Karnataka HC upholds withdrawing of tax exemptions for SEZs

June 15, 2013

The Karnataka High Court has upheld the amendments made to the Income Tax Act in 2011 withdrawing exemptions given to the business and service units as well as developers of Special Economic Zones (SEZs) from payment of certain income taxes.
What is the case?
A petition was filed by companies including Biocon Ltd., Mindtree Ltd., OPTO Infrastructure Ltd., and others operating in SEZs against the Union government’s move which amended Sections 115JB(6) and 115-0(6) of the Income Tax Act in 2011. Initially, in order to attract investments the companies operating in the SEZs were granted tax exemption but there was no clarity on the lifespan of the exemptions. The government realized it later and rectified it by amending the Sections 115JB(6) and 115-0(6) of the Act, limiting the exemption, granted from 2005, to a five-year period from April 1, 2005. Withdrawal of exemption resulted in imposition of 18.5 % minimum alternate tax (MAT) on the book profits of SEZ units from April 1, 2011 besides imposing dividend distribution tax from June 1, 2011. The companies had questioned the legality of withdrawal of exemptions while contending that all of them had invested on SEZs through borrowings as the exemptions appeared to be continuing in nature since the government had not specified the period of exemption. However, the Income Tax Department had pointed out that the exemption had resulted in loss of revenue to the government.
The HC ruling: The Karnataka HC pointed that all decisions in economic and social sphere are ad hoc and experimental and every tax exemption and incentive shall have a sunset clause, and fiscal legislation providing tax exemption must have a lifespan fixed in the enactment. It also observed that the exemptions without a sunset clause had resulted in discrimination since other industries had no such exemption.
What is “Sunset Clause”?
In public policy, a Sunset Provision or Clause is a measure within a statute, regulation or other law that provides that the law shall cease to have effect after a specific date, unless further legislative action is taken to extend the law.