Is the withdrawal of exemption for SEZ legally tenable?

Some very fundamental issues about direct and indirect taxes have arisen out of the decision regarding reimposing tax on SEZs in the Budget 2011. In the Budget the Finance Minister has declared that as a measure to ensure equal sharing of corporate tax liability, he proposes to levy Minimum Alternate Tax (MAT) on developers of special economic zones as well as units operating in SEZs. This measure has been resisted by the SEZ developers on different grounds. One of the grounds is that an exemption granted by the SEZ Act cannot be changed by the Finance Act. The second ground is that the developers have already made substantial amount of investment (one estmate puts it at Rs.1.95 lakh crores) and now this will not be viable any more. This argument has the undertone of invoking the theory of promissory estoppel according to which if a promise is made by the Government in the shape of a notification or declaration and if the financial commitment is made in pursuance of the promise, there is no way in which the Government can back out from the promise. According to news reports the aggrieved SEZ developers are also planning to seek legal remedy.

Regarding the first point as to whether the concession declared in the SEZ Act can be withdrawn by the Finance Act, the argument made by the SEZ developers is that the legal position stands on their side that the Finance Bill could not be used to amend the SEZ Act to entitle them to the tax benefit. This argument does not seem to be correct at all. We find from the Finance Bill that it has amended the Customs Act, the Central Excise Act, Service Tax provisions, Medicinal and Toilet Preparations (Excise Duty) Act, 1955, Central Sales Tax Act 1956, Additional Duties of Excise (Goods of Special Importance) Act, 1957 apart from the Special Economic Zones Act 2005. So it is not only the Special Economic Zones Act but other Acts which are amended regularly. The only point that needs to be taken into account is that the SEZ Act was made by the Commerce Ministry and not the Finance Ministry. The fact is that there must have been an agreement between the Commerce and Finance Ministries to do the change. So the legality cannot arise if it is made an issue in the Court of law.

The second issue is whether the Government having granted a concessional notification can withdraw it hurting investment that have already been made. The answer to this is that the Government can do it in the public interest. If it can be proved that the concession is being misused , it can be withdrawn in the public interest. The Government's position is that it has proof of colossal amounts of profit against investment being claimed and loaded against exempt SEZ entities by the SEZ developers. That is to say, the SEZ developers not only avail of the legitimate tax concessions for these zones but shift profits from their other operations to SEZs. In the case of such misuse the legal position is quite clear that the concession can be withdrawn. It has been clearly held by the Supreme Court in the case of Kasinka Trading Co. v. UOI – 1994(74)ELT782(SC) and Di-Ichi Karkaria Ltd. v. UOI – 2000(119)ELT516(SC), apart from some others, that public interest can be cited against promissory estoppel. The Supreme Court even went in the case of R.C. Tobacco Pvt. Ltd. v. UOI-2005(188)ELT129(SC) to the extent that a concessional notification can be withdrawn retrospectively if a misuse of the concession was proved. Therefore in the present case since the Ministry of Finance has proof that the concession was misused by the SEZ developers, there is no difficulty about defending the withdrawal of the exemption if the legality of the withdrawal is challeged in the court of law.

In any case this is a policy matter and the courts will be loathe to accommodate the argument of the SEZ developers against the withdrawal of exemption. This is the Parliament's jurisdiction. And the Courts have also agreed to that.

smukher2000@yahoo.com