Although the revised draft Direct Taxes Code (DTC) has suggested the continuation of profit-linked incentives for existing SEZ units and developers, they are likely to come under the ambit of Minimum Alternate Tax (MAT). The revised draft of DTC has recommended the rate of MAT at 2 per cent of the value of gross assets as the final tax. The provision, if adopted, would negate the very objective of the SEZ policy, as the developers and units would then end up paying MAT, based on their book profits, which will be a final tax.
The Department of Commerce is learnt to have written to the Department of Revenue on the issue and is awaiting a response. Commerce ministry officials told Business Standard the matter had been taken up by Commerce Minister Anand Sharma with Finance Minister Pranab Mukherjee.
The issue is likely to be discussed in the meeting of the Board of Approval, headed by Commerce Secretary Rahul Khullar, on July 13. “The commerce and finance ministers are discussing the matter. It is about credibility of the country as a manufacturing hub and investment destination. No investor would come to India if there is no stability of policy. All the money would become mere NPAs (non-performing assets) if the SEZs become sick units,” said a Commerce Department official.
At present, companies developing SEZs and the units are exempt from paying MAT.
“No exemption from MAT is contemplated in the DTC to the SEZ developers and the units, existing or new. This implies that the finance ministry has decided to virtually take away the so-called tax benefits from even the existing SEZ developers, co-developers and units,” said Vaish Associates Partner Hitender Mehta, who heads infrastructure and SEZ practices for the law firm. He is also one of the members of the SEZ council of Assocham.
The finance ministry has also suggested in the draft DTC that carry-forward of MAT will not be allowed for claiming tax credit in subsequent years.
“The way the provision of MAT has been proposed, if adopted, it will have far-reaching impact on the existing developers and units and the overall investment climate of the country would be dampened,” said Suneet Maheshwari, chief executive, L&T Infrastructure Finance Co Ltd.
The provision of MAT, as suggested in the draft DTC, would affect all the SEZs currently operational, such as the Mundra Port SEZ in Gujarat, Reliance SEZ, Mahindra World City SEZs and Dahej SEZ.
“It seems that SEZ units and developers are liable to pay MAT. SEZs’ attraction will be lost if this provision is implemented. Imposition of MAT will hamper export and economic growth of the country. This will result into additional burden of taxation on developers and units,” said Navin M Raheja, chairman and managing director, Raheja Developers Ltd.
According to a report by Assocham, the provision of MAT would discourage further investments in these tax-free enclaves that were conceptualised to boost the country’s export and make India one of the global manufacturing hubs. It has further argued that since SEZ units are not eligible to pay income tax on export profits, these should be forced to pay MAT as well.
“If the developers and units are made to pay MAT, it really would not matter whether they are in SEZs or not. The only differential factor would be the quality of infrastructure. Global investors might as well, then, look at our neighboring countries like Vietnam, Philippines, Sri Lanka and Bangladesh to put in money and set up shop as these provide tax incentives based on the model that we had developed in India,” said Nirav Kothary, senior vice-president (strategic consulting), Jones Lang LaSalle Meghraj.