Special Economic Zones (SEZs) are set to lose the direct tax benefits extended to them under the SEZ Act in four years’ time. The Union Budget has proposed to abolish all direct benefits for SEZs that are operationalised after March 31, 2020.

Finance Minister Arun Jaitley also refused to yield to pressure from the Commerce Ministry, which proposed a withdrawal or reduction in the Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) imposed on SEZ developers and units.

“It is proposed to amend section 10AA of the Income-tax Act to provide for a sunset date of March 31, 2020 for commencement of activity of manufacture or providing services by a unit located in a SEZ for availing the deduction,” Jaitley said in his Budget speech.

While the decision is in line with the government’s decision to move away from tax exemptions to prepare for a uniform goods & services taxes (GST) regime, the provisions on SEZs don’t augur well for developers who were hoping for at least a partial reduction of MAT to attract investments and make the zones viable.

The situation, however, could have been worse for SEZs, if the Finance Ministry had gone ahead with its initial proposal of introducing the sunset clause for SEZs from April 1 2017.

“Imposition of MAT/DDT on SEZs has dented the investor friendly image of SEZs, created uncertainty in the minds of foreign & domestic investors and has adversely affected the growth, investments, employment and exports from SEZs in India and resulted in loss of valuable foreign exchange earnings for the country,” the Export Promotion Council for EoUs and SEZs had stated in its pre-Budget representation to the Finance and Commerce Ministry.

Extension sought

It also made a case for extension of the sunset clause on SEZs up to 2023 stating that an early implementation will further dent the image of SEZs and result in an increased number of applications for de-notification of approved Special Economic Zones.

The Central government denotified about 80 SEZs last year with most developers complaining that the introduction of MAT and DDT in 2012 had made investments unattractive in the zones.