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MAT on SEZ can hurt investors' faith

March 07, 2011 10:46 IST
Among the proposals specific to exporters in Budget 2011-12, the most controversial is the imposition of Minimum Alternate Tax on Special Economic Zone developers and units.

One objective of the SEZ scheme is to ensure a stable policy framework, based on which investors can make a decision to invest in establishing SEZs or setting up SEZ units. Changing the rules of the game for developers or units who have already committed funds upsets the financial calculations that guided the investment decision. It is another matter if the government makes it clear that newcomers will be subject to taxes.

But withdrawing concessions for parties who have already committed funds undermines credibility of the government and imposes unforeseen costs on the investors.

Commerce Minister Anand Sharma was quick to assure the investors that he would take up the issue with the finance minister and try to get the decision to impose MAT on SEZ developers and SEZ units reversed.

Hopefully, he will also take up the issue of imposition of Dividend Distribution Tax on SEZ developers. Even if he succeeds, the very fact that the government had taken a decision to bring about unexpected changes in tax dispensations can only undermine the confidence of investors, raise serious doubts about the claims of stable policy framework and make investment in SEZs less attractive.

The decision to not extend the income tax concession to export-oriented units for one more year was not entirely unexpected. Even so, many EoUs and Software and Electronic Hardware Technology Park units, besides Biotechnology Park units, will have to live with the new reality that they will have to pay taxes on their income, like other units and Domestic Tariff Area units.

On-site software developers, whose income gets taxed abroad but earn a credit under Double Taxation Avoidance Agreements, may not be as severely affected as smaller service providers.

The move to allow exemption from service tax on services provided to SEZs that have no operations in DTA and on services that fulfil the conditions under the Export of Services Rules will relieve the units concerned from the pain of claiming refund and waiting endlessly.

But, for others, there is no way but to hope that refunds will be sanctioned quickly. The finance minister has promised a refund mechanism for taxes paid on services used for export of goods that will operate like the drawback mechanism in a far more simplified and expeditious manner.

It would be helpful, if a standard refund rate is fixed and the amount is disbursed in an automatic manner as in the case of disbursement of All Industry Rates of duty drawback.

The scope of notification (45/2005 dated May 16, 2005) exempting 4 per cent additional duty of Customs has been widened to cover 'goods cleared from SEZs' instead of 'goods produced or manufactured from SEZs', thereby facilitating even trading units in SEZs to avail of the exemption. Besides, Cenvat Credit Rule 6 (6A) now provides that Cenvat Credit need not be reversed against services rendered to SEZ developers and SEZ units for their authorised operations.

Overall, barring the surprise of imposition of MAT on SEZ developers and SEZ units and DDT on SEZ developers, rest of the dispensations should help exporters.

TNC Rajagopalan
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