‘Govt could be dragged to court on MAT on SEZs'

The Commerce Ministry on Thursday said imposing a Minimum Alternate Tax (MAT) on Special Economic Zones (SEZ) could result in the affected developers and units dragging the Government to court on the issue.

The levy could also lead to a fall in foreign and domestic investments in SEZs as well as exports from these enclaves, it said.

MAT is a levy on book profits of companies that do not have any taxable income either due to tax exemptions or actual losses.

The Ministry has already sought a roll back of the Budgetary proposal to levy from the next fiscal 18.5 per cent MAT on the book profits of SEZ developers and units as well as dividend distribution tax (DDT) on SEZ developers.

The Commerce Secretary, Dr Rahul Khullar, told reporters that “theoretically” the Finance Bill cannot over-ride the provisions of the SEZ Act.

The SEZ Act exempts SEZ developers and units from MAT. MAT was slated to be levied on SEZs with the expected implementation of the Direct Taxes Code from 2012.

“There is obviously a case for roll back of MAT. Exports from SEZs are doing extremely well and the MAT will hurt the SEZs. There is no doubt about it. The imposition of MAT will have a significant impact on SEZ exports,” Dr Khullar said.

“SEZ exports have grown at a huge clip because people have made investments after receiving assurances that there will be tax breaks,” he added.

The levy of MAT acts as a disincentive for those who have already invested in SEZs because it amounts to changing the rules of the game mid-stream, he said.

“Somebody is going to turn around and say it is not fair. I don't rule out the possibility of somebody dragging us to court. Nobody is going to sit back and just watch somebody take the tax breaks away,” Dr Khullar said.

He said the far more serious implication is that serious investors wanting to set up an SEZ or waiting to invest in these zones by establishing a unit will be discouraged from doing so.

“Why would you? (invest in SEZs) Even with MAT as it is, tax liability is over 20-21 per cent. So why not just stay outside the SEZs – take none of the headache and obligation of SEZs, and higher prices of the infrastructure in SEZs – and claim the accelerated depreciation allowance and still pay only 20-21 per cent of tax by being in the domestic tariff area (or DTA, which is the area outside SEZs where all the taxes and duties apply). Because under the rules of the game, MAT will be same in DTA and in SEZs,” he said.

“Till today there was no tax liability (on SEZs). But all of a sudden, without any previous indication, you have imposed a tax liability. It will not do wonders for our (Government's) credibility,” he said.

He wondered what the Government would achieve by imposing MAT and thereby discouraging both foreign and domestic investments in the country.

Recently the Commerce and Industry Minister, Mr Anand Sharma, had also said that the proposed MAT on SEZs took him by surprise.

Dr Khullar said the Commerce Ministry has already taken up the issue with the Finance Ministry and asked the industry also to raise the issue. “There is no dearth of complaints,” he said.

Wrong signal to investors

Mr Som Mittal, President, Nasscom, told Business Line recently that imposition of MAT with regard to SEZ scheme was giving out a wrong signal to investors.

“There were ground rules that you will get benefits of 15 years. This SEZ scheme came out in 2006, and it clearly said no MAT…it was a specific benefit given. Now you (Government) have changed the rules,” he said. He asserted there should be no MAT levy for units that move into SEZs by 2014.

“Our suggestion is if MAT has to come, it should mirror what is in the Direct Taxes Code. The DTC said that all new units that come up in SEZs up to 2014 will still continue to get benefits. Therefore, for all the companies that come into the SEZs by 2014, there should be no MAT for them.”

Last year, exports (both goods and services) from SEZs were around $55 billion, Dr Khullar said. This year SEZ exports would be $70-75 billion, he said, adding that out of this $35 billion would be from RIL’s Jamnagar oil refinery facility and $40 billion from the other SEZs.

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