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Minimum alternate tax withdrawal in plan to revive struggling SEZs
May, 23rd 2014

Gujarat angle could come to the aid of floundering special economic zones (SEZs), conceived as specialised enclaves to push exports.

The commerce department will push for the withdrawal of taxes like minimum alternate tax (MAT) and dividend distribution tax (DDT) on these zones as part of a bigger strategy to revive them and boost manufacturing. Gujarat has the largest notified SEZ land, making the policy change that much more marketable to the incoming Narendra Modi government.

The original programme provided for a complete tax holiday to SEZs for the first five years and tax at a discounted rate for the next five years. The 2011-12 Union budget imposed MAT at 18.5% on the book profits of these developers and units located inside SEZs, which made them unattractive.

"There should have been stability in the policy. We will raise the matter with the new government and push for the withdrawal of MAT and DDT among the ways to revive SEZs," said a commerce department official. "We are quite hopeful that SEZs will be the focus of the new government and the earlier announcement of tax incentives will be restored."

Minimum alternate tax withdrawal in plan to revive struggling SEZsThe matter was also flagged by the commerce department on Tuesday at a Cabinet secretary meeting. The commerce department has asked the export promotion council to list out a fivepoint strategy to make SEZs attractive. The export promotion council for export-oriented units and SEZs (EPCES) met on Wednesday to work on ways to revive SEZs.

With former Gujarat chief minister Modi as the new prime minister, hopes are high that SEZs will be the focus of the BJP-led government, considering that manufacturing and job creation were the key focus areas in the party's poll manifesto. The Kandla special economic zone in Gujarat has 33 notified SEZs spread over 12,890 hectares of land - the largest notified land area among SEZs. Jubilant Infrastructure, Larsen & Toubro, Adani Power and Reliance are among the SEZs in the Kandla duty-free enclave.

In the data put out by the ministry of commerce and industry, of the total 47,803 hectares of SEZ land notified, only 17,689 hectares, or 37%, has been put to use so far. Only 185 of the 389 notified SEZs are operational. "Imposition of MAT and DDT is just the tip of the iceberg. The entire SEZ policy in letter and spirit has been vitiated over the years," an EPCES official said. EPCES' strategy to revive SEZs will include passing of the exports sops such as focus-product and focus-market incentives to these zones, and single-window mechanism for clearances.

The focus-market programme helps offset high freight cost and other externalities to select international markets to enhance India's export competitiveness in these markets, but it is not applicable to SEZs.

Though SEZs enjoy zero import tariff, they can sell to the domestic tariff area only at full Customs duty of the final product, making their products uncompetitive, a situation that, EPCES says, needs to be assessed. Currently, SEZs enjoy duty-free import and 100% income-tax exemption on export income for the first five years, 50% for the next five years and thereafter 50% of the ploughed back export profit for another five years.

Last year, the government cut the minimum area required for SEZs and eased the exit clause for developers in a bid to make these zones attractive.

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