Though a Committee for SEZ that constituted to review the Minimum Alternative Tax on SEZ units recommended for its abolition, the government may not do it in the 2018 budget according to sources.
At present, the SEZ units attract the MAT of 18.5% plus cess. Though the SEZ units enjoy income tax exemption in a sunset manner, they have to pay the MAT rate. At the same time, momentum with SEZ is declining as several units have came out of the facility because of declined tax benefit. The government has lost around Rs 10000 crores by giving tax exemptions to SEZ units under the normal income tax window according to 2016 tax foregone estimates. Hence, there is a high demand for withdrawal of MAT. But tax officials point out that in the absence of MAT, several units may relocate to SEZ to simply avail the tax benefit. As per the latest data available, though around 450 SEZ units have registered, only 218 are operating.
Background/Basics
What is MAT?
The Minimum Alternative Tax (MAT) is imposed on book profit of companies who record nil or negligible profit to pay the usual corporate income tax. During the 1990s, companies having large profits and declaring substantial dividends to shareholders have paid no tax by arranging zero profitable income.
What is Book Profit?
Book profit means the net profit as shown in the profit & loss account for the relevant previous. Some components are added while some other components are deducted to get the book profit.
Rationale for MAT
There were several companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act. The Income Tax Act allows companies to claim certain exemptions, deduct certain expenses and make various provisions to while calculating taxable income. Because of these exemptions and deductions, the taxable profit may become zero despite having substantial book profit. These companies are popularly known as Zero Tax companies.
Incentives and facilities offered to the SEZs
The units established in Special Economic Zones gets several benefits including income tax exemption for initial years, duty free import benefit, exception from service tax etc. The income tax exemption is provided in a sunset manner implying that the tax concession decreases with time. Following are the main incentives for SEZ units.
- Income tax exemption: 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.
- Duty free imports: Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
- Exemption from Service Tax.
- Exemption from state taxes: Exemption from State sales tax (SGST) and other levies as extended by the respective State Governments.
- Easy Approvals: Single window clearance for Central and State level approvals.
- ECB without maturity restriction: External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.
Benefits to SEZ developers
In the same way, SEZ developers also enjoy certain benefits. The major incentives and facilities available to SEZ developers include: –
- Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.
- Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.
- Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.
- Exemption from dividend distribution tax under Section 115O of the Income Tax Act.
- Exemption from Central Sales Tax (CST).
- Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).
SEZ units should pay the Minimum Alternative Tax (MAT). Currently MAT is levied at 18.5% on the book profit of firms, with the effective rate over 21%, factoring in surcharges and cess.
