Impact of High tax rates on the performance of SEZs in India

The slow implementation and poor performance of Special Economic Zones (SEZs) can be largely attributed to the imposition of high rates of Minimum Alternate Tax(MAT) and Dividend Distribution Tax(DDT)

MAT is the tax imposed on the book profits of a company. Normally a company is liable to pay tax on the income computed in accordance to the provisions of the Income Tax Act. But profit and Loss Account of a company is prepared as per the provision of the Companies Act.

The Indian Income Tax Act provides a large number of exemptions and deductions from the Total Income. As a result, companies who otherwise show book profits in their P&L account and distribute huge dividends to their shareholders, are able to make use of such exemptions, deduction and other incentives under the I-T Act to reduce their taxable income to negligible levels.

To bring such companies under the purview to Income Tax, MAT was introducted in 1997-98, according to which all companies having book profits under the Companies Act will have to pay a MAT at 18.5%.

Dividend distribution Tax is the tax levied by the Indian Government on companies according to the dividend paid to a company's investors. This tax is paid out of the profits/reserves of the company declaring the dividend. At present the dividend distribution tax is 15% according to the Union Budget 2007, India.

DDT was imposed to make companies pay taxes that though making huge profits showed no taxable incomes as these incomes went away in dividend distribution to shareholders.

Though these taxes have enabled the government to reduce their forgone revenue, the high tax rates have proven to be major bottlenecks towards the development of SEZs in India. It has led to low participation from developers and investing companies in these tax-free enclaves. This sustained decline since the imposition of MAT on SEZs has resulted in exports from SEZs declining in 2013-14 for the first time since inception - by 6.61% to $82.35 billion from $88.18 billion the previous year.

Investing companies demand removal of both the taxes and say it affects their internal functioning. But it is immoral to work in a country and evade taxes by using deception. Taxes should be paid. This justifies the sustenance of both the taxes.

However, reduction in these taxes can provide a major boost to SEZs by renewing the interest of developers and investing companies towards these enclaves. Considering that India needs the investments badly to ramp up manufacturing, revive the SEZs and kindle up NIMZs as a part of 'MAKE IN INDIA' campaign, these taxes should be reduced to such levels that strike a healthy balance between company's needs and government’s claims.