Commerce department to oppose draft tax code on SEZ units.

NEW DELHI: The commerce department is set to oppose the finance ministry’s proposal for withdrawing tax exemptions for new industrial units coming up in special economic zones (SEZs) after the direct tax code is implemented the next fiscal year.

The revised draft code also proposes to replace tax exemptions with sops on investments made by developers, which will lead to drying up of investments in SEZs, an official in the government said.

Officials in the department felt that the revised draft tax code, circulated on Tuesday, does not address several concerns raised by it. The department was expecting the second draft to be more SEZ-friendly than the first one. The finance ministry had put up the first draft code for public debate in August 2009. Based on the feedback from other ministries and the industry, it revised the draft on Tuesday.

“If the taxation laws for SEZs are changed, you can totally write-off the policy which has contributed significantly to exports and created six lakh jobs over the last four years,” a commerce department official told ET.

Tinkering with a policy in the third year of its existence does not reflect well on the investment environment of a country, he added.

While the second draft has clarified that both SEZ developers and units that start operations before the DTC is implemented on April 1, 2011 will continue to get tax exemptions on profits for the remaining years of the exemption period, the rules would be different for SEZs and units that come up after that.

Under the SEZ Act, industrial 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. SEZ developers, on the other hand, get 100% tax exemption on profits for ten years which they can choose in the block of the first 15 years.

According to the proposal, developers of SEZs will get sops based on investments made in the zone instead of getting exemptions on profits earned.

“The scenario is even worse for SEZ units as there is no provision for continuation of tax exemptions for them beyond April 1, 2011 in the new draft,” points out SEZ expert Hitender Mehta.

This is bad news for SEZ developers that have put in money in the zones and are expected to start operations as they may not be able to attract units.

This would also result in lot of rush by corporates to establish operating units in SEZs before March 31, 2011, according to KPMG executive director Hemal Zobalia. The changes in the tax regime, if executed, could cut down tax benefits enjoyed by SEZs, especially in sectors like IT where investments are low. They may also attract minimum alternative tax (MAT) of 18% as the proposed DTC has no provision of giving any sector exemption from MAT, Mr Mehta pointed out.

“While the law may allow such changes in tax provisions, it is kind of a breach of trust on the part of the government as the SEZ policy attracted investors on the basis of certain promises made,” the commerce department official said. In 2009-10, goods and services exports from SEZs was worth Rs 2,20,000 crore, 122% higher from the previous year. The government has formally approved the setting up of 574 SEZs, of which more than 100 have started operations.

Source : The Economic Times