The Hindu Business Line : Negative profits: I-T Act change proposed to give relief to exporters

IF the tax treatment of profits on sale of DEPB licences had left the exporting community somewhat aggrieved, there is major relief coming their way on the `negative profit' front.

The Taxation Laws (Second Amendment) Bill 2005 introduced in the Lok Sabha on Tuesday seeks to ensure that export incentives are allowed to be set off against `negative profit' situations for calculation of Section 80 HHC benefits.

For this purpose, the Income-Tax Act is to be amended on a retrospective basis from April 1, 1992.

Indications are that the exporting community would get a relief of about Rs 800-1,000 crore from this move. This is the approximate sum that was under dispute for "negative profit" cases from 1992-93.

The garment export sector would be a significant beneficiary of the proposed amendment on `negative profit' situations. Exports from this sector are mainly undertaken through the drawback scheme and not through the DEPB route.

A `negative profit' situation arises when the export price of an item is, say, Rs 100 and this is less than the cost of procurement or manufacture (including taxes and duties) of, say, Rs 105.

If the drawback applicable here were, say, Rs 10, the exporters would add this to the export price and show a net profit of Rs 5 and this amount would be claimed for Section 80HHC deduction.

The Income-Tax Department, however, contended that export incentives should not be added to the negative profit and the resulting amount could not be claimed as a deduction under Section 80 HHC.

The Department then sought to tax the entire export incentives on an independent basis. It had reopened past cases and Section 80 HHC benefits were denied to such `negative profit' cases.

On their part, the exporters argued that they usually operated on thin margins and that the export incentives should be included in determining export profit or export losses.

The issue of negative profits got settled at the level of the Prime Minister's Economic Advisory Council, which had come out in favour of the exporting community on this controversial issue.

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