Dr. Sanjiv Agarwal

Special Economic Zones (SEZs) which contribute over 30 % of country’s exports have been adversely hit by Budget 2011 proposals as the SEZs have been brought under Minimum Alternate Tax (MAT) by 20.1 percent (including cess) and dividend distribution tax (DDT) at 16.22 percent (including cess). SEZs were hitherto exempt from both these taxes. The units as well as developer, both will be liable to MAT and DDT a year ahead of Direct Tax Code (DTC) which is intended to be in place in April 2012. However, some relief has been given to SEZs by way of exemptions from service tax to taxable services provided within SEZ and simplification of the refund procedures.

As per the budget proposals, SEZ will be subject to levy of minimum alternate tax (MAT) under section 115JB of Income Tax Act which will now be @ 18.5 percent on book profits. This will be levied on both, SEZ developer as well as units in SEZ. MAT was not applicable to either as per the exemptions available. Thus from next assessment year- AY 2012-13, units operational in SEZ and developer of SEZ, both will have to shell out a tax called MAT.

The second bombshell on SEZs has been levy of Dividend Distribution Tax (DDT) which was not applicable to SEZ developers until now. The DDT shall be levied from 1st June 2011 on dividends distributed by SEZ developers @ 15 percent plus cess, i.e., 16.22 percent.

Infact investments in SEZ were made by business entities keeping tax incentive in mind. These units will now suffer profitability squeeze and liquidity crunch to the extent of tax out go which is going to be substantial.  SEZs in Rajasthan (Jaipur / Jodhpur) will also be adversely affected.

The Budget proposal ahead of time (as proposed in DTC  from next year) on MAT is certainty against the spirit of law itself which grants exemption in one section (10AA) and levies tax in another section (115JB). The Government of the day could have waited till the report of Parliamentary Committee examining the DTC proposals. The Government’s proposal is also against the principle of promissory estoppel.

In service tax, all services received by Units in a SEZ which does not has any domestic operation will be considered as wholly consumed and no service tax shall be payable on such services. On common services, meant for SEZ as well as domestic operations, refund could be available on pro-rata levis basis on turnover.

SEZs were set up and promoted in order to upgrade the industrial infrastructure in the country and to have specialized and sectoral Zones to sharpen competitive edge of Indian entrepreneurs. Having promised certain incentives, backing out mid way is nothing less than betrayal at its best and governance at its worst.

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September 2021