Companies & Sectors
SEZs: From 'hot picks' to leftovers, the story of changing policies

The move to remove tax sops with regard to SEZs seems at odds with the governmental policy and may spell the death knell for SEZs—once a hot favourite among corporates

Special Economic Zones (SEZs), once the hot favourite of Corporate India (as well as politicians and bureaucrats) have been dealt a body blow by the finance minister. In his Budget speech, finance minister Pranab Mukherjee said, "I propose to increase the rate of Minimum Alternate Tax (MAT) from the current rate of 18% to 18.5% of book profits to keep the effective rate of the MAT at the same level. As a measure to ensure equal sharing of the corporate tax liability, I propose to levy MAT on developers of Special Economic Zones as well as units operating in SEZs."

Following the announcement, SEZs and units operating in SEZs would now lose the MAT exemption, which they currently enjoy. SEZ developers would also be subject to a dividend distribution tax (DDT) at the rate of 15% on dividends distributed to their shareholders.

Currently, SEZ developers are exempt from paying DDT and the Budget proposals would cumulatively give rise to tax costs of around 30%, which can distort cash flows.

"The decision to levy MAT on SEZ developers and units in SEZs is a bit sad and will certainly prove to be a dampener for investors. I think the euphoria associated with SEZs is now fading with regular changes in policies. India needs to look at other countries which have stable regimes & rules for SEZs. A few exporters may look or shift units overseas if they found the environment there more beneficial and less restrictive compared with India," said Jatin Mehta, chairman, Export Promotion Council for export oriented units (EoUs) and SEZs (EPCES) and chairman and managing director, Su-Raj Diamonds & Jewellery Ltd.

The levy of MAT on units set up in an SEZ and developers of an SEZ was not unexpected, especially given that the proposed Direct Taxes Code (DTC) provides for imposition of MAT on income earned by units set up in an SEZ or by a developer of an SEZ.

However, this is nonetheless a move which raises questions as to the direction of the governmental policy with respect to SEZs.  

Dinesh Kanabar, deputy chief executive and and chairman for tax at KPMG, said, "The imposition of MAT on SEZ developers and units is retrograde as it seeks to impose tax on income received from investments made with a commitment of tax exemption. This is advancing the negative impact of the DTC and should have been avoided."

The government is keen on SEZs being one of the engines of growth of the economy and therefore promotes their growth, on the grounds that creation of SEZs will benefit the country in terms of creation of additional employment, world-class infrastructure and help make development uniform by creation of these zones in different regions of the country.

On the other hand, the move to remove tax sops with respect to SEZs seems at odds with the avowed governmental policy.

"While the 2011 Budget does have a number of welcome features, especially on the non-tax front, the withdrawal of specific tax benefits for SEZ developers and units and changes to the service tax regime may not augur well for the industry. The government will lose credibility in the eyes of investors if it frequently resorts to retrospective amendments, policy changes and introduction and revocation of incentives," said Nishith M Desai from Nishith Desai Associates (NDA), in a statement.

Echoing the same views, Emkay Global Financial Services Ltd, said in a report, "Sunset (clause) to the exemption granted to SEZs from 1 June 2011 in terms of MAT exemptions and exemptions from the application of DDT provision will be a big negative for fresh investments in SEZ development."

Earlier in April 2000, with a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances, absence of world-class infrastructure, unstable fiscal regime and with a view to attract larger foreign investment, the Indian government announced its SEZ policy.

After extensive consultations, the SEZ Act, 2005, supported by the SEZ Rules, came into effect on 10 February 2006, providing for drastic simplification of procedures and for single-window clearance on matters relating to Central as well as State governments.

In addition to the seven Central government SEZs and 12 State or private sector SEZs set up prior to the enactment of the SEZ Act, formal approvals have been accorded to 575 proposals out of which 348 SEZs have been notified. According to data from the Ministry of Commerce, there are 130 SEZs operational in India.

As per the provisions of the SEZ Act, the units of the SEZs are allowed duty-free goods for setting up SEZ units, exemption from service tax, MAT and Central Sales Tax (CST).

SEZ Units are allowed 100% Income Tax (I-T) exemption on export income under Section 10AA of the Income-Tax Act for the first 5 years, 50% for the next 5 years thereafter and 50% of the ploughed-back export profit for the next 5 years. Also, sales into the domestic tariff area by SEZ units attract all duties including countervailing duties.

Unfortunately, the government introduced the new DTC Bill in August 2010, which tried to alter the special benefits and provisions provided in the SEZ Act. The DTC Bill proposes that the SEZs notified on or before 31 March 2012 will get income-tax benefits while units in SEZs that commence commercial operations by March 2014 shall be allowed profit-linked deductions permitted under the Income Tax Act, 1961.

"These provisions do not meet the requirements of the SEZ scheme fully, and would very seriously affect employment, exports and investment in the SEZs," an official from the EPCES had said at that time.  

NDA further said that a peculiar problem might also arise with respect to the MAT credit that would be available with a unit or a developer for setting off against future tax liability. In quite a few cases, especially in the case of developers, in the first couple of years of their tax holiday, the MAT credit with respect to such years may lapse or be on the verge of lapsing by the time such developers are taxable under the normal tax provisions, since the MAT credit can only be carried forward for a period of 10 years.

It is pertinent to point out here that a unit set up in an SEZ or a person developing an SEZ is entitled to a 100% tax holiday for a period ranging from 5 to 10 years. Further, in case of a foreign investor investing in a unit set up in an SEZ or a developer of an SEZ, claiming a tax credit in its home tax jurisdiction for the MAT paid in India may pose a challenge, the tax and law firm added.

Another key concern that this move raises is that a taxpayer is entitled to certainty in terms of tax law, so as to plan his or her economic affairs, and the removal of these tax sops has a regressive impact in many ways which adversely affects taxpayers who would have based their business models on the availability of these very benefits and incurred additional expenses to move into or develop an SEZ.

One suspects that this proposal may face stiff opposition in the coming weeks, NDA concluded.


63 persons under scanner in 2G case, CBI tells SC

Centre writes to Delhi HC, asking to set up special court to try accused in telecom scam

New Delhi: Sixty-three persons, including promoters and chief executive officers (CEOs) of 10 telecom companies are under the scanner in the 2G spectrum allocation case, the Central Bureau of Investigation (CBI) today told the Supreme Court (SC).

The central government, which is also a party to the case, informed judges GS Singhvi and AK Ganguly that it is in favour of setting up a special court to try the accused in the 2G case, and that the law minister has written to the Delhi High Court chief justice asking him to constitute a court and identify a judge for this purpose, reports PTI.

"The matter is under consideration," additional solicitor general Indira Jaisingh told the bench, which wanted to know about the progress of investigation in the case.

Senior advocate KK Venugopal, representing the CBI, apprised the judges about the progress by the CBI and placed the probe status report in a sealed cover before the court. "Sixty-three persons including promoters and CEOs of 10 companies have come under the scanner of the CBI in its probe into the 2G spectrum scam," Mr Venugopal said.

The judges today expressed satisfaction over the progress of the probe. They also asked both the CBI and the Enforcement Directorate to submit their reports on the investigation next by 10th March and posted the matter for further hearing on 15th March.

In the meanwhile, senior advocate Harish Salve, appearing for the Tata group of companies, pleaded for in-camera proceedings.

Earlier, on 10th February, while hearing a plea by the Centre for Public Interest Litigation (CPIL) for a probe into the 2G case, the SC had asked the CBI to widen the ambit of its probe and to cover high-flying corporate leaders, without getting influenced by their status. While giving the CBI a free hand to probe the case, the court had also asked the government to set up a special court exclusively to try the spectrum scam accused.

"We have a large number of persons who think themselves to be the law. The law must catch them. It should be done with greater expedition. Merely that they are on the Forbes list or they are millionaires does not make any difference," the bench had remarked after perusing the CBI's probe status report in which names of big corporate houses and their officials had been mentioned.

But counsel Prashant Bhushan, appearing for the CPIL, had pointed out to the court that the agencies had not questioned the heads of several companies, including those of Swan Technology, which was controlled by Anil Ambani's Reliance Group, when the spectrum was allocated. At this, the bench had said, "Top authorities of companies were not questioned. It is surprising that the managing directors were not summoned."

Seeking to widen the ambit of CBI's probe, the court said the agency's freedom to investigate the matter should not be curtailed in any way and it asked the agency to go beyond the role of the four persons, among them former telecom minister A Raja, who were already arrested in the case.

"This investigation has led to a prima-facie conclusion about the culpability of four persons. What about the beneficiaries. They are part of a larger conspiracy. We want to know about them. You (CBI) take instructions and tell us what action you are planning to take," the judges had told the CBI.



Rajan Manchanda

6 years ago

This is the biggest scam to hit the Nation. Instead of In-camera proceedings , the proceedings should be telecast live on doordarshan from Supreme Court.


6 years ago

Why Sharad Pawar is not being questioned. I feel that he is also involved in the scam. Sharad Pawar seems to be brain behind most of the corrupt practice such as Stamp Paper Scam, Sugar Price Scam, IPL scan, Wheat Price Scam, Milk Price Scam, Land Scam specially Pune area & Lavasa project. It has been observed that he is trying to get the investigating top officials from CBI to ICC. This shows he is working on the back door.


6 years ago

Where does TATA and AMBANI stands in this que of 63? All looters of India must be exposed. PM Manmohan and Kapil Sibal should be arrested to the Conspiracy of Cover-Up 2g scam and Misguiding the country.

Exports up 32.4% in January, may touch $225 billion in 2010-11

Commerce secretary Rahul Khullar recently said India is likely to cross the $200 billion export target for the fiscal in February and total shipments during the year are likely to touch $225 billion

New Delhi: Driven by a pick-up demand in the US and Latin American markets, India's exports rose by 32.4% year-on-year to $20.6 billion in January, in line with projections that overall shipments will touch $225 billion this fiscal, reports PTI.

During the April-January period of 2010-11, outbound shipments grew by 29.3% to $184.63 billion vis-à-vis the year-ago period, commerce ministry data released today showed.

Apex exporters' body-Federation of Indian Export Organisations (FIEO)-said the country's exports are increasing in new markets of Latin America and Africa, along with the US and especially within Asia.

"The January number is a huge jump. Strategy of going beyond the traditional markets of the US and Europe is paying rich dividends," FIEO said.

The government incentivises exporters to explore African and Latin American markets.

However, finance minister Pranab Mukherjee today said there are several external factors that pose challenges to the Indian economy.

"Global recovery remains fragile... There is also the danger of sovereign debt crisis in peripheral Euro zone countries spilling over to financial markets," Mr Mukherjee said at the annual general meeting of Ficci here.

As per the data, imports grew by 13.1% during the month to $28.58 billion, resulting in a trade deficit of $7.98 billion.

Commerce secretary Rahul Khullar recently said India is likely to cross the $200 billion export target for the fiscal in February and total shipments during the year are likely to touch $225 billion.

The commerce ministry has also sought public comments on its strategic paper to double India's exports to $450 billion in the next three years.

As per the ministry, the sectors that performed well during the April-January period of the current financial year include gems and jewellery (up 9.3%), engineering (up 70%) and petroleum and oil lubricants (up 36%).

Exporters are seeing huge demand for engineering products from Latin American countries such as Colombia, an official said.

On the import front, oil imports grew by 7.8% to $7.85 billion in the month under review, taking the import bill during April-January 2010-11 to $79.95 billion.

Non-oil imports grew by 23.8% to $20.73 billion in the month under review. Imports of non-oil items were up 19.2% during April-January to $193.64 billion from $162.4 billion in the same period last year.

Oil and non-oil imports totalled $273.59 billion in April-January, thus taking the trade gap to $88.96 billion. This is marginally lower than the $89.84 billion deficit recorded in the same period of 2009-10.

The government expects the trade gap to touch $105-110 billion by the end of the fiscal.

With a view to help exporters and importers, the government has announced a procedure for 'self assessment' of duty liabilities, a move that will help reduce transaction times and costs. In addition, the process for exporters to claim service tax refunds has also been simplified.

In the Budget 2011-12, the government has proposed to give duty benefits to exporters of handicrafts and leather products.


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