MAT on SEZ: A Red Flag for Investors

The Minimum Alternate Tax (MAT) was introduced in 1987 to bring companies that paid no corporate taxes or very little tax, after taking advantage of the exemptions provided by the Income-Tax Act, into the tax net.Under the Special Economic Zone (SEZ) Act, more>>


George Korah, Chartered Accountant
Annapoorna J Kamath , Ranjith Haridas - Articled Assistants

The Finance Minister has presented a Budget, which many industry analysts have felt is more “middle of the road” than being one which is a “game changer” for the Indian economy. The highlights of the Direct & Indirect Tax proposals are given below
I. Income Tax proposals:
What it means for the Individual Taxpayer
  • Exemption limit for the general category of individual taxpayers enhanced from Rs.1,60,000 to Rs.1,80,000 and for senior citizens from Rs.2,40,000 to Rs.2,50,000 . Hence for Financial Year 2011-12 the tax rates will be as follows:
  • Tax slab rate
    0 - 1.8 lakh
    1.8 lakh - 5 lakh
    5 lakh - 8 lakh
    more than 8 lakh
    0 - 1.9 lakh
    1.9 lakh - 5 lakh
    5 lakh - 8 lakh
    more than 8 lakh
    Senior Citizen
    0 - 2.5 lakh
    2.5 lakh - 5 lakh
    5 lakh - 8 lakh
    more than 8 lakh

  • Qualifying age reduced for senior citizens from 65 years to 60 years.
  • Higher exemption limit for Very Senior Citizens, who are 80 years or above of Rs.5,00,000.
  • An Additional deduction of Rs.20,000 for investment in long-term infrastructure bonds was introduced last year. This is proposed to be extended for one more year. Hence you can deduct a total of Rs.120,000 (including Section 80C tax saving investments) from your income.
  • II. Indirect Tax Proposals ( Service tax, Excise Duty & Customs):
    What it means for the Consumer:

  • Excise duty of 1% on Branded jewellery to be levied. 2-gram pendants to be costlier by Rs.300.
  • Excise on pastry, cakes & sugar confectionary increased from 1% to 5%.
  • Medical bills including diagnostic tests to shoot up 5%.
  • Branded garments to cost more as 10% excise is leviable.
  • Passengers to pay Rs.50 more on domestic air travel and Rs.250 more on foreign travel.
  • Laundry soaps to become cheaper.

  • What it means for the Service Provider (Service tax proposals):

  • In a notification dated March 1, 2011 the Government has introduced a far reaching change, which will severely impact service providers- especially professionals.

  • Currently the liability to remit Service Tax is when your client pays you your bill. Now service tax will have to be remitted when you raise an invoice/bill. The burden of paying the tax is now on the poor service provider even before he is paid for his services!

  • Rate of Service Tax retained at 10%.

  • In an attempt to make sure that you are punctual in your Service Tax obligations the interest rate for delays has been increased from 13% to 18%.Late filing of Service Tax Returns will be penalized heavily. The penalty has been increased ten-fold from Rs 2000 to Rs 20,000.

  • The Tourism and Hospitality Industry is in for a set back as hotel rooms above Rs.1000 per night is to be taxed at 5% and food served in air conditioned restaurants that have liquor license is to be taxed at 3%.

  • Hospitalisation and medical check-ups to be costlier. Air conditioned Hospitals with more than 25 beds, diagnostic centres and any other health related services provided by doctors now attract 5% tax on their services.

  • With a 2% rise in the service tax, domestic and international air travel becomes costlier by Rs.150 and Rs.750 respectively. Business class travel will attract a 10% tax.
  • The tax net of Services provided by Life Insurance Companies proposed to be made to include all services including management of investments.
  • Business exhibitions held outside the country will now be exempt from the service tax liability.
  • Commercial Training and Coaching services centres who also conduct non-recognised courses will now come under the Service tax net.
  • Services provided by Clubs or Associations even to non-members to be included in the Service tax net.
  • Business Support Service to be expanded to include operational or administrative assistance of any kind.
  • Lawyers who provide services to business entities will now be in the Service Tax net.
  • What it means for Business Taxpayers

  • Surcharge on tax, currently at 7.5% for domestic companies proposed to be reduced to 5%.
  • Rate of Minimum Alternative Tax (MAT) proposed to be increased from 18% to 18.5% of book profits.
  • MAT to become applicable to SEZ Developers & units in the SEZ. This is a proposal which entrepreneurs who have set up units in SEZ will certainly not like.
  • MAT becomes applicable on Limited Liability Partnerships (LLPs).
  • Tax Holiday scheme for Export Oriented Units and Software units not extended.
  • Investment linked deduction to businesses developing affordable housing introduced.
  • Weighted deduction on payments made to National Laboratories, Universities and Institutes of Technology to be enhanced to 200%.Hence if a business gives, say Rs 5 lakhs for research to an IIT, it would be eligible for a tax deduction of Rs 10 lakhs.
  • Dividends received by an Indian company from its foreign subsidiary will be taxed at a lower rate of 15%.
  • Benefit of investment linked deduction extended to businesses engaged in the production of fertilisers.
  • Return filing deadline extended to 30 November in case of businesses having international transactions. Certain other provisions relating to such businesses amended.
  • Liaison Offices of Foreign Companies are now required to file Annual statements.related services provided by doctors now attract 5% tax on their services.
  • What it means for the Business (Excise Duty & Customs Duty):

  • The standard rate of central excise is kept at 10%. However the lower rate has been raised from 4% to 5%.
  • Reduction in number of exemptions in Central Excise rate structure.
  • Nominal Central Excise Duty of 1% imposed on 130 items entering in the tax net.
  • System of collection of information from foreign tax jurisdictions to be strengthened.