business.
- The undertaking should not be using previously used machinery or plant exceeding 20% of the total value.
Quantum and Duration of Exemption
The exemption under Section 10A is typically available for ten consecutive assessment years, starting from the year in which the undertaking begins manufacturing or production.
The exemption applies only to profits & gains derived by an assessee from export turnover & not from domestic sales. "
Key Highlights of Section 10A
- It is a special provision aimed at newly established industrial undertakings.
- The profits earned from exports are fully exempt from tax during the specified period.
- The deduction helps to lower the effective tax burden in the initial stages of the business, enabling faster growth & investment.
Important Notes
- The exemption under Section 10A is available even if the business does not receive foreign exchange immediately, as long as it is received within six months from the end of the financial year (or extended period).
- It is also necessary to furnish a report from a Chartered Accountant in Form 56F along with the income tax return to claim this exemption.
Section 10A vs Section 10AA
While Section 10A deals with tax holidays for older SEZ units or STPs, Section 10AA now governs the new SEZ exemptions. The two sections are similar in intent but apply to different periods & business categories.
Common Queries Related to Section 10A
- Is deduction under Section 10A available for unlimited years?
No. The deduction is available for a fixed period of 10 consecutive years from the commencement of eligible operations. - Can a business formed by reconstructing an old business claim Section 10A?
No, such entities are specifically excluded from this benefit. - Is deduction under Section 10A available after the introduction of MAT (Minimum Alternate Tax)?
Section 10A profits are exempt from total income, but MAT may still apply in certain cases.
Conclusion
Section 10A of the Income Tax Act plays a crucial role in boosting India’s export ecosystem. By allowing industrial undertakings to avail of certain tax deductions, it fosters business expansion, employment generation, & global competitiveness. This special provision in respect of newly established undertakings in a free trade zone has been a game-changer for several export-oriented units, especially in the tech & manufacturing sectors.
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