Some of the SEZ developers have decided to move court against what the Budget 2011 decision to bring them and the units in these originally tax-free zones under the purview of minimum alternate tax (MAT). Speaking to FE a couple of them said they have received legal advice that the Finance Bill could not be used to amend the SEZ Act which entitled them for the tax benefits.

Revenue secretary Sunil Mitra, however, told FE that the department has proof of large-scale transfer of profits from non-exempt to exempt entities by the SEZ developers. That is, SEZ developers not only avail of the legitimate tax concessions for these zones but shift profits from their operations from their other businesses to SEZs.

Mitra said, ?We have proof of colossal amounts of profits against investments being claimed and loaded against exempt (SEZ) entities. Through MAT, we are hoping to cast some responsibility among the SEZ developers in the reporting of profits?. The Income-tax Act allows investment-linked tax benefits.

The finance minister Pranab Mukherjee announced in the Budget that minimum alternate tax (MAT) of 18.5% will be levied on the book profits of special economic zone (SEZ) developers and the units. The developers feel that this decision will prove to be a big dampener for themselves and the units operating in these zones.

Mitra said, ?The SEZ Act was enacted by the commerce ministry. So, the fiscal concession were introduced by them. We had to make changes in the I-T Act as a consequence. Now, through the finance Bill, we had to change the provision of the SEZ Act to re-introduce MAT provisions. The exemption announced then has been done away with. This has been done through an amendment to the SEZ Act done through the Bill.?

SEZ developers have been crying foul after the finance bill had been passed as their appeal to the government to drop the clause did not cut ice with the finance ministry. Apart from the MAT, the budget has also proposed to impose dividend distribution tax on SEZ developers.

On condition of anonymity, a SEZ developer told FE that the legal advice received by the panel which met the commerce ministry to represent their case clearly stated that the finance Bill cannot modify the SEZ Act. Section 51 of the SEZ Act overrules all other acts. Mitra, however, said through the finance Bill, other acts can be amended.

The commerce ministry made several appeals to the finance ministry against the levy of the MAT on SEZs. The ministry argued that thousands of crores of investments is at stake in these tax free export hubs which won?t be tax free any more if MAT at 18.5% (plus surcharge and education cess) is imposed.

Representations were also made to the PM, finance minister and the commerce minister to change the goal posts before the passage of the Bill. SEZs will now move court individually and collectively. The developers are armed with strong legal advice in their favour.

Convenor of the SEZs? committee Ajay Nijhawan told FE all panel members have got legal advice. He said, ?developers are disappointed and frustrated as levy of MAT will hurt their investment. The units who were wanting to come to SEZs are now reluctant to join. The Budget decision has made SEZ Act nonviable as the difference between actual tax and MAT levy is minimal.?

Many developers are planning to move to court now. Approximately R1.95 lakh crore has been invested in new SEZs over the last five years, while 5 lakh new jobs have been created during the same period.

More investments are in the pipeline.

The exports from the functioning SEZs have grown to Rs 2,20,000 crore in 2010, registering a growth of 121% over the previous year.

Under the SEZ Act, units operating are entitled to 100% tax exemption on profits earned for the first five years, while developers get an exemption for ten years. In addition, a 50% exemption for the next five years and another 50% tax break on re-invested profits was also allowed in the following five years, which had attracted a slew of realtors to make a beeline for SEZs. India has 582 SEZs formally approved, of which about 130 are in operation.

The budget proposals are expected to take effect from June this year.