The Hindu Business Line : Concessions

There are ongoing debates about tax concessions. Low tax rate with no concessions is simple and easy to operate, but is seldom adopted in practice. India has made some progress in this regard.

The merit of the tax concessions and how they should be viewed can be better understood through an analysis of one of the latest controversies relating to taxation of SEZs. As per the current regulations, SEZ developers and units are exempt from Min imum Alternate Tax (MAT). But now there are reports suggesting that MAT should be made applicable to them as well.

MAT rollout

The concept of MAT was introduced in India in the late 1980s. At that time, it was visualised as an additional tax over and above the normal tax payable under the the I-T Act. After considerable debate and benchmarking against international practice, the concept of MAT was revised to a method of advance collection of tax and not as an additional levy.

Accordingly, the relevant regulations were amended providing set-off of MAT paid in the earlier years against normal tax liability in the later years subject to certain time limit. This clearly establishes that MAT should be applied only in cases where there is deferment of tax payment and not in situations where there is a permanent exemption as in the case of SEZs. A possible counter argument to the above construct is that MAT has been made applicable to other similar set-ups such as EOU (export-oriented unit). A mistake done in the past doesn’t justify the repetition of the same.

Another possible argument for imposing MAT is that the tax exemptions for SEZs are for a limited period whereas MAT exemption is given to them indefinitely.

There is some merit in this argument, but after promising such exemption (obviously with the objective of promoting export) it will be unfair to go back on it.

For the promotion and growth of business a stable and consistent taxation policy is needed. This is all the more important for long gestation projects such as SEZs.

SEZ developers and units work out their business plans and financial viability based on the existing exemptions. If these are withdrawn at this point of time, it will amount to retrospective change and affect their business plans.

Despite the small dip in the forex reserves, our foreign currency position today is still comfortable. But this should not lead one to a false sense of comfort and retrospectively withdraw the tax concessions given to promote exports. Withdrawal of the existing MAT exemption for SEZ developers and units will increase the tax incidence and affect their global competitiveness.

Retrospective changes

In any case such retrospective changes destroy the confidence of the business community and will hamper investments at a time when the country needs large investments for supporting its growth plan. Steps that shake the confidence of investors and industry should be avoided.

Dealing with tax concessions requires a holistic approach. First, the purpose of tax concessions should be fully factored in and changes, if required, should be considered prospectively and introduced in a phased manner.

It is also important to provide sufficient advance notice of the proposed change.

(The author is Director, ICL India Ltd. blfeedback@thehindu.co.in)

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