MAT on SEZ to hurt developers: commerce secy

Opposing the levy of MAT on special economic zones (SEZ), the Commerce Ministry today said the tax could be challenged in courts as it will have a significant impact on tax free export zones.

"The rules of game are changed mid-stream. I don't rule out the possibility that somebody will drag us to court (on the issue of imposition of MAT on SEZs). No body is going to sit back and just watch somebody taking tax away," Commerce Secretary Rahul Khullar told reporters here.

Finance Minister Pranab Mukherjee has proposed to levy Minimum Alternate Tax (MAT) of 18.5% on the book profits of SEZ developers and units. The changes in the tax rate would be effective April 2012.

Both developers as well as units in the tax-free enclaves were earlier exempted from MAT under Section 115 JB of the Income Tax Act.

"The levy of MAT acts as a disincentive...So somebody is going to turnaround and say it is not fair," he said.

Khullar said there is a case to reverse the decision on MAT as the move would hurt investor sentiments.

"I think, there is a case for rollback of MAT. SEZs are doing extremely well and the MAT will hurt. There is no doubt about it," he said adding in value terms it will adversely affect "significantly".

MAT was introduced in 1987 to bring companies that paid no or very little tax, after taking advantage of the exemptions provided by the Income-Tax Act, into the tax net.

Exports from SEZs contribute about one-third of the country’s total outbound shipments.

Exports from these zones during April-December 2011, grew by 47% to Rs 2,23,132 crore vis-a-vis the same period last year.

Under the SEZ Act, units get 100% tax exemption on profits earned for the first five years, while developers get exemption for ten years.

Additionally, units get a 50% exemption for the next five years and another 50% exemption on re-invested profits in the following five years.

So far, 582 SEZs have been formally approved by the Board of Approvals (BoA), of which 130 are in operation. SEZs have emerged as major sources for attracting investment and increasing exports in the country.

"People have made investments because people have received assurances that there will be tax breaks," Khullar said adding the move would seriously impact prospective investors.

He also asked the industry to raise the issue with the Finance Ministry.

"We have done our bit. It is now for the industry (to raise the issue)," Khullar said.

The government has also proposed dividend distribution tax on SEZ developers which would come into effect from June this year.

MAT was scheduled to be introduced on SEZs when Direct Tax Code is rolled out next year.