In a fresh setback for the country’s struggling special economic zones (SEZs), the revenue department has turned down a suggestion by the commerce department to bring parity in the minimum alternate tax (MAT) rates for both the SEZs and the International Financial Services Centre (IFSC) in Gujarat.
The revenue department, according to sources, 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.
In the Budget 2016-17, finance minister Arun Jaitley proposed a 9% MAT for the IFSC, while keeping the tax rate unchanged at 18.5% for all other SEZ developers and units. The Budget also announced the abolition of the DDT for companies located in the IFSC, while retaining the same for SEZ developers. An 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. The Gujarat International Finance Tec-City (GIFT) in Gandhinagar, a pet initiative of Prime Minister Narendra Modi, is the only IFSC in India, and has been given the status of a multi-specialty SEZ.
“The Budget announcements are aimed at encouraging investments in the current IFSC and pave the way for more IFSCs in the country,” a finance ministry official told FE. The official pointed out that while there are so many SEZs in the country, there was only one IFSC and “so, the IFSC needs a greater boost than the SEZs, as things stand now.”
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. The Export Promotion Council for export-oriented units and SEZs has been complaining that the imposition of the MAT and the DDT has eroded the investor-friendly image of SEZs and created uncertainty in the minds of investors.
The sources, however, said that the IFSC is given a special treatment, as norms applicable for the IFSC are under the purview of financial sector regulators like the Reserve Bank of India, Sebi and IRDAI. So the finance ministry has a greater say in decisions on IFSCs than the commerce ministry.
The government imposed MAT on SEZ developers and units and DDT on developers in 2011-12 when Pranab Mukherjee was the finance minister, after the revenue department had complained of massive revenue losses to the exchequer due to the tax exemptions and shifting of profits to exempt (SEZ) entities.
Before the MAT and the DDT were imposed in
2011-12, the 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.
However, such high growth dropped consistently since the taxes were imposed and even contracted by over 6% in 2014-15, worse than the 0.2% drop in the overall merchandise and services exports for the last fiscal.
While the average effective rate of tax on corporate income is around 23%, much lower than the marginal rate of 30%, MAT serves as a threshold below which the tax incidence on profit-making firms can’t fall. The revenue foregone on corporate tax incentives stood at Rs 98,400 crore in FY15. This was partly offset by the revenue from MAT of Rs 33,350 crore.
Earlier this week, giving a presentation at the board of trade meeting, joint secretary in the commerce ministry Guruprasad Mohapatra said while SEZs got income tax benefits of Rs 358 crore in and indirect tax benefits worth Rs 8,424 crore in 2014-15, exports from such zones touched Rs 4.63 lakh crore. It is a worldwide accepted practice that exports shouldn’t be taxed. “Even domestic tariff area units enjoy tax benefits in the course of exports, hence the duty foregone is a myth,” he said.