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SEZ businesses lose battle against exemptions

26 Jun 2013

The Karnataka High Court has confirmed in a recent ruling the validity of the legislative amendments made to withdraw tax exemptions - which was pronounced in respect of a writ petition filed by various stakeholders of Special Economic Zones (SEZ) against the abrupt withdrawal of exemption from Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on their profits. Taxand India explores the background to the case which led to this ruling.

Upon enactment of the SEZ Act 2005 corresponding provisions were introduced in the Income Tax Act to provide complete tax exemption on the profits earned by units located in SEZs and developers of SEZs, by way of newly introduced tax holiday sections. This specifically excluded SEZ units and developers of SEZ from the purview of MAT. Profit distributions by SEZ developers were also specially exempted from the purview of DDT.

However by insertion of proviso to section 115JB(6) and 115-O(6) via Finance Act 2011, the exemptions from MAT and DDT were withdrawn respectively. Stakeholders of SEZ comprising of units, developers and co-developers had committed huge capital outlays for setting up SEZ infrastructure with the belief that there would be no tax costs, at least in the near term. Aggrieved by the abrupt withdrawal of the exemptions, they filed a writ petition to challenge the constitutional validity of such amendment by relying on the Doctrine of Promissory Estoppel and Doctrine of Legitimate Expectation.

The High Court dealt with the matter in question by first examining the scope of judicial review entrusted with the courts by virtue of Article 226 of the Constitution of India. The High Court stated that such power is to be exercised very rarely and in exceptional circumstances only. Further the High Court deliberated upon the validity of the amendments in light of Article 14 of the Constitution and upheld the validity of the amendments.  

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Mukesh Butani
T. +91 124 339 5010

Taxand's Take

This judgment, which is the first of the pronounced rulings on this matter on merits, is a definite dampener to the SEZ stakeholders’ expectations of a relief from the judicial process on the MAT and DDT exemptions.

In this judgment the High Court has ruled against a judicial intervention in respect of the amendments withdrawing the tax incentives to SEZ stakeholders and has concluded that there is no violation of Article 14 of the Constitution and that application of Doctrine of Promissory Estoppel is not warranted by articulating that the amendments made by the Finance Minister actually support the principle of equity.  

It will be interesting to watch out for the influence of this ruling on the writ petitions pending before the various courts of the other states and on how the Supreme Court would deal with this issue. 

Taxand's Take Author

Mukesh Butani
Taxand Board member