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Budget 2018: Tax-free status likely to be restored for Special Economic Zones?.

Date: 31-01-2018
Subject: Budget 2018: Tax-free status likely to be restored for Special Economic Zones?
Budget 2018: The Special Economic Zone (SEZ) policy was introduced in 2000 to attract foreign investments in India. The policy was intended to make SEZs a growth engine that could augment manufacturing and exports, while generating employment, thereby potentially accelerating economic growth. SEZs were projected as tax-free enclaves enjoying various fiscal and non-fiscal benefits. Amongst the various tax exemptions/concessions, the minimum alternate tax (MAT) exemption for both SEZ developers and units, for an indefinite period, and the dividend distribution tax (DDT) exemption on dividends distributed, acted as catalysts in encouraging companies to set up in an SEZ. While the rationale behind introducing MAT was to bring ‘zero-tax companies’ into tax net, which, despite having earned substantial book profits, were not paying any tax due to various tax incentives provided under domestic tax laws, this was exempt for SEZ units and developers for the reasons discussed above.

However, the rules of the game changed in 2011, with the levy of MAT at the rate of 18.5% on SEZ developers and units, and DDT at the rate of 15% on SEZ developers. The government noticed that companies operating in SEZs were making huge profits and distributing dividend to shareholders, but not paying income tax due to exemptions/concessions available under domestic tax laws. To address this, MAT and DDT were levied on SEZ developers and units, thereby bringing SEZs within the tax net as soon as they were profitable, contrary to the intent laid out in the SEZ policy.

This move was considered a major setback for the exports industry. While it helped the government partly offset the revenue foregone on tax incentives for SEZs against the revenue from MAT and DDT, it impacted investor confidence, hurt business sentiment, and raised serious concerns about the government’s intent to incentivise export-oriented companies. Overall, these changes made the SEZ scheme less attractive.

Despite the adverse impact, the government has been reluctant to roll back MAT/DDT imposed on SEZs, fearing revenue losses. Also, in 2017, the government brought in a sunset clause, whereby only units set up prior to March 31, 2020, would be eligible for income-tax holiday. SEZs, which provided a major impetus to export activity in India, started becoming less alluring after these changes. As on December 1, 2017, there were 423 formally-approved SEZs in India, of which 356 were notified, but only half formally approved, i.e. 222 are operational, according to the SEZ India website.

In India, SEZs are regarded as a barometer to forecast impending macroeconomic trends. Therefore, the focus of the government should be on making SEZs successful through right policies. Rolling back the tax on MAT and DDT, and extending the tax holiday beyond 2020, may provide the required impetus for economic growth and uplift investor sentiment. Keeping in mind the government’s ‘Make in India’ agenda, a re-look at the SEZ policy should form part of the government’s immediate economic agenda in the upcoming Budget.

The current government has expressed its intent to create a tax-friendly, predictable environment. But it’s equally important to demonstrate this by making relevant policy changes supporting the business community. It will be interesting to watch the direction the government takes in this regard.

(The author is partner, Corporate and International Tax, PwC India. Views are personal; Monika Baid and Nikish Jain contributed to the article)

Source: financialexpress.com

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