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  1. Budget 2018: Here is what SEZs can look forward to from FM Arun Jaitley

Budget 2018: Here is what SEZs can look forward to from FM Arun Jaitley

Budget 2018: The anticipated push for exports in the upcoming Budget to boost jobs is unlikely to include substantial relief to special economic zones (SEZs) that were once the growth engine for the country’s outbound shipments. The minimum alternate tax (MAT) on SEZ units and developers, which has jeopardised the tax-free status of these enclaves and severely undermined their export potential, is unlikely to be removed in the Budget for 2018-19.

By: | New Delhi | Updated: January 24, 2018 1:11 AM
budget 2018, budget date, Arun Jaitley, budget 2018 india, India budget, Union budget 2018, budget 2018 expectations,minimum alternate tax,  special economic zones, budget news , latest news on budget 2018, Gujarat, finance ministry, commerce ministry, SEZ Act Budget 2018: Finance minister Arun Jaitley had proposed, in the Budget 2016-17, a 9% MAT for the IFSC, while keeping the tax rate unchanged at 18.5% for all other SEZ developers and units.

Budget 2018: The anticipated push for exports in the upcoming Budget to boost jobs is unlikely to include substantial relief to special economic zones (SEZs) that were once the growth engine for the country’s outbound shipments. The minimum alternate tax (MAT) on SEZ units and developers, which has jeopardised the tax-free status of these enclaves and severely undermined their export potential, is unlikely to be removed in the Budget for 2018-19 despite fresh requests by the commerce department, official sources told FE. Fearing potential revenue losses, the finance ministry is even reluctant to endorse the commerce department’s suggestion to cut MAT for SEZs by just over a half and bring parity with the rate applicable for the International Financial Services Centre (IFSC) in Gujarat.

The commerce ministry has also proposed that the sunset date to scrap tax incentives to SEZ units that sign in after end-March 2020, be removed. “There is still uncertainty about indirect tax collection growth after the implementation of the GST and subsequent rate cuts. The government is already hard-pressed to maintain fiscal deficit target. So this may not be an ideal time to scrap MAT on SEZs and dent the direct tax kitty as well,” said a government official. The revenue department is also unlikely to scrap the dividend distribution tax (DDT) for SEZ developers and treat them on a par with the companies located in the IFSC, said the one of the officials.

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Another commerce ministry proposal to allow SEZs to sell products in the domestic market at concessional tariffs (the lowest rates at which India imports such items from its free trade agreement partners) hasn’t yet gained much traction with the revenue department. Finance minister Arun Jaitley had proposed, in the Budget 2016-17, a 9% MAT for the IFSC, while keeping the tax rate unchanged at 18.5% for all other SEZ developers and units. The Budget had also announced the abolition of the DDT for companies located in the IFSC, while retaining the same for SEZ developers. The IFSC is a designated area outside the jurisdiction of the country’s economy, which allows the flow of financial services and products across borders with ease.

Also read: Budget 2018 date: Day, time of FM Arun Jaitley’s budget speech, economic survey and Budget session

The Gujarat International Finance Tec-City (GIFT City) in Gandhinagar, a pet initiative of Prime Minister Narendra Modi, houses the only IFSC in India, and has been given the status of a multi-specialty SEZ. The commerce department was seeking the parity in MAT rates following demands from SEZ developers who argue that the Gujarat IFSC is part of the GIFT City SEZ and is also governed by the SEZ Act. Currently MAT is levied at 18.5% on the book profit of companies, with the effective rate touching around 21%, factoring in surcharges and cess. In fact, the commerce ministry has been consistent in its demand for the removal of MAT and DDT in recent years on grounds that the tax exemption will improve exports. However, the finance ministry is yet again reluctant to offer breather, fearing revenue losses.

Watch video: Budget 2018: US tax reforms key factopr in accelerating FM’s promise to tax rates

Vinay Sharma, chairman of the Export Promotion Council for EoUs and SEZs, said “We are not seeking any special concession. All we want from the government is to restore the original SEZ Act (which didn’t have MAT, DDT and latest sunset date for expiry of I-T incentives) that it had offered and diluted substantially later.” Before the MAT and DDT were imposed in 2011-12, growth in exports from SEZs was as high as 121% (2009-10) and 43% (2010-11), far exceeding the increase in the country’s overall goods exports for these years. After an over 6% drop in 2014-15, exports from SEZs have recovered a tad, having risen 0.1% in the last fiscal, still trailing the 5.4% increase in the country’s overall outbound shipments.

SEZ units were earlier given full exemption on income up to five years, 50% for another five years and another 50% for yet another five years if the profits were ploughed back into investments in those units. However, as part of its plan to phase out exemptions, the government has said the sunset dates provided in the Income-Tax Act for various incentives like those for SEZs will not be advanced; this means that Section 80 IAB benefits for SEZ development and Section 10AA sops for SEZ units would be available to only to those firms that sign in by end-March, 2020.
Currently, many of the SEZs are operating at 70% of their capacities. Although merchandise exports have been growing each month since early 2016-17 (barring a very few exceptions), the growth has been uneven. Reviving SEZs has, therefore, become critical.

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