In a major set back to the business and service units operating in Special Economic Zones (SEZs), including Biocon SEZ, the Karnataka High Court on Wednesday upheld the amendments made to the Income Tax Act in 2011, withdrawing exemptions from payment of certain income taxes given to the these units and the developers of SEZs.

Justice H. N. Nagamohan Das delivered the verdict while dismissing the petitions filed by companies such as Biocon Ltd, Mindtree Ltd, OPTO Infrastructure Ltd, Mangalore SEZ Ltd, Primal Projects Ltd, Subex Ltd, RGA Software System Ltd, and others.

Pointing out that “all decisions in economical and social sphere are ad-hoc and experimental,” the court said every tax exemption and incentive shall have a sunset clause, and fiscal legislations providing tax exemption must have a life span fixed in the enactment.

The court also said the Government limited the period of exemption by amending the I-T Act in 2011 as it had noticed the flaw that the exemptions, granted in 2005 through Sections 115JB(6) and 115-0(6) of the I-T Act, were in the nature of a permanent incentive.

The Union Government had amended Sections 115JB (6) and 115-O (6) limiting the exemption, granted from 2005, to a five-year period from April 1, 2005. Withdrawal of exemption resulted in imposition of 18.5 per cent minimum alternate tax (MAT) on the book profits of SEZ units with effect from April 1, 2011, besides imposing dividend distribution tax with effect from June 1, 2011.

Observing that the exemptions without sunset clause had resulted in discrimination as other industries had no such exemption, Justice Das also noted that SEZ Act, an outcome of globalisation, had lead to some development through investments and contributions made through the SEZs.

The court, however, said the question is that development is for whose benefit and at what cost, and the Government in assessing this aspect in its wisdom, felt necessary to withdraw tax exemptions well within its legislative competency.

The companies have had questioned legality of withdrawal of exemptions while contending that all of them had invested huge sum on SEZ through borrowings, as the exemptions appeared to be continuing in nature as the Government had not specified the period for exemption. It was also their contention abrupt withdrawal had detrimental impact on them and it was opposed to principles of legitimate expectation.

Loss

However, the Income Tax Department had pointed out that the exemption had resulted in huge loss of revenue to the Government. It was informed to the Court that the Government lost Rs 12,491 crore revenue from the SEZs during 2006-2010. The Government claimed that Rs 692 crore revenue was lost from SEZs in 2006-07; Rs 2,710 crore in 07-08; Rs 4,099 crore in 08-09 and Rs 4,990 crore in 2009-10.

Meanwhile, the court has also declined to accept the contention of the companies that the Ministry of Finance had no legislative competency to withdraw tax exemption, as SEZ is the subject pertaining to the Ministry of Commerce and Industries.

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