Section 54GA – Capital Gains Exemption on Shifting Industrial Undertakings to SEZs

For industrial undertakings looking to relocate from urban areas to Special Economic Zones (SEZs), Section 54GA of the Income Tax Act provides significant tax relief. This exemption aims to encourage businesses to move to SEZs, which offer various economic benefits and infrastructural advantages. In this blog, we will explore the key provisions of Section 54GA and how businesses can take advantage of capital gains exemptions when shifting their operations.

Understanding Section 54GA

Section 54GA provides an exemption on capital gains tax arising from the transfer of capital assets such as machinery, plant, buildings, land, or rights in land/buildings when an industrial undertaking relocates to an SEZ. This exemption is subject to specific conditions that must be met within a defined time frame.

Definition of Key Terms

Special Economic Zone (SEZ): As per the Special Economic Zones Act, 2005, SEZs are designated areas with business-friendly policies to promote exports and industrial growth.

Urban Area: Defined by the Central Government based on factors like population density, industrial concentration, and urban planning requirements.

Eligibility Criteria for Capital Gains Exemption

To claim the exemption under Section 54GA, the assessee must fulfill the following conditions within one year before or three years after the transfer of assets:

1. Purchase of New Machinery or Plant: The industrial undertaking must purchase new machinery or plant for its business operations in the SEZ.

2. Acquisition of Land or Building: The business must acquire or construct a new building or land in the SEZ for its operations.

3. Shifting of Assets and Establishment: The original assets must be transferred, and the business establishment should be relocated to the SEZ.

4. Additional Expenses: Any other expenses incurred as specified under a scheme framed by the Central Government also qualify.

Tax Implications and Capital Gains Computation

Depending on the amount of capital gain and the cost of new assets acquired, the tax treatment varies:

• If capital gains exceed the cost of the new asset, the difference is taxed under Section 45 in the year of transfer.

• If capital gains are equal to or less than the cost of the new asset, no capital gains tax is charged.

• If the new asset is sold within three years, its cost for capital gains computation will be considered as NIL.

Deposit Scheme for Unutilized Capital Gains

If the capital gains are not fully utilized within the prescribed time frame, the amount must be deposited in a specified bank or financial institution before filing the income tax return. This deposit will be treated as the cost of the new asset for exemption purposes.

Consequences of Unutilized Deposits

If the deposited amount remains unutilized for the specified purposes within three years:

• The unused portion is taxed as capital gains in the year the three-year period expires.

• The assessee can withdraw the remaining amount in accordance with the scheme rules.

Conclusion

Section 54GA provides a beneficial tax exemption for businesses shifting from urban areas to SEZs, making the relocation financially viable. By carefully planning the asset transfer and reinvestment strategy, businesses can maximize tax savings while leveraging the advantages of operating in an SEZ. If you are considering relocating your industrial undertaking, consulting a CA can help ensure compliance and optimize tax benefits.