Build-up to Budget: Eye on major manufacturing push, govt may give SEZs more tax sops

Written by Priyadarshi Siddhanta | priyadarshi siddhanta | New Delhi | Updated: Jul 3 2014, 15:59pm hrs
SEZ ActMAT was imposed in Budget FY12 on SEZs despite making no change in the SEZ Act. (Photo: AP)
To attract major investments in the countrys special economic zones (SEZ), the government is likely to exclude the developers from paying the Minimum Alternate Tax or MAT in Budget FY15.

After several years the commerce and finance ministries have held detailed discussions on the zones with ways to revive investor confidence in them. MAT was imposed in Budget FY12 on SEZs despite making no change in the SEZ Act. Among the reasons confidence in Indian investment and tax regime has slumped this was a big one.

The commerce ministry has argued that MAT credits are unworkable. With this provision, we have been informed, no investor would like to set up a unit in the SEZ, a top commerce ministry official told The Indian Express.

While it has also asked for other tax sops to make the SEZs come alive including exemption from dividend distribution tax, MAT is the top priority. Under this section, every company is liable to pay a MAT at the rate of 18.5 per cent plus applicable surcharge and cess on book profits.

The commerce ministry note too argues imposing MAT has the unintended consequence of impairing capital formation in the economy, particularly SEZs given the high growth of capital formulation witnessed.

India has sanctioned the largest number of SEZs in the world at 175 ( as on December 2013) but their performance has been desultory. As on FY13 the total exports from them was only $87 billion.

Asian countries like Philippines and Thailand despite starting later are already at 50 per cent of this number. But developers claim with an employment potential of 1 million, a tax plough back into them is made out.

Unlike other Asian countries India has not been able to offer non-fiscal sops to SEZs. While the clamour about agricultural land being diverted to them created a furore against them, since labour too is a state subject the centre has not been able to offer any other concessions.

For the finance ministry, however giving the tax concessions could be difficult as their performance is linked to exports and hence actionable under WTO rules.

The government is therefore considering providing non-tax support too like transport facilities for workers in SEZ and others.

SEZs were made subject to an act in 2005 but received negative publicity because of which the UPA government went back on its own promise on them. It has now been subsumed under the NIMZ policy.

Under the SEZ Act 2005, the developers were specifically exempted from DDT. Since SEZ developers have made huge investments based on the promise made by the Parliament through the provisions of SEZ Act and IT Act, it is imperative to restore this benefit to maintain the parity and consistency in the provisions, the commerce ministry said in its note.

Realising that investment based exemption provided in the Direct Taxes Code to SEZ developers and the units should continue to help them attract more units within their zones, the finance ministry is veering towards the view that exemptions under Section 801AB of the Income Tax Act should continue for both developers and co-developers.