The minimum alternate tax (MAT) levied on special economic zone (SEZ) developers and units in 2011-12, which hit the tax-free status of these enclaves and burdened them at a time of subdued global demand, may finally be removed in the coming Budget.
Top sources indicated an understanding on reinstating the MAT exemption for SEZs has been reached between the finance and commerce ministries, as the latter could convince North Block the revenue losses could be offset in the medium term by their export push and sale of goods to domestic industries at competitive prices.
Currently, MAT is levied at 18.5% on the book profit, with the effective rate touching 20%, factoring in surcharges.
The commerce department has been consistent in its demand for removal of MAT and dividend distribution tax (DDT) on SEZ developers — the proposals topped its Budget wish-list in the last five years — but the finance ministry refused on revenue considerations.
The tax waiver would, however, come with the more vigilant scrutiny of the shifting of profits from non-SEZ entities to SEZs by corporate India. SEZs availed of direct tax breaks to the tune of Rs 18,400 crore in 2014-15, although they paid a few thousand crores as MAT in the last fiscal and many hundreds of crores as the dividend distribution tax (an exact break-up of MAT proceeds are not available as SEZs are often one of the agencies of companies than companies themselves).
The government imposed MAT on SEZ developers and units and DDT on developers in 2011-12 when Pranab Mukherjee was the finance minister, after the revenue department had complained of massive revenue losses to the exchequer due to the tax exemptions and shifting of profits to exempt (SEZ) entities.
The Export Promotion Council for export-oriented units and SEZs has been complaining that the imposition of the MAT and the DDT has eroded the investor-friendly image of SEZs and created uncertainty in the minds of investors.
Before the MAT and the DDT were imposed in 2011-12, the growth in exports from SEZs was as high as 121% (2009-10) and 43% (2010-11), far exceeding the increase in the country’s overall goods exports for these years.
However, such high growth dropped consistently since the taxes were imposed and even contracted by 7.8% in 2014-15, worse than the 1.2% drop in the overall merchandise exports for the last fiscal. Consequently, the share of exports from SEZs in the country’s overall merchandise exports also declined from almost 28% in 2010-11 to 24.4% in the last fiscal.
While the average effective rate of tax on corporate income is around 23%, much lower than the marginal rate of 30%, MAT serves as a threshold below which the tax incidence on profit-making firms can’t fall. The revenue foregone on corporate tax incentives stood at Rs 98,400 crore in FY15. This was partly offset by the revenue from MAT of Rs 33,350 crore.
Pursuant to finance minister Arun Jaitley’s announcement in the FY16 Budget to reduce corporate tax to 25% from 30% over the subsequent four years, the Central Board of Direct Taxes (CBDT) in November came out with a blueprint for the phase-out of tax exemptions and various profit-and-investment-linked deductions. But it said that the Section 80 IAB benefits for SEZ development and Section 10AA sops for SEZ units would be available to firms that start operations by April 1, 2017. Under the SEZ Act, SEZ developers and units are given full tax exemption on income up to five years, 50% for another five years and another 50% for the subsequent five years if the profits were ploughed back and reinvested.
About 15% of SEZ sales are in the domestic tariff area, of which 4% is “deemed exports” and included for the positive net foreign exchange earner norm for these zones.
With private investments failing to pick up, thanks to stressed balance sheets of companies, the government now intends to roll out certain tax concessions to boost manufacturing as well as exports, which, in turn, could give a leg-up to investments. Towards this end, the government is also considering providing tax breaks to the proposed National Investment Manufacturing Zones, similar to the ones enjoyed by the SEZs, the sources said. It is also planning coastal economic zones along the country’s 7,500-km coastline, taking a cue from the port-led manufacturing growth achieved by China.
The finance ministry had warned in the recent midyear economic review report that as the reliance of growth on consumption buoyancy gradually diminished, the “ensuing growth was likely to be more investment-driven”. Despite some improvement in capital formation, the investment rate at around 28% (of gross domestic product) in the first half of this fiscal was 3 percentage points lower than the average in the three years through FY15, it had noted.
Although the government had made the plan to phase out various tax incentives, it will not make the MAT redundant immediately, revenue secretary Hasmukh Adhia had earlier told FE . “The revenue loss on account of exemptions is not going to disappear immediately. The government would get the full gain from exemption phase-out only by 2033,” he said. “We are closing the new window (for those entering after the respective sunset dates). But people who are already in would get the benefits till the period of their exemption expires.”