The Income-Tax department has decided to reopen the cases of exporters who availed of tax exemption on the basis of export incentives and not on actual profit from exports under the Section 80 HHC of the Income Tax Act. The section, which exempted profits from exports from tax, ceased to exist on March 31, 2004.

The total tax involved is huge and can be anything between Rs 3,000 crore (Rs 30 billion) and Rs 4,000 crore (Rs 40 billion) a year, according to an Income-Tax department official.

The income-tax department is reopening the cases even though the appellate Income-Tax tribunal has constituted a special Bench to resolve issues related to the calculation of tax exemption under Section 80 HHC.

According to tax officials, the Bench will come out with a new ruling on the use of export incentives in availing of tax exemptions under Section 80 HHC.

A senior tax official said the department was banking on the Supreme Court's February 4, 2004, judgment in the IPCA Laboratories vs DCIT, Mumbai, case. The court ruled that if the exporter made a loss on exports, he would not be eligible to claim tax exemption under Section 80 HHC.

The Income-Tax department argues that tax exemption can be granted only if an exporter makes a profit from exporting goods the exporter manufactures and those the exporter buys from others and then exports.

The tax exemption on export profits under Section 80 HHC was wound down by 20 per cent a year over the last five years. As a result, in the last four years exporters have had to pay tax on a part of their profits from exports.

They also used to offset the money they got from export incentives such as duty drawback, replenishment of licences and cash components like the duty entitlement passbook scheme against their tax liabilities.

Tax consultants and the Federation of Indian Export Organisations contend that the Income-Tax department has no business zooming in on export incentives. They claim the Supreme Court did not rule on export incentives but on whether exporters who made losses could claim tax exemption.

Says a tax consultant: "It is a very specific judgment and says one needs to net out the profit from manufacturing from the loss of trading in the case of a manufacturer and trader before calculating the taxable income and arriving at the loss or profit." He suggests that the income-tax department is just going all out to raise revenue to meet the finance ministry's diktat.

However, tax officials contend that exporters have been involved in a scam by claiming tax benefits when they make no actual profits. The FIEO has argued that if exporters are now asked to pay huge sums by the income-tax department, they will go out of business and exports will suffer. It has now raised the matter with the income-tax appellate tribunal.

Under the scanner

• The I-T department has decided to reopen the cases of exporters who availed of tax exemptions on the basis of export incentives
• The appellate I-T tribunal has constituted a special Bench to resolve the tax exemption cases
• The department is banking on the Supreme Court's February 4, 2004, judgement in the IPCA Labs vs DCIT, Mumbai
• Tax consultants and the Federation of Indian Export Organisations argue that the SC judgement is specific to a case and cannot be extended
• Tax officials contend that exporters have systematically misused incentives
• FIEO has now raised the matter with the Income-Tax appellate tribunal