Mumbai: A years respite the IT companies have got on the extension of tax sops for STPI units seems to be a bubble as proposed tax exemption from SEZ gives room to loopholes. Under Section 10AA(7) of the Income Tax Act, only a particular percentage of profits will be eligible for exemption. Already, TCS, Infosys Technologies and Wipro get some amount of their revenues from SEZs and continue to add new capacities in SEZs, reported The Economic Times.

Most of the leading software companies expect to receive up to 50 percent of their export revenue from SEZs by 2010. Under the SEZ Act, profits earned by the unit are 100 percent tax exempt in the first five years, and 50 percent tax exempt for the next five years. The 50 percent tax exemption can be extended for another five years based on the amount re-invested in the SEZ unit.

However, according to Section 10AA(7), which details how the profits are computed for the purpose of tax exemption, only a proportion of profits, based on the proportion of export sales from the SEZ unit to the total turnover of the company, will be exempt.

So, if a company has a turnover of Rs 10,000 crore and if it does Rs 5,000 crore of exports from the SEZ unit leading to a profit of Rs 1,000 crore from the unit, the entire Rs 1,000 crore will not be tax exempt. Only 50 percent of Rs 1,000 crore (where 50 percent is the export sales of the unit as a percentage of the company's total turnover) or Rs 500 crore will be exempt. This significantly reduces the tax exemption the company can get on profits from SEZs at least in the initial years, when a greater percentage of their exports come from outside of SEZ units.