The Death of SEZs?

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More DTC, this time collateral damage! Special Economic Zones- it was Kamal Nath's pet policy! Introduced in 2005, the then commerce minister promoted SEZs as the cure to all of India's manufacturing ills and the ultimate export booster. The policy promised a 10 year tax exemption on all export revenues generated in these zones. At last count, 531 SEZs have received formal approval and 260 have been notified. tens of thousands of crores have been invested or earmarked for SEZs and for many companies, SEZs form the core of their expansion strategy. But much of that could now be at risk. In changing the incentive and exemption method the direct tax code 2009 could mean the death of special economic zones! Isha Dalal finds out

They almost caused a land war in India! 

But now- the very reason of their existence is under threat.

India's special economic zones are special because they have a 10 year tax exemption on all export revenues.  

A tax exemption thats been done away with in the new Direct Tax Code

V Balakrishnan, CFO, Infosys

You have the SEZ act and you have the new tax code. I don't know which has superiority over the other. But both are contradictory. So to that extent it creates uncertainty for any investments to come into SEZ

Well actually Infosys is actually amongst the luckier ones. 

All SEZs have to first get in principle government approval, then after acquiring land they get formal approval and finally, notification before they start operations.

All 4 of Infosys' Special Economic Zones are already operational and hence incentives for all 4 will get grandfathered. That's because the Direct Tax Code proposes that all SEZs notified before April 1st, 2010 can avail of the original tax exemption for upto 10 years.

V Balakrishnan, CFO, Infosys

They talked about a grandfathering kind of provisions where they've said all SEZs notified after April 1, 2010 will fall under new regime and all others will grandfathered. There are no details on that but they have talked about grandfathering, yes 

But grandfathering only for SEZ developers and not for units. Section 282 of the Direct Tax Code lists out the incentives to be grandfathered under the new regime  -it mentions developer exemptions, but there's no word on exemptions for SEZ units.

Rajeev Chugh, Partner, E&Y

Somehow, section 10AA does not figure in that list unlike section 80IAB for developers. So as it stands today, the units going forward would not be eligible for a tax holiday. But based on market feel and discussions from various associations, we understand that this has been picked up by the ministry of commerce and there should be a resolution in favor of the units coming in.

That may get resolved.  But what happens to those Special Economic Zones that have got in-principle approval and are yet in the process of acquiring land?

Such as the Mahamumbai SEZ that got in-principle approval in 2003. It has yet to finish land acquisition.

In fact of the 531 approved SEZs, 146 - including those of Wipro, TCS, Adani Power & Bajaj are still in the process of acquiring land

If they don't complete that and get notified before April first next year...the benefits to these SEZs could substantially change. That's because the Direct Tax Code offers only investment linked incentives to SEZs

Abhishek Goenka, Partner, BMR Advisors

The manner in which the tax holiday will be computed significantly changes. Earlier it used to be a ten year profit linked incentive and now like all other tax holidays, the incentive is changed to an investment linked incentive. So the extent or quantum of relief for the developer significantly reduces under the new code.

That's bad news for developers. But it's worse for SEZ units that are coming up. While the Code specifically mentions SEZ developers, it makes no mention of whether SEZ units started after April 1st, 2010 will enjoy investment linked exemptions. This will not only impact future SEZs, but also existing ones that are not fully occupied.

Rajeev Chugh, Partner, E&Y

Not all of them I would say are fully operational. If you look at Gurgaon today, you have about 3 or 4 operational SEZs with still half of them in the process of completely occupied. So nothing I would say is fully utilized right now and we need to have more stakeholders coming in and setting up units, I think a amendment to the DTC by way of introducing 10AA as applicable to SEZ units needs to be looked into very closely by the MOF.

And finally-there's the MAT googly

The Code proposes to do away with the Minimum Alternate Tax or MAT exemption that SEZ developers and units currently enjoy . It proposes a MAT  levy of 2% on  gross assets without any carry forward.

V Balakrishnan, CFO, Infosys

On one side, SEZs get the tax benefits based on investments. On the other side there is a minimum alternate tax on assets not profits. So to some extent both are counter productive because on one side you want to give incentives for making investments. On the other side you are taxing that investment 

That's the SEZ saga...When the SEZ act came into force in 2005, the government proudly proclaimed that the three pillars of fiscal incentives, regulatory freedom and a supportive infrastructure would make the new policy a success. Today-the very same government has proposed a tax policy that takes the fiscal incentive pillar away.   Without which, there will be nothing special about Special Economic Zones.