With the global slowdown beginning to take its toll on the investment prospects of special economic zones (SEZs), prime minister Manmohan Singh has asked the finance ministry to remove an anomaly in the Income Tax Act, which would help IT/ITeS SEZs.

The PM, who also holds charge of the finance ministry, has decided to modify Section 10 AA of the Act to ease the pain of the global slowdown for SEZ promoters and units. Till now, Section 10 AA (which gives a complete tax holiday to SEZs for the first five years and a 50 per cent tax break for the next 10 years) contained an anomalous clause — Section 10AA(7) — according to which profits of the unit eligible for tax deduction had to be in the same proportion as the export turnover of the unit with total turnover of the promoting firm, instead of the SEZ unit.

The government can relax certain conditions governing the zones across other sectors as well, commerce secretary GK Pillai told reporters today. “Investments have slowed down in the last three months as the global slowdown is taking its toll on SEZs. We will see 2009 as being the period of reduced investment,” Pillai said. “Some relaxation will be there in terms of meeting net forex obligations so that units would be able to sell some products in the domestic market.”

Pillai said the proposal to allow export-oriented refineries to sell in the domestic market without having to pay additional duties is pending with the revenue department. Since the government that wants EOU refineries to sell in the domestic market instead of export, they want waiver from tax that is imposed on domestic sale by EOUs.