200 SEZs likely to be exempt from 18.5% MAT

Commerce ministry monitoring remedial measures to promote exports in key markets; planning FTA review

Enterprises operating from over 200 Special Economic Zones (SEZs) in the country are likely to be exempted from the minimum alternative tax (MAT) of 18.5 per cent on their book profits. The Union commerce ministry is understood to have made a strong case for removing MAT on SEZ units on the ground that giving this tax benefit would revive domestic manufacturing and provide the much-needed boost to exports, declining in each of the last 13 months.

GROWTH STORY OF SEZS

• 1965: Asia’s first export processing zone set up in Kandla, Gujarat
• Apr 2000: Special Economic Zones (SEZs) policy announced
• Feb 2006: Special Economic Zones Act, 2005, comes into force
• Apr 2012: MAT imposed at 18.5% as well as dividend distribution tax (June 2011) on 10% book profits of developers and units located inside SEZ

In addition, the commerce ministry has also put in place an effective monitoring mechanism that is closely looking at what remedial measures can be taken to promote exports in some of India's key markets. The free trade agreements (FTAs) are going to be examined from that perspective, as and when they come up for review.

Meanwhile, an attempt is being made to use India's services exports strength and build that into its negotiations for agreements for merchandise trade. Simultaneously, an effort is being made to strengthen the legal framework for the plantation industry, so that this sector can also play a more useful role in exports and in domestic markets.

On the question of MAT, the commerce ministry has had detailed discussions with the finance ministry. Expectations of the government removing MAT on SEZ units are high, even though the finance ministry is still debating the decision's implications of revenue loss for a government that is struggling hard to adhere to its promised fiscal deficit of 3.5 per cent of gross domestic product for 2016-17.

In the current financial year, the fiscal deficit has to be kept within 3.9 per cent of GDP, but next year the challenges of an increased expenditure burden on account of the recommendations of the Seventh Central Pay Commission are going to be more difficult.

According to official estimates, the corporation tax revenues foregone on account of the SEZ units in 2014-15 were estimated at Rs 18,394 crore. This revenue loss would have been more if the government had not levied MAT on these units. MAT was levied with effect from April 2011 on SEZ units. Therefore, the size of the potential revenue loss on account of removing MAT on SEZ units is what is causing a dilemma in the finance ministry.

The larger implication of removing MAT on SEZ units would be that the government's earlier plan of phasing out corporation tax exemptions on SEZ units from 2017-18 would need to be reviewed. If MAT is to be removed from 2016-17, as is expected in the commerce ministry, then there would be no logic of phasing out corporation tax exemptions for them from 2017-18.

FACTFILE

• Out of 347 SEZs which have received all requisite clearance certificates and been notified as of November 2015, only 204 are currently operational
• Comptroller and Auditor General, in its December 2014 report, said out of 45,635.63 hectares notified for the development of SEZs, actual operations took place only in 28,488.49 hectares, or 62% of the notified land
• Exports from SEZs declined to Rs 4.63 lakh crore in 2014-15, from Rs 4.94 lakh crore in 2013-14
• Nearly Rs 3.63 lakh crore investments in SEZs currently, with Rs 1.5 lakh crore additional proposed investment
• Total employment: 1.54 million

The latest move to consider removal of MAT on SEZ units follows a detailed representation made by SEZ companies to the commerce ministry last month. It was argued that the 204-odd SEZs have an estimated 4,122 operating units, engaged in exports of Rs 4.6 lakh crore, which accounted for almost a fifth of India's total exports in 2014-15. With total investments estimated at Rs 3.63 lakh crore in these SEZ units, they employ around 1.5 million workers.

Those arguing in favour of abolishing MAT on SEZ units point out that the move would also help counter the steady rise in imports of a large number of items from various developing countries and China, which have begun flooding the Indian markets with their products in view of a downturn in international trade. The removal of MAT is being justified not only for giving a boost to the government's Make In India programme, but also for keeping a check on imports of a large number of items.