In an attempt to finally resolve any misgivings about the use of second-hand or used capital goods while setting up an SEZ unit, the government has issued an instruction saying that a company can now bring in as much second-hand capital equipment to a new special economic zone unit as it wants. The SEZ unit, however, will not be eligible for tax exemption if the ratio of used equipment exceeds 20 per cent of the overall capital investment. This is the third time the government has issued such a notification pertaining to the treatment of second-hand capital goods used in SEZs with respect to tax exemption under the Income Tax Act.
In its instruction dated May 27, the commerce ministry outlined the guidelines for procurement of used capital goods from domestic tariff area (DTA) to SEZ units. Apart from clarifying that the developer is free to transfer as many second-hand capital goods as he wants, it also stated that prior approval of the Development Commissioner of that particular zone would be required. That, however, is just a formality, according to Vikram Bapat, executive director with international consultancy PricewaterhouseCoopers (PwC). This instruction is important especially for old IT companies setting up IT/ITES SEZs across the country, who might want to consolidate their existing software and technology parks (STPIs) on which theyve reaped tax benefits for the past 8-10 years with their new SEZs, he added. Given that these STPIs have already been suffering in the face of the ongoing global recession, it only makes sense to ease the cost burden of these companies by allowing them to transfer their existing capital goods from their STPIs, which are a part of the DTA to their SEZs. These SEZs will, however, still be able to avail of service tax benefits, if not income tax.