Special Economic Zones (SEZs) can hope for restoration of tax benefits withdrawn by the Finance Ministry three years ago. This adversely affected the performance of such zones, originally planned as tax-free enclaves.

The Economic Survey 2013-14, considered a window to the Government’s thought process, has pitched for a sympathetic treatment of the zones. “A clear signal needs to be given to Indian SEZs as fresh investments have been slowing down in recent years and greenfield investments have not taken off in full swing,” the Survey says.

Promoting SEZs at a time when alternative investment zones have also been planned has its merits as investments have already come into the zones, it adds.

“While the New Manufacturing Zones are being planed, a lot of investment has already been made in SEZs waiting to be tapped to the full potential,” it says.

Tax concern The Survey, however, falls short of spelling out that the Minimum Alternate Tax (MAT) of 18.5 per cent and Dividend Distribution Tax (DDT) of 15 per cent should be withdrawn.

The Finance Ministry had imposed MAT and DDT on SEZs in 2011-12, six years after the SEZ Act was passed. The SEZ Act promised units a complete, five-year tax holiday on profits, while developers have been promised a tax holiday for 10 consecutive years. The Finance Ministry is now considering the Commerce Ministry’s proposal of withdrawing or paring both taxes as investments in SEZs fell considerably following their imposition.

Impact on sentiments While the MAT imposed on units leads to a 0.5-4 per cent rise in production costs, depending on the profit margin of the sector, an ICRIER study shows that the biggest impact is on investor sentiments.

“The validity of the SEZ policy has been questioned. Investors are not secure about the SEZ policy and fear that any other change can be made any time,” said Arpita Mukherjee from ICRIER.

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