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Criticism Over The Effect Of Tax On Indian Business Zones

by Mary Swire,, Hong Kong

02 May 2011

The effects of the announcement in the Indian budget earlier in the year that a minimum alternative tax (MAT) would be imposed on special economic zones (SEZs) are now showing. New investors are staying away, and, as predicted from the beginning, SEZ developers are starting to take their grievances to the courts.

SEZs were set up six years ago with the idea that manufacturers were given tax holidays to encourage them from moving to other Asian countries, and they in return would provide jobs and exports. The Indian government had hoped to attract substantial new investment and create millions of new jobs.

Imposing the levy of 18.5% MAT on the income of businesses working within the SEZs came as a huge surprise to most people, including even the Indian Commerce Secretary, who said at the time that the tax could damage India’s image as a safe place to invest. He also warned that there was the possibility that firms could take the government to court over breach of contract.

The Madras High Court has agreed to issue notices to the finance ministry and the revenue department on a petition by a group of SEZ developers. The Tamil Nadu Association of SEZ Infrastructure Developers says that it and the units in the SEZs should be exempt from the MAT because they had been promised financial incentives in the SEZ Act 2005. Developers from Andhra Pradesh have applied on the same grounds to the Andhra Pradesh High Court.

There had been plenty of detractors of the Special Economic Zones, not only over their economic performance but also on the social costs of purchasing land in a country where many don’t have a roof over their heads. The Finance Ministry’s reason for withdrawing the tax breaks was that they had drained revenue, and that the new MAT would make the corporate tax burden fairer.

TAGS: court | tax | business | India | budget | tax breaks

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