Special Economic Zone (SEZ) units are eligible for significant tax deductions under the Direct Tax Code (DTC) 2025. Section 144 provides deduction for profits and gains derived by an entrepreneur from the export of articles or things or from services. This guide analyses the audit requirements and Form 32 documentation for SEZ unit exporters.
The SEZ Unit Deduction Framework
Section 144 — Deduction for SEZ Units
Section 144 provides that where in computing the total income of an assessee, being an entrepreneur as referred to in Section 2(j) of the Special Economic Zones Act, 2005, who begins to manufacture or produce articles or things or provide any services, as referred to in Section 10AA of the Income-tax Act, 1961 (as it existed prior to its repeal), there shall be allowed a deduction, subject to the conditions that:
- The amount of deduction is calculated as per the provisions of Section 10AA of the Income-tax Act, 1961
- The deduction under this Act shall be allowed only for such tax years, as would have been allowed under Section 10AA of the Income-tax Act, 1961
Section 10AA — Key Features
- 100% deduction of profits and gains for the first five years
- 50% deduction for the next five years (subject to conditions)
- Available to entrepreneurs who begin to manufacture or produce articles or things or provide services in SEZs
Savings Clause
Under Section 536(2)(s), the deduction referred to in Section 10AA of the repealed Income-tax Act shall, on fulfilment of the conditions, continue to be allowed under the DTC for tax years beginning on or after 1st April 2026.
Audit Requirements
Rule 66 — Furnishing of Audit Report
Rule 66 provides that for the purposes of claiming deduction under Section 144, the accounts of the eligible business for the tax year for which the deduction is claimed shall be audited by an accountant, before the specified date referred to in Section 63, and the assessee shall furnish by that date the report of such audit duly signed and verified by such accountant.
Form No. 32 — Audit Report
The report of the audit of the accounts of an assessee claiming deduction under Section 144 shall be in Form No. 32.
Separate Report
A separate report shall be furnished by each undertaking or enterprise of the assessee claiming deduction.
Accompanying Documents
The audit report shall be accompanied by:
- Profit and loss account of the undertaking
- Balance sheet of the undertaking
- Such documents as if the undertaking or enterprise were a distinct entity
Relevant Documents
For Section 144, Form No. 32 shall be accompanied by:
- Copy of the notification of the Special Economic Zone (SEZ)
- Details of the entrepreneur registration
Audit Report Contents
Part B4 — SEZ Unit Deduction
For Section 144, the relevant part of Form No. 32 is Part B4.
Key Certifications
The audit report must certify:
- The deduction claimed is correct
- The conditions for deduction are fulfilled
- The undertaking is eligible for the deduction
- The SEZ unit began manufacture or production on the specified date
Eligibility Conditions
1. Entrepreneur Status
The assessee must be an entrepreneur as referred to in Section 2(j) of the Special Economic Zones Act, 2005.
2. SEZ Unit
The undertaking must be a unit in a Special Economic Zone.
3. Commencement of Operations
The unit must have begun to manufacture or produce articles or things or provide services.
4. Export of Goods or Services
The deduction is available on profits derived from the export of articles or things or from services.
5. Deduction Period
The deduction is available for the specified number of years from the date of commencement of operations.
Documentation Requirements
1. SEZ Notification
- Copy of the notification of the SEZ
- Details of the date of notification
2. Entrepreneur Registration
- Entrepreneur registration certificate
- Approval letter from the Development Commissioner
3. Financial Records
- Separate books of account for the SEZ unit
- Profit and loss account
- Balance sheet
4. Export Records
- Export documents
- Foreign exchange realisation certificates
- Details of export income
5. Audit Report
- Form No. 32 (Part B4)
- Duly signed and verified by an accountant
6. Other Documents
- Details of income derived from exports
- Details of deductions claimed
Practical Compliance
1. Maintain Separate Books
Maintain separate books of account for the SEZ unit.
2. Get Accounts Audited
Get the accounts audited by an accountant before the specified date.
3. File Audit Report
File the audit report in Form No. 32 (Part B4) before the due date.
4. Attach Documents
Attach the required documents with the audit report.
5. Claim Deduction
Claim the deduction in the return of income.
Consequences of Non-Compliance
Disallowance of Deduction
If the audit report is not filed or the conditions are not fulfilled:
- The deduction may be disallowed
- Income may be recomputed
- Interest and penalty may be levied
Penalty
Non-compliance may result in penalty under Section 439 for under-reporting of income.
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on SEZ unit deduction and audit requirements. Our direct tax experts help SEZ exporters understand the deduction conditions, prepare audit reports, and navigate the regulatory framework. We assist in audit report preparation, documentation, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on SEZ unit deduction or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex SEZ unit deduction and audit requirements requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- Audit Report Preparation: Assistance with Form No. 32 filing
- Documentation: Assistance with SEZ documentation
- Compliance: Guidance on ongoing compliance requirements
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your SEZ unit deduction matters.