The imposition of minimum alternate tax (MAT) on special economic zones could make them unattractive for exporters as incentives available outside will outweigh the tax benefits offered by an SEZ, according to experts.

The Budget for 2011-12 has proposed to levy 18.5% MAT on the book profits of units operating in SEZs.

Exporters in the domestic tariff area, or places outside the SEZs, are offered several incentives under the foreign trade policy, such as the freedom to set up the unit anywhere and no obligation to be net foreign exchange earners.

" SEZ units have been enjoying the advantage of zero-tax liability for five straight years and were thus prepared to give up benefits of export promotion schemes, which vary between 3% and 5% of the export value," said Ajay Sahai, director general, Federation of Indian Export Organisations .

Once the tax-free status goes, equations change completely, he added.

For instance, if there is a unit that earns 10% profit, then it would earn Rs 10 on a turnover of Rs 100. If the unit is outside an SEZ, it would have to pay a tax of 33.5% on profit, which would amount to Rs 3.5. But it would also get a minimum 3% incentive that would amount to Rs 3.

The same unit in an SEZ will have to pay Rs 1.85 as tax under the new MAT dispensation and will not gain any export incentive.

"Although exporters can take credit for minimum alternate tax, SEZ units exporting 100% of their production cannot adjust it in the first five years of operation as they would have no tax liability to set it off against," said SEZ consultant Hitender Mehta.

Under the SEZ Act, units get 100% tax exemption on profits earned for the first five years, a 50% exemption for the next five years and another 50% exemption on re-invested profits in the following five years.

With India signing free-trade agreements with several countries allowing imports on concessional duties, there is an additional disadvantage for SEZ units.

"While those operating outside SEZs can import inputs at concessional rates, units in SEZs have to pay full customs duties," said R K Sonthalia, former president of export promotion council for EoUs and SEZs and owner of a SEZ unit in Kolkata.