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18.5 pc Minimum Alternate Tax on units operating in SEZs
March, 03rd 2011

The budget presented by the finance minster this week has dealt another blow to Mihan-special economic zone (SEZ) which is being developed by the Maharashtra Airport Development Company (MADC). Last year the draft  direct tax code put a deadline of March 2014, for units to start working in SEZs so as to avail an income tax exemption. Now the current budget proposes to charge a minimum alternate tax (MAT) of 18.5% to the units operating in SEZs.

The move is termed to bring an end of tax incentives for the IT industry and incidentally all except a couple of investors in the Mihan-SEZ are from this sector. So far only one unit Calibre Point has begun operations in Mihan. Observers feel imposing MAT may discourage further investments into the SEZ as well as have an effect on the investors' decision to start a unit here.

Companies had been allotted land as much as 4-5 years ago, but the construction work on the premises came to a standstill after the recession of 2008. If the 2014 deadline passes then the Mihan-SEZ would become less appealing for the investors who are now also saddled with the MAT burden. A direct tax holiday is a major incentive chased by the IT firms.

MADC is also trying to get investors from other sectors, as the indirect tax sops continues to be available in the SEZs.

"The Vidarbha Industries Association (VIA) is already apprehensive of the proposal hampering the development of the Mihan-SEZ. IT industries are mainly concentrated in the SEZs including Mihan. SEZs will no longer be an attraction for this sector. A software unit can be set up in any location unlike a manufacturing plant which has to be close to the source of raw materials. All they need is good infrastructure," said the association's secretary Anil Parakh.

MAT is a tax charged on the book profits of a corporate entity. It means that the tax is payable if the revenues exceed expenditure in the profit and loss account. The ultimate tax liability can lower after deducting the other exemptions available in the law, but MAT has to be paid first.

Shashikant Chaudhary of M/s GlobalLogic says it brings an end to the tax holiday regime for the IT sector. The income tax holiday under the section 10A and 10B of Income Tax Act ended in 2010. It was available to exporting units registered under the software technology parks of India (STPI) and now there is the MAT liability. This will be a major dampener for small players who will have to set aside substantial amount of liquidity for paying the tax. Even as the IT majors will be able to absorb the loss, several co-developers who are coming up with IT parks within the Mihan-SEZ may look for small players to check-in. The MAT proposal may influence the investment of smaller firms into such IT parks.

"Members of the Vidarbha Economic Development Council (VED) had called on the chief minister a few days ago, insisting on an early appointment of the vice-chairman-cum-managing director. Now the news on MAT is a further dampener as it will hit investments in the SEZ," said Vilas Kale, President of VED an organisation advocating early development of Mihan.

A SEZ is required to generate cargo for the multimodal hub proposed near the airport. VED is now lobbying with the Maharashtra Industries Development Corporation to allot land to regular units so that they would also contribute to the cargo required for the hub, said Kale.

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