Will pre-election budget budge on MAT on SEZs?

Every year since 2013-14, there has been speculation about doing away of minimum alternate tax (MAT) on special economic zones (SEZs) or giving these free trade zones some sort of relief on this tax in the Budget. However, successive budgets did not provide such a relief to SEZs. 

Speculations in the run-up to the Budget for 2018-19 are no exception in this respect. Currently, there are 204 SEZs in the country. 

The proposal - to impose MAT at 18.5 per cent on book profits of both SEZ developers and units in these enclaves - was announced in Budget 2011-12 by the then finance minister, Pranab Mukherjee. The MAT rate has been 18.5 per cent with effect from 1 April, 2012. Besides, DDT at almost 20 per cent was also imposed for dividend distributed to shareholders.

It was introduced through a proposal in the Finance Act, even as the SEZ Act specifically mentioned a stipulated tax holiday to be given to these zones.

If one assesses the export performance of SEZs, growth dramatically declined since 2012-13 and came down to single digits of 4% in 2013-14 (see chart). However, it again picked up pace and exports from SEZ units stood at 13 per cent in the first half of the current financial year from the corresponding period of the previous year, though way down in the pre-MAT period. It had stood at over 12 per cent in 2016-17.

Officials argue that MAT exemptions to SEZs have led to revenue losses. According to a paper by think tank ICRIER, MAT is often filed at the corporate level and not by the SEZ units. Further, SEZ units are not required to declare their MAT contribution in their annual performance report. Therefore, neither the Ministry of Finance nor the SEZ Division of the Department of Commerce have records of the amount of revenue losses due to MAT exemptions to SEZs or the revenue earned after the imposition of MAT on April 1, 2012. In the absence of data, it is not possible to examine the impact of MAT on government revenue.

It was earlier assumed that MAT will be there as long as there is an income tax exemption. In other words, MAT exemption is expected to be phased out if income tax exemption is phased out. Further, none of the countries have an income tax exemption for an indefinite period. However, in the Indian SEZ Act of 2005, there was no sunset date for MAT exemption. Therefore, SEZ developers and units assumed that MAT exemption will continue indefinitely.

Since the SEZ Act, 2005, provides for a phased exemption of income tax, the issues related to MAT exemption stem from the lack of clarity in the SEZ Act 2005, on whether MAT should be phased out in the same way as income tax exemption or continue indefinitely. Ideally, MAT should be phased out exactly like the income tax exemption, ICRIER report said.