Govt eases hiring norms for IT companies’ units in SEZs
IT-ITeS companies that have set up a new unit in a special economic zone (SEZ) will be able to transfer existing technical employees, provided they account for not more than 50% of the total manpower engaged in software development in the new SEZ unit.
MUMBAI:
The Central Board of Direct Taxes (CBDT) has revised upward the
percentage of existing employees that can be transferred by companies in
the IT & ITeS sector to a new SEZ unit, without losing the tax
holiday benefits.
IT-ITeS companies that have set up a new unit in a special economic zone (SEZ) will be able to transfer existing technical employees, provided they account for not more than 50% of the total manpower engaged in software development in the new SEZ unit.
The circular clarifies that the computation of the manpower ratio for the new SEZ unit in its first year of operation will be considered as 'at the end' of the financial year. "Thus, it could be possible for a company to start business operations from its SEZ unit, by transferring a handful of existing employees and later hire new employees and meet the ratio," explains a CFO of an IT company.
An alternative option has also been provided to companies. If the company is able to show that the net addition of new technical manpower in all units of the company is at least equal to the number that represents 50% of the total technical manpower of the new SEZ, the tax holiday benefit will not be denied.
"Many companies operate both of out SEZ and non-SEZ units; thus this option is a welcome flexibility provided to the companies as it recognizes and considers the spirit of new employment generated by the company as a whole, rather than restricting it only to the new SEZ unit," says Punit Shah, co-head, tax at KPMG.
As reported by TOI, an earlier circular issued in July by the CBDT had sent shock waves in the IT sector. Subsequently, the CDBT received representations from many companies and also the industry body Nasscom, which argued that the limit of 20% for eligible manpower transfer, set down in the circular, was inadequate, restrictive and would impact global competitiveness in terms of quality and timely delivery.
SEZ units are granted a graded 15-year tax holiday. As part of eligibility conditions, under section 10AA of the Income-Tax Act, the new SEZ unit should not have been formed by splitting up or reconstruction of a business already in existence; and it should not have been formed by the transfer, to a new business, of machinery or plant previously used for any purpose in excess of 20% in value.
The ministry of commerce in November 2010 had stated that there is no bar on transfer of manpower to SEZ units and the cap on transfer of assets applied only to old plant and machinery.
In this context, Ravi Mahajan, tax partner, at EY, says: "It would have been ideal to remove the criteria of employees in the context of splitting up and reconstruction. Nevertheless, the revised circular is a positive development and will bring substantial relief to companies operating in the IT & ITeS sector.
The CBDT has also clarified that its revised circular will not apply to assessments that have already been completed.
IT-ITeS companies that have set up a new unit in a special economic zone (SEZ) will be able to transfer existing technical employees, provided they account for not more than 50% of the total manpower engaged in software development in the new SEZ unit.
The circular clarifies that the computation of the manpower ratio for the new SEZ unit in its first year of operation will be considered as 'at the end' of the financial year. "Thus, it could be possible for a company to start business operations from its SEZ unit, by transferring a handful of existing employees and later hire new employees and meet the ratio," explains a CFO of an IT company.
An alternative option has also been provided to companies. If the company is able to show that the net addition of new technical manpower in all units of the company is at least equal to the number that represents 50% of the total technical manpower of the new SEZ, the tax holiday benefit will not be denied.
"Many companies operate both of out SEZ and non-SEZ units; thus this option is a welcome flexibility provided to the companies as it recognizes and considers the spirit of new employment generated by the company as a whole, rather than restricting it only to the new SEZ unit," says Punit Shah, co-head, tax at KPMG.
As reported by TOI, an earlier circular issued in July by the CBDT had sent shock waves in the IT sector. Subsequently, the CDBT received representations from many companies and also the industry body Nasscom, which argued that the limit of 20% for eligible manpower transfer, set down in the circular, was inadequate, restrictive and would impact global competitiveness in terms of quality and timely delivery.
SEZ units are granted a graded 15-year tax holiday. As part of eligibility conditions, under section 10AA of the Income-Tax Act, the new SEZ unit should not have been formed by splitting up or reconstruction of a business already in existence; and it should not have been formed by the transfer, to a new business, of machinery or plant previously used for any purpose in excess of 20% in value.
The ministry of commerce in November 2010 had stated that there is no bar on transfer of manpower to SEZ units and the cap on transfer of assets applied only to old plant and machinery.
In this context, Ravi Mahajan, tax partner, at EY, says: "It would have been ideal to remove the criteria of employees in the context of splitting up and reconstruction. Nevertheless, the revised circular is a positive development and will bring substantial relief to companies operating in the IT & ITeS sector.
The CBDT has also clarified that its revised circular will not apply to assessments that have already been completed.
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