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Ministry to seek tax concessions
June, 28th 2010

In a last-ditch attempt to preserve the special status of special economic zones (SEZs) after the proposed Direct Taxes Code (DTC) takes effect, the commerce ministry plans to seek some tax concessions for SEZ developers and units located in the enclaves.

The ministry wants SEZ developers and units to be charged a lower corporate tax rate or get exemption from the minimum alternate tax after the DTC comes into force in April next year.

We are writing to the finance ministry to at least provide a preferential tax regime to the SEZ units and developers over their counterparts in the domestic tariff area under the new direct tax regime, said a senior commerce ministry official who didnt want to be named.

The revised discussion paper on DTC released this month proposes to end all profit-linked tax incentives to SEZ units and developers after the code is notified. However, it will allow the existing SEZ developers and units to continue to enjoy tax benefits.

The commerce ministry and SEZ developers are concerned because this would mean that SEZs that are under construction and will be completed after April 2011 may fail to attract tenants.

Hitendra Mehta, a partner at the Gurgaon-based law firm Vaish Associates, said the proposed changes through the DTC could be challenged legally.

Investors have put their money (in SEZs) under the assumption of certain future tax benefits promised under the SEZ Act. Now by changing the tax regime for SEZs midway, government is withdrawing its earlier promises. The legal validity of such proposals in the DTC could be challenged, Mehta said.

Such changes will also send signals of an unstable policy regime to global investors, said Mehta. This would also mean the end of SEZ policy, he said.

Vikram Bapat, executive director at the consulting firm PricewaterhouseCoopers, said he opposed the proposed changes because of their timing. The first SEZ unit came into operation in 2008 after SEZ Act was notified in 2006. This means the SEZ act is being given only two years for survival, he said.

The nine-month time period now available for developers to develop SEZs and sell the space to units is not enough. This will derail the business case of developers. There should be a longer moratorium, he said.

The SEZ Act was enacted by Parliament with the objective of stimulating economic activity, generating employment, promoting exports and attracting foreign as well as domestic investment.

Various fiscal incentives were provided to SEZ developers and units located in the enclaves including benefits on income from the development of the SEZ infrastructure for 10 years, exemption from dividend distribution tax, corporate tax exemption on export income for 15 years and exemption from MAT.

However, justifying the case for doing away with profit-linked tax incentives, the finance ministry has argued that such deductions are distortionary in nature as they create an incentive to inflate profit as well as to transfer profits from a taxable entity to a non-taxable one.

So far 578 formal approvals have been granted for setting up of SEZs out of which 353 have been notified. Only 111 have become operational. SEZs have so far attracted Rs1.5 trillion of investments and created at least 500,000 jobs.

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