R. Kumar, B.Com. MBA


Conceptually, Special Economic Zone (SEZ) is a geographical region that has economic laws different from a country’s generally applicable economic laws, with the underlying objective being an increase in economic growth and activity through increased foreign investment. Special Economic Zones (SEZs) have been established in several countries across the globe including the People’s Republic of China, India, Jordan, Poland, Kazakhstan, Philippines and Russia.

Special Economic Zones(SEZs) in India are areas declared as quasi foreign territory in which private enterprises can benefit from a lucrative package of tax and regulatory exemptions. Claimed to promote exports and foreign exchange earnings, they are also criticised as merely encouraging the relocation of existing firms, causing a loss of tax revenue and the undermining of workers’ rights. They can also been seen as a policy response to commercial pressure on land, allowing the state to act as an agent for private companies in making prime real estate available to the latter through forced acquisition. They have thus met with nationwide resistance from local communities faced with displacement from their land.

Globally, establishment of Special Economic Zones (SEZs) have revolved around achieving the following basic objectives:

  • Economic growth and development – through exports and backward integration
  • Foreign Investment
  • Infrastructure development
  • Employment generation
  • Up-gradation of managerial and technical skills

Achievement of the above objectives through Special Economic Zones (SEZs) is typically facilitated through the following:

  • Income tax Holidays
  • Hassle Free Environment
  • Exemption from Indirect duties and taxes
  • No currency restrictions
  • Relaxed foreign investment norms
  • Excellent infrastructure facilities

Exemptions granted to Special Economic Zones (SEZs) have attracted attention in recent times because of the disappointment caused to the government in some cases, when the desired result has not been achieved for reasons of varied nature. So, when open-ended (timeless) exemptions given by the government were modified to impose “sunset clause”, that is, a time limit was inserted, the affected parties went to the courts on the ground that it was not in the competence of the government to do so, since it went against the doctrine of promissory estoppel.

Case Studies:-

Amendments by Finance Act, 2011 to withdraw exemption from MAT & Dividend Distribution Tax to SEZ developers/units are not unconstitutional. In the impugned amendment it is made clear that it is prospective in nature. Therefore the impugned amendments can neither be said unreasonable or arbitrary. The road map is not a condition precedent for the Parliament to introduce sunset clause. The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment. This was challenged in the Karnataka High Court in case of Mind Three Ltd Vs. Union of India [(2013) 295-ELT-641(Kar)] basically on ground of legislative competence of the government to impose a sunset clause in a notification, on the ground that it was against the doctrine of promissory estoppel.

In the above mentioned case (i.e. Mind Three Ltd.), the petitioners were SEZ developers. They had borrowed massive loans from various financial institutions and made investments in land, buildings, infrastructure facilities, etc., and commenced their projects on the basis that income accrued or arising to them as SEZ developers would be exempted from MAT and Dividend Distribution Tax. The Union Finance Minister moved the Union Budget for 2011-2012 on the floor of Parliament and the Finance Bill, 2011 was introduced, in terms of which, a proviso was inserted to Sec.115 JB (6) and 115-O (6), to withdraw exemption from MAT and DDT. Being aggrieved by the insertion of the above provisos, the petitioners filed the instant writ petition. The High Court dismissed the petitions by holding at it was a settled position of law that every tax exemption and incentive would have a sunset clause. Every fiscal legislation, providing for tax exemption must have a life span fixed in the enactment. There could be no permanent tax exemption or incentive in fiscal legislation. Realizing this lapse on the part of the Government, the impugned provisos were introduced restricting the exemption only for a particular period. The impugned amendments were shown in the Finance Bill and were placed before the Parliament in the month of March, 2011 for the years 2011-2012.The proposed amendments specified that the exemption from MAT would come to an end from 1st April, 2012 and exemption from tax on distribution of dividends would come to an end from 1st June 2011. Thus, the impugned amendments were prospective in nature. The road map was not a condition precedent for the Parliament to introduce sunset clause. The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment. Thus, the instant writ petitions were dismissed.

There have been several judgments which say it cannot be done as it will hurt the principle of promissory estoppel. This has been held by the following judgments:

The High Court, settled the issue in the case of Sri Chakra Tyres Vs. UOI [(1987) 29-ELT-865 (Mad) and others, held that Grant of exemption by notification No. 268/82-ce to tyre industry for seven years from date of first clearance. Petitioner setting up unit for manufacture of tyres on basis of notification, Petitioner making first clearance of tyres on 25-1-1984–Rescissio….. It is common ground that other conditions envisaged under the said notification are satisfied by the petitioner. It would be most inequitable to allow the Excise Authorities to assess excise duty on the basis that the value of the cigarettes manufactured by the respondents should include the cost of corrugated fibreboard containers when it was clearly represented by the Central Board of Excise and Customs in response to the submission made by the Cigarette Manufacturers’ Association -and this representation was approved and accepted by the Central Government -that the cost of corrugated fibreboard containers would not be includible in the value of the cigarettes for the purpose of assessment of excise duty. Of course, this representation could operate to create promissory estoppel only if it was within the competence of the Central Board of Excise and Customs and the Central Government to make good such representation and the exclusion of the cost of corrugated fibre-board containers from the value of the cigarettes was not contrary to law. So also the Central Board of Excise and Customs had power under Rule 8 sub-rule (2) to make a special order in the case of each of the respondents granting the same exemption, because it could legitimately be said that, having regard to the representation made by the Cigarette Manufactures’ Association, there were circumstances of an exceptional nature which required the exercise of the power under sub-rule (2) of Rule 8. The Central Government and the Central Board of Excise and Customs were therefore clearly bound by promissory estoppel to exclude the cost of corrugated fibreboard containers from the value of the goods for the purpose of assessment of excise duty for the period May 24, 1976 to November 2, 1982.’In that case, the Supreme Court expressed the view that what has been laid down in Motilal Padampat Sugar Mills v. The facts in this case stand in a better footing. (2) The Central Board of Excise and Customs may by, special order in each case exempt from the payment of duty, under circumstances of an exceptional nature, any excisable goods. There is also the authoritative pronouncement by the Supreme Court that the rule of promissory estoppel was applicable against the Government as well.

The Supreme Court, however, finally settled the issue in the case of Kasinka Trading Vs.UOI [(1984) 74-ELT-782 (SC)] holding that even a time-bound notification can be withdrawn if public interest so demands. It held that the doctrine itself is based on equity and, therefore, if equity so demands, that is, if public interest so warrants, a time-bound notification can be changed or withdrawn. In this case the issue was that by the amendment of a notification the impact of customs duty on certain machinery increased in the case of the petitioners. The Supreme Court held in this case the following :

“A tax, in particular, in the nature of duties of customs is not per se violative of Article 19(1)(g). Mere excessiveness of tax is not by itself violative of Article 19(1)(g). This question cannot be divorced from the nature of the right to import.”

This has been further confirmed by the Supreme Court in later judgments in the cases of (i) UOI Vs. Victory Plastic Ltd [(1996) 83-ELT-481 (SC)], (ii) Shrijee Sales Corporation Vs. UOI [(1997) 89-ELT-452 (SC)] and (ii) DPF Textiles Ltd Vs. UOI [(1997) 92- ELT-28 (SC)].

In the case Shrijee Sales Corporation Vs. U.O.I. [(1997) 89- E.L.T.-452 (SC)], Supreme Court observed that In this case under the Customs Act an exemption notification has withdrawn in public interest.  The Supreme Court held that the State has power to supersede or revoke an exemption notification in public interest.  The doctrine of promissory estoppel does not get attracted unless a malafide on the part of a government is established. “

In this judgement the Supreme Court has summarised the then existing status of the theory of promissory estoppel [while deciding on the validity of its previous judgment in the Kasinka case [(1994) 74-ELT-782 (SC)] and agreed with this judgement.  It decided the principle by using the following words:

…. the principle of promissory estoppel is applicable against the Government but in case there is an supervening public equity, the Government would be allowed to change its stand “

     Analysing all the above judgments we find that it is well settled now that mere excessiveness of tax is not justiceable. One cannot go to the Court on the ground that the tax rate is very high and therefore the profit has got reduced or he is finding difficulty in cut-throat competition with the indigenous or foreign competitors. Had it been so, all the cases of notification issued increasing or decreasing the tax rates or all the cases of anti-dumping impositions would go before the Courts which would create an absurd situation and it would completely upset the distribution of powers between the executive, legislature and judiciary.

     So in order to make it justiceable, the petitioner has to prove that the burdensomeness or excessiveness has robbed him of his right to practice any profession or to carry on any occupation, trade or business. Here it is the right to trade or business which is relevant. That is to say, he has to prove that the excessive tax has been hit by Article 19(1)(g) of the Constitution. So far no case has succeeded before the High Courts and the Supreme Court on this count, though high levy on newsprint has been struck down on the mere ground of burdensomeness. The reason given by the Supreme Court is that in the case of a fiscal levy on newsprint, it is to be remembered that “newsprint constitutes the body if expression happens to be the soul. In view of the intimate connection between newsprint and freedom of Press, which is enshrined in the freedom of speech under Article 19(1)(a), even if burden someness of tax is proved, the tax goes against Article 19(1)(g).

      Another important conclusion is that a notification in taxation is a subordinate legislation and is also a legislative action because of which it cannot be justiceable in respect of the public interest in which it is declared to be issued.  The Court cannot judge whether the public interest has been exercised by Government justly or not. If the Government declares that the notification is in the public interest, it cannot be challenged in the Court. Only the Parliament can debate it when it is placed before it.


This issue of withdrawing exemptions, with or without time limit attached to them, has been the subject of judicial decisions several times before. Factually speaking, by far, the largest number of exemption notifications – may be more than 90 per cent is not time-bound, but timeless. Timeless exemption notification means that there is no time limit given, and the government can terminate the notification any time. Usually, it is done at the Budget time every year and scores of notifications are withdrawn. Nobody usually challenges that because it is well accepted judicially that government can withdraw any notification any time if there is no time limit given. Had it not been so, the whole exercise in the Budget every year would be impossible. The above judgment only confirms that view. The real controversy is only about whether government can withdraw the time-bound notifications. The conclusion is that the government has legislative competence to issue both time-bound and timeless notifications. And the government can withdraw or restrict both types, any time, if the public interest so demands.

Author can be reached @ sunraj.18@rediffmail.com

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