SEZs suffer MAT body blow

The Direct Taxes Code also has a provision for imposing minimum alternate tax on these tax-free enclaves

Special economic zones (SEZ) have been given a body blow in the form of 18.5 per cent minimum alternate tax (MAT). The effective tax rate would be 20 per cent, including the surcharge and education cess.

SEZ developers would also have to pay 16.23 per cent tax on the dividend distributed after June 1.

Both developers as well as units in these tax-free enclaves were earlier exempted from MAT under Section 115 JB of the Income Tax Act. So far, the Board of Approval has cleared 581 SEZs. A total of 154 zones have received in-principle approval.

Nearly 130 SEZs are operational at present. Exports from SEZs rose from Rs 13,284 crore in 2003-04 to Rs 2,20,711.39 crore in 2009-10.

VN Dhoot, chairman and managing director of the Videocon Group, said this was a breach of promise the government had made to industry and would hamper exports and hit the confidence of foreign investors.

The country needed SEZs to reduce the current account deficit, an area of great concern for the finance minister, Dhoot said. “That’s why we expect the finance minister to reconsider his proposal,” he said. Videocon is developing a multi-product SEZ in West Bengal.

Anuj Puri, chairman & country head, Jones Lang LaSalle India, said the move to bring SEZs under MAT diminished the benefits they offered developers over other commercial real estate as an asset classes.

Dinesh Kanabar, deputy chief executive and chairman of tax at KPMG, said the imposition of MAT on SEZ developers and units was a retrograde step, as it sought to impose tax on income from investments made on the basis of the promise of tax exemption. It would worsen the negative impact of the proposed Direct Taxes Code (DTC) and should have been avoided, he said.

Neera Ahuja, partner, Deloitte Haskins & Sells, said although the MAT paid would be available for credit against the zone’s tax liability over the next 10 years, the move was in line with the proposals in the DTC Bill, 2010. DTC also provides for levying of MAT on SEZs. The government has also not extended the tax holiday to units operating under the Software Technology Park Scheme, though such units are already paying tax under the MAT provisions.

“The message is clear -- the regime of zero-tax companies is over and companies availing of tax holidays also need to pay a minimum tax, as do companies in power and infrastructure sectors, under Section 80IA of the Income Tax Act. The intention behind giving tax holiday to SEZs and units in SEZs was to promote capital formation, generate employment and promote exports. Now, with minimum taxation being introduced for such undertakings as well and because the MAT credit may probably remain on paper, the moot question is – would thise objectives be met?” Ahuja said.