IT-BPM sector seeks clarity on SEZ units in a hybrid work model

The Indian information technology-business process management (IT-BPM) sector, in a pre-budget memorandum, has urged the government to clarify if the place of providing the service will continue to be considered a Special Economic Zone (SEZ) unit, even if a worker of the unit has been working remotely.

Under Section 10AA provision of the Income Tax Act, taxpayers are allowed deductions for businesses which are established in SEZs. Section 10AA(1)(ii) of IT Act requires a company to transfer part of profits to SEZ reserve and utilize the same for acquiring plant and machinery (which should be used before expiry of 3 years following the year in which SEZ reserve was created) to claim tax holiday for the third block (from year 11- 15).

Industry body Nasscom, however, believes “an aggressive interpretation of section 10AA could lead to instances where officials may consider that work done remotely by workers of the SEZ unit is ineligible for the tax holiday”, which explains why it has made this request to the government before the Union Budget. 

Further, post Covid-19 pandemic, the industry expects to continue implementing a hybrid work model where, unlike in the past, work will happen both on-site and remotely as a matter of routine. While earlier, this was considered a temporary requirement, it will now be a way of working.
The intention behind mandating creation of SEZ Reserve under section 10AA was to utilise the same for promotion and development of SEZ units. However, unlike traditional brick and mortar manufacturing businesses, IT-BPM companies do not have significant investments in plant and machinery and instead invest in laptop, desktop, servers, and networking equipment, which do not require heavy capital outlay. Further, due to change in technology, the requirements of “on premises” assets have reduced, and companies are using third party clouds and infrastructure.  

Nasscom has recommended that utilisation of the SEZ Reserve should be expanded to include “expenses incurred on leasing of computers/laptops, using cloud infrastructure, buying software and investment in building, infrastructure, workstation, interiors, furniture related cost.” 

“Expanding the scope for utilization of SEZ Reserve for aforementioned purposes shall improve cost competitiveness of the industry. This shall also incentivise IT companies to make additional investments in SEZs, thereby contributing to exports and creating additional employment opportunities,” Nasscom said in a pre-budget memorandum.