SEZ developers may lose tax benefits

NEW DELHI: The SEZ boat may be rocked once again. The finance ministry has said that as a principle, complete income-tax exemption for SEZ developers and co-developers should be withdrawn.

North Block had earlier hinted at a minimum alternate tax (MAT) on SEZ units, emphasising that this will bring some parity with non-SEZ exporters most of whom are small exporters hit hard by appreciation of the rupee. However, such a move will require an amendment to the SEZ Act, which could be a long-winded process.

The finance ministry’s latest missive will be a major cause of concern for the SEZ programme as scores of developers have committed huge investments on the strength of tax breaks.

Highly-placed government sources said the finance ministry has sent a letter to the empowered group of ministers (EGoM) on SEZs, seeking withdrawal of direct tax sops due to revenue constraints. It has been argued that notional revenue foregone on account of SEZ tax sops would be Rs 1 lakh crore in 2008-09, and half of it would be on account of direct tax exemption. Loss of revenue could affect allocation of funds for social programmes, ministry officials feel.

The EGoM, headed by external affairs minister Pranab Mukherjee, will debate the issue next week. The plea for extension of tax holiday to STPI units, scheduled to be phased out by 2010, is also likely to be discussed by the ministerial panel.

Despite the finance ministry’s insistence, it would not be easy to withdraw the sops as the exemptions are part of the SEZ Act passed by Parliament. Imposition of tax on SEZs would require amendment to the law for which a Bill has to be piloted by the commerce & industry ministry which is opposed to withdrawal of tax concessions meant for exporters.

Speaking to ET, government sources said the finance ministry, while targeting developers and co-developers, had decided to spare units operating within SEZs from total withdrawal of direct tax exemption. This would disturb stability in the tax regime and discourage investments, a commerce department official said.

At a time when exports face a major challenge due to appreciation of the rupee, the department has been highlighting job creation by SEZs as a major achievement of the programme. It seems the finance ministry is targeting direct tax exemption on two grounds: while buoyancy in direct tax collection is strong, indirect taxes are not growing as fast, with service tax being the lone exception.

It is estimated that more than half of the Rs 6 lakh crore revenue collected during the year would be on account of direct taxes. The SEZ law grants full tax exemption for five years to the units, 50% tax exemption for the next five and tax exemption on ploughed-back profits for another five years.

Developers get tax exemption on development of the processing area where export goods are produced. They get 100% income-tax exemption for 10 years within a block of 15 years. The commerce department is likely to oppose the proposal on the ground that the SEZ Act had attracted investments from players on the basis of the sops promised in the Act. To go back on the provisions of the Act would be a breach of promise.

Although it would be difficult for the government to decide on withdrawing sops provided under an Act, the debate being generated by the finance ministry’s demand could put a shadow on the future of SEZ policy which is expected to attract a lot of foreign direct investment.

“There has to be continuity in policy if we want to attract investments. The debate is not healthy for the economy,” a source said. While the finance ministry has been expressing concern about revenue loss from the beginning, a study commissioned by the ministry was recently in spotlight as it explained that incremental economic activity and job creation justified the tax concessions.