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MAT On SEZs Unconstitutional?

Published on Sat, May 28,2011 | 12:08, Updated at Mon, Jun 06 at 20:34Source : Moneycontrol.com |   Watch Video :

SEZs versus Finance Ministry over MAT. Payaswini Upadhyay gets you the unabbreviated version!

Pranab Mukherjee
Finance Minister
“As a measure to ensure equal sharing of the corporate tax liability, I propose to levy MAT on developers of the SEZ as well as units operating in sales.”

That announcement, in February this year, ran cold water on the ambitions of India’s 584 SEZ developers. Last week, one of them decided to take the matter to court. Mundra Port and Special Economic Zones and co-developer Adani Power-both Adani group ventures- challenged the Constitutional validity of 3 Sections of the Finance Act 2011 saying they are ‘arbitrary, unreasonable and violative of Article 14 of the Constitution of India’ – an article that promises equality before law.

Abhishek Goenka
Partner, BMR Advisors
I definitely would think that these two companies are justified- somebody had to bell the cat and I am glad that these companies have gone and filed a petition.

DP Sengupta
Former Joint Secretary, CBDT
Former Chief Commissioner, Income Tax
By the SEZ Act, 2005, an exception was made to the SEZ developers and others. What this Finance Act has done is that it has removed those exceptions. In the process, the inequality that was there was removed. So I don’t know how these provisions can be challenged on the basis of Article 14 which guarantees equality before the law. Similarly, there is no right to do business without paying any taxes.

HP Ranina
Senior Counsel, Supreme Court
Possible view of the government will be that what we have done is to introduce the Minimum Alternate Tax at 18.5%. We have not taken away the tax holiday under Section 80IAB. All that we have done is to make the party pay tax- if they have a book profit, if they don’t have a book profit, the question will not arise- but if they have a book profit, then they will pay the tax but they will get credit for the tax which they have paid so that as and when, they are liable to pay income tax in the course- once the tax holiday period is over- then they would get credit for the tax they have paid today. So we are only collecting the tax in advance- that will be one of the major arguments of government of India.

The Finance Act 2011 imposes an 18.5% Minimum Alternate Tax on SEZ developers and units and makes them liable to pay dividend distribution tax - starting this fiscal. All this by amending the 2nd Schedule of Section 27 of the SEZ Act 2005 – the Schedule that grants SEZ developers and units a 100% tax exemption. The Adani petition argues that the Finance Act cannot amend the SEZ Act and that any imposition of tax would have to be done by amending Section 27 of the SEZ Act itself.

PV Srinivasan
Senior Vice President- Taxation, Wipro
This is a unique case we are visiting. There has not been a precedent to the best of my knowledge where one Act tries to amend another Act not associated with it. Traditionally, we know, the Finance Act would amend the Income Tax Act but here the Finance Act is trying to amend the SEZ Act.

HP Ranina
Senior Counsel, Supreme Court
There is reasonably good argument that unless Section 27 of the SEZ Act is amended- that Section will prevail over the other provisions of any other law. And therefore, in the absence of the amendment to the SEZ Act, the developer would continue to get the benefit of the exemption or the tax holiday.

DP Sengupta
Former Joint Secretary, CBDT
Former Chief Commissioner, Income Tax
Section 27 is very clear. It says that the provisions of the Income Tax Act will apply except to the extent that it is modified by Schedule 2 to the SEZ Act. And now that the Schedule 2- the relevant portion- has been amended by the Finance Act, I do not see how this argument holds good.

The Adani petition also makes the argument that Section 51 of the SEZ Act gives it overriding effect over other laws which are inconsistent with the 2005 legislation.

HP Ranina
Senior Counsel, Supreme Court
Here, the SEZ Act itself says that even assuming there is a law which is contrary to the SEZ Act, it is the provision of the SEZ Act which will prevail over the other provision which is contrary to the SEZ Act.

D P Sengupta
Former Joint Secretary, CBDT
Former Chief Commissioner, Income Tax
It gives overriding powers to the SEZ Act but as we have seen, the Schedule to the Act has already been amended by the Finance Act. So that’s part of the SEZ Act now.

The Adanis also argue that as per the Transaction of Business Rules, the Manual of Parliamentary Procedure and Section 49 of the SEZ Act - only the Commerce Ministry can initiate changes to the SEZ policy. “It, therefore, follows that Ministry of Finance is not competent to initiate the proposal for amendment of the SEZ Act”, says the Adani Petition.

PV Srinivasan
Senior Vice President- Taxation, Wipro
The legislation of the SEZ Act was proposed by the Ministry of Commerce and all changes which have been brought up in that have also been proposed by the Ministry of Commerce. So there is an understanding that the SEZ Act is an initiative of Ministry of Commerce. Having said that, the Ministries are all subordinate to the parliament and the Act is for everybody. So I am not sure whether a technicality would survive. 

D P Sengupta
Former Joint Secretary, CBDT
Former Chief Commissioner, Income Tax
In a cabinet form of government, it is a collective decision of all the ministers. Even if a particular Ministry has got some reservations, once a decision is taken, it has to be assumed that it is a unanimous decision and will be implemented by the government.

Rs 27000 crores invested, 20 units in operation, 35,000 employees and Rs 4,000 crores of exports- all of which are at risk of ‘Grave and irreparable harm loss and injury’ say the Adanis.

Abhishek Goenka
Partner, BMR Advisors
Clearly the Adani group is relying on, what we think, is the principle of Promissory Estopple which is that once you make a promise on the basis of which investments are made, then those promises in the form of incentives particularly should not be taken away.

PV Srinivasan
Senior Vice President- Taxation, Wipro
Promissory Estopple is a concept of contract and that would perhaps work in a contract situation but here the legislation, the Act of the Parliament – Supreme Court has always held that the parliament is competent to withdraw any incentive if it were to be in a public interest and public interest in a tax situation is always seen as a given. So I am not sure whether Promissory Estopple would be the right base to challenge. The right way to challenge is the procedure.

HP Ranina
Senior Counsel, Supreme Court
There are of course several issues involved in the case. The court may strike this down as unconstitutional or violative of the provisions of the Constitution. Another way and which is normally adopted by the courts is to read down the provision by saying that even if the government wants to make this amendment, it will only apply to developers who are notified by the Ministry of Commerce on or after 1st April, 2011

379 notified SEZs, 110 operational with exports of over Rs 2 lakh crore - developers across the country are closely watching the outcome of the Adani petition.

But some say considering that the Finance Act is already in force, negotiation and not litigation might prove more successful – a lower MAT rate, applicable prospectively is one of the more acceptable compromises. But will revenue agree – in a year of slow collections and at a time when they want to hold back legally due refunds! The Gujarat HC’s next hearing is on July 7th. In Mumbai Payaswini Upadhyay.

 
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