Section 54GA of the Income Tax talks about exemption of capital gains on transfer (sale) of capital assets of the existing unit to a third party at the time of shifting of industrial undertaking from urban area to any Special Economic Zone. Such instance of capital gain arises when the three ingredients of capital gains are satisfied- i.e. (a) existence of a capital asset; (b) transfer of such capital asset, and most importantly profits or gains that arise from such transfer (or sale).
If an existing unit currently operating outside SEZ and desirous of setting up a unit in SEZ, wants to avail the tax benefits applicable to SEZ units under the income-tax law, it must ensure either of the following-
- that the number of technical manpower so transferred from the existing unit to SEZ units, in the first year of commencement of business from the SEZ Unit does not exceed 50% percent of the total manpower actually engaged in developing software at any point of time in the given year in the new unit, OR
- the enterprise/company can demonstrate that the net addition of new technical manpower in all units of the enterprise is at least equal to 50% of the total technical manpower of the new SEZ unit during the previous year.
If it crosses that limit, redeployment of technical manpower from an existing unit to a SEZ unit will be construed as splitting up or reconstruction of existing business. The relevant provisions of income-tax laws stipulate that for a software unit based in SEZ to avail itself of the tax holiday, the unit concerned should not have been formed by the splitting up or reconstruction of a business already in existence. Similarly, there are specific provisions to provide that transfer of second-hand plant and machinery beyond a certain permissible limit can be considered as a case giving rise to split up or re-construction of an existing undertaking, resulting in no tax benefits.
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