SEZ tax sops retained till 2014, but will need to pay 20% MAT

NEW DELHI: In a partial reprieve to special economic zones (SEZs), the Direct Taxes Code Bill has proposed to retain the current tax system of exemptions for zones notified till 2012 but imposed a 20% minimum alternate tax.

“The code will grandfather the existing unavailed exemptions for units that commence operations by 2014,” said Sunil Mitra, revenue secretary on Monday after the Bill was tabled in the Lok Sabha.

As per the Bill, any zone notified before March 31, 2012 and any unit that commences commercial operations by March 31, 2014 will be able to enjoy profit-linked tax exemption even as the Bill marks a shift in the criterion of corporate tax holidays.

SEZ units get 100% tax exemption on profits earned for the first five years, a 50% exemption for the next five years and another 50% exemption on re-invested profits in the following five years. SEZ developers, on the other hand, get 100% tax exemption on profits for 10 years, which they can choose in the block of the first 15 years.

The Bill has suggested a phased withdrawal of the current regime of tax exemptions that are linked to profits, and replacing it with tax sops linked to investments. The finance ministry proposes to implement the DTC by April 1 2012.
The finance ministry is hopeful that this will help offset the revenue loss of nearly `80,000 crore from tax exemptions, Mr Mitra said.

But developers and units have opposed the move, as it would make investments in such zones unattractive. For sectors such as IT, where investments made are relatively low, it would definitely lead to lower exemptions.

“The tax-free status is partly taken away by the imposition of 20% MAT on such units though the MAT will be creditable in future years,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.

At present, there are nearly 576 formerly approved special economic zones of which 114 are operational. They are expected to garner nearly `10 lakh crore of investments.

“It is a welcome move given the original position of the code. But the tax exemption should have been continued in perpetuity, as this will hurt the SEZ policy. The 20% MAT adds more pressure on investors and skews the picture from a cash-flow perspective,” said Abhishek Goenka, partner, BMR Advisors.