New tax code should retain exemptions to SEZs: Commerce Ministry

The Commerce Ministry has proposed that the Direct Taxes Code should bring in “grandfathering provisions” exempting Special Economic Zones from its purview so that the developers and units of these tax-free enclaves can continue to enjoy the tax benefits as offered by the present regime. Contending that it is “unfair” to take away tax benefits promised to SEZ developers and units through DTC norms with retrospective effect, the Commerce Secretary, Dr Rahul Khullar, told Business Line that the tax regime that the new code proposes, if need be, should be applicable only to new SEZs. “Even when the new code comes in, you can have saving provisions that grandfather everything that happened up to that point of time. This means, if the Direct Taxes Code so decides, you could have a different regime for all prospective SEZ developers and units. But you cannot take away the promises that you gave to SEZs that came into existence prior to the coming into force of the new law,” Dr Khullar said. The new tax code, in the long run, proposes to move from an exemption-based tax incentive system to an investment-based one. The Finance Ministry is yet to take a call on how SEZs should be treated under the new code. In the Budget, the Government had committed to ensure continued growth of SEZs to draw investments and boost exports and employment. “This commitment is a positive signal indicating that all issues arising in the new tax code regarding SEZs would be taken care of and benefits in the SEZ Act would be continued,” said Dr L.B. Singhal, Director General, Export Promotion Council for EOU and SEZs. Mr Tapan Sangal, Senior Manager, PricewaterhouseCoopers, said, “The new code should allow continuation of these exemptions for SEZ developers as well as units. If it discontinues exemptions only for units but retains it for developers, then it will be difficult for developers to attract more units to SEZs. It will attract lots of litigation if the Government takes away the promises based on which huge investments have been made.” Current SEZ regime offers several tax benefits. The SEZ developers are exempt from corporate tax for any consecutive 10 years of the first 15 years from the date of notification of the SEZ. Units are exempted from tax on export profits for the first five years and get 50 per cent exemption on the same for the next five years. SEZ developers and units are exempted from the Minimum Alternate Tax. SEZ developers are perpetually exempted from the Dividend Distribution Tax, though units have to pay this tax. A recent PwC study said the Centre's overall tax earnings from SEZs, excluding State taxes, were Rs 65,540 crore. The Government has approved 575 SEZ proposals of which 348 have been notified and 105 have commenced export. SEZs have attracted investments of around Rs 130,000 crore and generated direct employment for about 490,000 people. During April-December 2009, exports from SEZs were worth Rs 1,52,092.68 crore. – www.thehindubusinessline.com