Special economic zones (SEZ) may be headed for some more tax trouble. With states continuing to protest the stamp duty exemption provided to SEZs, the revenue department has asked the commerce ministry to reconsider this benefit and amend the SEZ Act, 2005.
The SEZ Act provides for exemption from stamp duty along with other direct and indirect taxes as well as state level duties and levies. ?We have been corresponding with the commerce ministry on the matter and it is up to them to decide,? a finance ministry official said. The law ministry, to whom the issue was initially referred, has also said that it needs to be clarified.
The commerce ministry, on its part, had discussed the issue in a meeting of all state representatives over a month ago, sources told FE, adding that all the states have repeatedly been asked to fast-track the clearance of their own SEZ legislation on the lines of the central SEZ Act and Rules.
Currently, only states including Madhya Pradesh, Gujarat and Haryana have passed their own SEZ Act, while others like Uttar Pradesh, Punjab, Orissa, Haryana and Tamil Nadu have their respective SEZ policy by way of notification.
Since land cost in all SEZ projects is around 30% of the total cost of the project, and the stamp duty ranges from 5-10% of the transaction of the land cost, it is a major source of revenue for the states. While the states are reluctant to part with this significant stream of revenue, on the other hand the amount paid as stamp duty is a ?dead? cost for the investor. Stamp duty also applies to SEZs where land has been received on lease from the state government.
But some states, like Tamil Nadu, are ready to give stamp duty exemption to those developers who provide lease agreements with the units, as it is a proof that some economic activity would happen soon.
Most state governments have only been giving tax and duty exemptions, including stamp duty exemption, to SEZs after the notification stage.
They have been opposing stamp duty exemption saying land acquisition is an activity prior to the notification stage and therefore is not does not lead to economic activity, employment generation, or exports?which are the reasons for giving special treatment to SEZs.
While opposing the stamp duty exemption, states have pointed out that the Centre on its own can not grant the exemption as stamp duty is on the Concurrent list in the Constitution. They have argued that while the Centre can legislate on it, it is up to the states to fix rates and provide exemptions.
Further, they also fear that SEZ developers may misuse the provisions of the law. The amendment to the Stamp Act provides exemption to ?any instrument executed, by, or, on behalf of, or, in favour of the Developer, or Unit or in connection with the carrying out of purposes of the Special Economic Zone.?
Some states have argued that the amendment is so worded that it can mean that developers can get exemption from stamp duty even for buying land outside the SEZ by claiming that it ?is in connection with carrying out of purposes of the SEZ.?
The blanket tax exemption given to these zones, even for operations in the non-processing areas has also drawn the ire of state governments. Authorised operations in the non-processing area of SEZs include the construction of residential areas, shopping arcade, multiplexes and golf courses are all authorised operations.
States have said that these do not really promote economic activity and do not fulfil the objective behind setting up these zones, so the exemption should be withdrawn.
Significantly, the empowered committee of state finance ministers had opposed the exemption from state level dues and duties to the non-processing areas in SEZs at a meeting last year as well.
But pointed objections against the stamp duty exemption first surfaced in a meeting of the empowered committee in May this year. While initially Orissa raised it, other states like Maharashtra and Madhya Pradesh also took it up.
However officials close to the development said that even if the commerce ministry is willing to amend the Act, it may be difficult at present, when economic activities are slowing down and the real estate sector is in a slump. ?We need to promote economic activities right now and withdrawing the exemption would obviously not do so,?they said.
Analysts said the state governments need to look into the rationale behind giving stamp duty exemption to SEZs. ?These are duty-free areas, which means the cost of developing or operating should have no direct or indirect tax consequences. SEZs are meant to promote exports with zero tax,?said Ajit Krishnan, partner, Ernst & Young.