More tax trouble seems to be brewing up for special economic zones (SEZs). State governments have opposed the stamp duty exemption provided to them under the SEZ Act, 2005. The matter, which was first referred by the finance ministry to the ministry of commerce, is now under consideration of the law ministry for further clarity.
States have pointed out that the Centre cannot on its own grant such an exemption as stamp duty is on the concurrent list in the Constitution.
This means that the Centre and states can both legislate on it. While the Centre can legislate on it, only states have the power to fix rates and provide exemptions, they have argued.
They have also protested against the exemption provided to SEZ developers for operations in non-processing areas, as they do not promote any economic activity.
Construction of residential areas, shopping arcade, multiplexes and golf courses are all authorised operations, for which SEZ developers get tax exemption although they fall in the non-processing area.
The empowered committee of state finance ministers had last year as well also opposed the tax holiday to the non-processing area of SEZs. They enjoy exemption from value added tax (VAT), local sales tax and besides other state-level taxes and levies.
Meanwhile, some state governments are also of the view that the blanket exemption from stamp duty may be misused by SEZ developers. 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 SEZ.? 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?.
These issues came up for discussion in the meeting of the empowered committee of state finance ministers in May this year. While initially it was taken up by Orissa, other states like Maharashtra and Madhya Pradesh also took it up.
?We received a representation from the empowered committee on the issue, which we have forwarded to the department of commerce as it is responsible for framing policies on SEZs,? a finance ministry official said. The department of commerce has now referred the issue to the law ministry. Tax breaks given to SEZs have been under a cloud for a long time now.
The department of revenue contends that the tax holiday to such units will lead to huge revenue losses, estimated according to one study at over Rs 1 lakh crore. It has recommended that they should instead attract a minimum alternative tax.
An empowered group of ministers was set up to look into the matter along with a number of other issues regarding SEZs.