MUMBAI: The Karnataka high court has in its recent order upheld the imposition of Minimum Alternate Tax (MAT) on special economic zones (SEZ) developers and units operating in
SEZ zones. It has also upheld the levy of Dividend Distribution Tax (DDT) on dividends declared by SEZ developers. These taxes were introduced for the SEZ units and developers by the Finance Act, 2011.
A bunch of companies having units in SEZs and SEZ developers such as MindTree, Biocon, Opto Circuits, Opto Infrastructure and Primal Projects, to name a few, had petitioned the Karnataka high court against the withdrawal of MAT and DDT exemption available to them earlier.
The petitioners claimed that they had made heavy investments and established units in SEZs or developed SEZs on the basis of the tax holiday benefits available, which included MAT and DDT exemption. Thus, withdrawal of the exemption was violative of various articles of the Indian Constitution. It was also violative of the Doctrine of Promissory Estoppel and Doctrine of Legitimate Expenses.
On enactment of the Budget proposals of 2011, both SEZ developers and units in SEZs were brought within the ambit of MAT, from the financial year 2011-12 onwards. Prior to such enactment, MAT exemption was available to them. The current rate of MAT is 20.96% and it is computed against book profits.
Earlier, SEZ developers did not pay DDT on dividend distributed by them. From June 1, 2011, dividend distributed by SEZ developers was covered by DDT which is currently 17%.
The Karnataka HC dismissed the petition on various grounds. It held that it is a settled position of law that every tax exemption should have a sunset clause. As the MAT and DDT exemption for SEZs did not have a sunset clause, the flaw was removed by an amendment made by the Finance Act, 2011. Second, these exemptions created an inequality between SEZ companies and other companies, which was removed by the amendment.
The HC pointed out that such exemptions also resulted in erosion of the tax base. It upheld the right of the government to make amendments to fiscal polices.
"The legislature can never be precluded from exercising its legislative power by resorting to the Doctrine of Promissory Estoppel," added the HC.
The CFO of a software company said, "The order appears to be harsh and we are examining it. Business plans do take into account tax costs and the imposition of MAT on SEZ units is a huge burden."
Rostow Ravanan, CFO, MindTree, which was one of the petitioners, said: "The verdict is disappointing. We are examining the available legal alternatives."
Source : timesofindia.indiatimes.com