High Court of Karnataka has upheld withdrawal of tax exemptions

Karnataka-based promoters of Special Economic Zones (SEZ) await the verdict in other High Courts before determining their response to the Karnataka High Court’s order of Wednesday which quelled their challenge to the withdrawal of tax exemptions by the Income Tax Department.

Industry sources told The Hindu that their contention, which mainly centred on the imposition of the Minimum Alternate Tax on SEZs, is a point of contention because the SEZ policy predated the imposition of the MAT on such units.

Similar petitions

The sources said that their response to the defeat in the court would be determined by what happens to similar petitions filed in the High Courts of Madras, Bombay and Delhi.

Understanding

Rostow Ravanan, Chief Financial Officer, Mindtree, which was among the litigants in the High Court here, said that when SEZs started functioning there was “an understanding” that MAT will not apply to their profits. The issue became contentious only in 2011, when MAT became applicable to SEZs, he argued.

“This was fundamentally unfair because the scheme (for SEZs) was started with the objective of providing tax benefits to these units,” he said. A clutch of companies — IT services companies such as Mindtree; and Biocon, a biotechnology company, and SEZ developers went to court challenging the applicability of MAT.

Since tax benefits enjoyed by SEZs were based on the quid pro quo that their investments would result in jobs, changing them midstream was “unfair”, said Mr. Ravanan.

However, Mindtree, which has SEZs in Bangalore and Chennai, would not be affected adversely by the ruling, he said. Entities investing in SEZs enjoy a full tax holiday in the first five years, 50 per cent tax breaks in the subsequent five years, and tax breaks for a third block of five year, which depends on the extent of profits that are reinvested in the project.

Mr. Ravanan said the companies have argued that Indian SEZ promoters did not enjoy a level playing field vis-à-vis “captive” unit established by multinational companies.

“Although we would not be affected adversely, we contested the issue on grounds of principle,” Mr. Ravanan said.

Estoppel

K.R. Shekhar, Chairman, Direct taxes Committee of the Bangalore Chamber of Industry and Commerce (BCIC), said the amendment to the IT Act amounted to a violation of the doctrine of promissory estoppel. “In effect, going back on a promise made (by the government to SEZ promoters) violated this doctrine,” Mr. Shekhar said.

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