Amidst hue and cry by developers over the Budget proposal to impose MAT on SEZs, Central Board of Direct Taxes today said it has detected revenue diversion from domestic operations to the tax free enclaves.

“There is a huge shift of turnovers from non-SEZs to SEZs. There is diversion of current revenue to SEZs,” Central Board of Direct Taxes (CBDT) Joint Secretary (Tax Policy and Legislation) Ashutosh Dikshit said.

In his Budget for 2011-12, Finance Minister Pranab Mukherjee has proposed to levy 18.5 per cent Minimum Alternate Tax (MAT) on Special Economic Zones (SEZs) developers and the units therein.

Under the SEZ Act, both developers and the units enjoy exemptions from income tax.

The Finance Ministry has been conveying its concerns over the revenue loss from these zones.

Following strong reaction from the SEZ developers, Commerce Minister Anand Sharma has said that he would take up the issue with the Finance Minister.

Addressing a post-Budget event organised by the American Chamber (Amcham), Dikshit said the proposal to bring SEZ developers and units under the ambit of MAT is in line with the government’s policy to broadbase the taxation structure in the run-up to the Direct Taxes Code (DTC) from April 1, 2012.

“It is totally in line with policy. There is nothing like free lunch. I think the message has gone out well,” he said.

Dikshit said though SEZs were originally intended as enclaves to promote manufacturing, the outcome has been quite different.

“The SEZs are supposed to be for manufacturing. But what you find is that all SEZ exports are services and more specifically IT exports. The government and the industry are both to be blamed for this,” he said.

The senior official said in the last fiscal, exports from SEZs went up by 110 per cent even as the country’s overall shipments abroad were stagnant.

His comments came a few days after Revenue Secretary Sunil Mitra said the proposal had an implication of Rs 15,000 crore.

“Profit linked incentives are resulting in shifting (of units) to SEZs,” Mitra had said while addressing a CII deliberation.

According to the government’s projection, the revenue foregone on tax incentives to SEZ units in the current fiscal is Rs 5,126 crore, up from Rs 4,233 crore in 2009-10.

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