Will Minimum Alternate Tax stay on SEZs?

The industry players were hoping for a tax cut in the SEZs and scrapping of minimum alternate tax (MAT) in the Union Budget, but Finance Minister Arun Jaitely refrained from saying anything specific on the issue.

However, commerce secretary Rajeev Kher at a CII event on July 15 said the government is looking at a package to revive Special Economic Zones (SEZs). He also added that the issue of MAT on SEZs is up for review.

Speaking at the same event, revenue secretary Shaktikanta Das said tax sops are unlikely as the fiscal space is limited. Both the finance and the commerce ministries are still negotiating a solution to this issue.

In an interview to CNBC-TV18, Arun Nanda, Chairman, Mahindra Lifespace , said SEZs were meant to incentivise setting up factories, were built to strengthen India's export market. He said he is disappointed with no MAT exemption in Budget.

Nanda feels there should be no taxes on SEZs and is looking at tax benefits in the revival package. Special Economic Zones need strong support like logistics hubs and social infrastructure, he added.

DP Sengupta, Former Joint Secretary, CBDT, is against any exemption of taxes for doing business. He feels tax exemptions create an environment for litigations.

Below is the transcript of Arun Nanda and DP Sengupta's interview with Sonia Shenoy and Latha Venkatesh of CNBC-TV18.

Sonia: The Finance Minister spoke about reviving SEZ schemes but there was no specific mention about any tax sops that could be given to SEZs perhaps because it would sort of strain the fiscal situation. What is your view on how much of a negative this could be, the fact that there was no scrapping of minimum alternate tax (MAT) and also no specific mention of any tax sops for SEZs?

Nanda: I disagree with you on the fiscal part of it because people look at verticals separately but let me come back to the main issue. The whole concept of SEZ was suppose to be that these were suppose to give certain incentives to people to come and setup factories and become globally competitive. It was not only incentive it was also to make them globally competitive.

However, somewhere down the line in the previous government the finance ministry and commerce ministry had divergent views and we were slapped with MAT. The whole concept of MAT is that when you pay tax in the future year it gets set off but if in an SEZ there is no basic tax and you still impose MAT that means it goes from your pocket.

Both Mr. Modi in his earlier statements and the Finance Minister talked about boosting exports. However, it was very disappointing to know that neither was the MAT removed nor any mention made of things like dividend distribution tax (DDT) or other fiscal benefits or streamlining of policies. They made so many policy announcements, there are other pains and I will come back on that but it is very disappointing.

However, let me clear the perception of the fiscal benefit. We have had this argument with the previous Finance Minister that you are only looking at tax not being paid by the entity. However, the employees who work there, the products that are sold, these tax that you collect from the social infrastructure that happens because the young men and women who work there who go and buy goods they pay the value-added tax (VAT) and things like that there. So, there is that snowballing effect. You have to look at it from an employment generation and the kick start that it gives to the economy. Don't look at it only in one bucket that this company is not paying tax.

Latha: Your point always was that there is no right to do business without paying any taxes, would you say that there is a take that comes to the economy because of businesses in SEZ and therefore tax can be excused, you don't buy that argument?

Sengupta: I don't buy that argument at all. Let me first say that I am basically against all tax exemptions not only relating to SEZ but relating to all tax exemptions for the simple reason that they distort tax system and spawn huge litigations. There are many number of studies done in India and abroad which show that these tax SOPs are ultimately not benefiting anyone.

Secondly the fact remains that there is a huge tax base erosion because of this tax expenditure. In so far as the SEZ tax SOPs are concerned in respect of corporates alone for FY13-14 the tax revenue statement shows something to the tune of about Rs 15000 crore. So when the whole world is now talking in terms of preventing base erosion, we cannot go on creating some cliffs of tax havens within India itself.

Latha: We had the Commerce Secretary saying yesterday that they are looking at preparing a revival package for SEZs. So, let us look forward since the tax issue has been to some extent discussed by the Karnataka High Court or settled by it. What would you want in terms of helping SEZs? Since the government doesn't have the elbow room for taxes what do you want other than taxes?

Nanda: I want to correct one perception. It is not a question of whether you pay tax or you don't pay tax. I would like to with due respect to Mr. Sengupta ask him does he believe in growth because if you don't give benefits the Nokia's and Flextronics of this world do not setup shop here; they go and set it up at some other place. It is not a question of do you get tax or you don't get tax.

If you have to make a level playing field because there are other economies and they have options to go somewhere else. So, either we say that we will take tax but we don't care about growth then it is fine. We can have revolution on the streets and not create 200 million jobs.

Latha: Since the Commerce Secretary has said that they are looking at revival packages what would you have included in that package?

Nanda: There are three things that I would like to look at in the revival package. The first is the whole policy was setup that there will be no taxation on the basis of which people made the investment. Whatever you want to do prospective, when certain promises were made they should be kept there.

The second is that there is a misconception that whatever we do should be only limited to what is called processing area. A processing area will not survive without the non processing area. You need to have the infrastructure to support, you need the logistic hubs, you need these social infrastructure for people to come and study, educate, stay – all those things will have to be looked at.

Third is, I think there should be a very clear policy because the Development Commissioner says service tax should not be available but the Service Tax Authorities say service tax should applicable. So, there should be a very clear understanding between center and state governments or between various departments of the government because the developer needs to know what is there and what is not there especially for our clients who come and setup shop. They should know in what economics they are going to be working in.

Sonia: Do you think this whole process of revival of SEZs or the revival scheme is really futile because unless you don't give tax exemptions, unless you don\\'t give land, relaxation in regulations and clearances, there is actually no revival process underway?

Sengupta: Whether we should have these on cliffs of tax havens within India or not is a policy decision for the government to take, I am not questioning that.

Assuming that we have then what is necessary is for them to have proper infrastructure. There are number of studies which say that tax SOP is not the deciding factor for companies or investments to come in particular areas. These are proper infrastructure availability of electricity, the red tape etc which Mr. Nanda has eluded to, I have no issues with that but tax SOPs is something which is a concern for the revenue for the reasons that I have already mentioned. If assuming that the companies need, after all revenue forgone is also a subsidy and when we talk of subsidy in other sectors, we keep on harping on the subsidy not being targeted and being non transparent. This is also a very non transparent subsidy.