By Sudipta Bhowmick, KIIT School Of Law, Bhubaneswar.

Introduction: How MAT was stretched out?

The Concept of Minimum Alternate Tax (MAT) was introduced for the first time in the annual year 1988-89 under Section 115J of Income Tax Act,1961 to tax big corporate groups which had become Zero Tax companies. This section provided for levy of MAT on 30% on books profit of companies. The intent of inserting the sections of MAT was to ensure that no taxpayer with substantial income can avoid tax liability by using exclusions, deductions and incentives[1] as big companies have no significant taxable income because of exemptions, deductions and incentives.[2] But, after lot of criticism this provision was deleted from the A.Y. 1991-92. The Finance (No. 2) Act, 1996, effective from A.Y. 1997-98, gave a rebirth to MAT by introduction of a new S. 115JA. and the Finance Act, 1997, effective from A.Y. 1997-98, inserted a new S. 115JAA providing for tax credit in respect of tax paid under the provisions of S. 115JA if such tax was in excess of the tax payable on the total income computed according to other provisions of the Income-tax Act.[3] But The provisions of S. 115JA and S. 115JAA, though, being equitable in nature, the Finance Act, 2000, provides that S. 115JA and S. 115JAA will stand deleted effective from A.Y. 2001-02. New concept proposed in the Finance Act, 2000 is that “Minimum Alternate Tax will now be levied at the revised rate of 7.5% of the ‘book profits’ as determined under the Companies Act instead of the existing effective rate of 10.5%. However, this will now be uniformly applied”.[4]

SEZ, Too Special to be Taxable:

Special Economic Zone (SEZ) is a specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs.[5] In the year 2005 SEZ Act was enacted to  enhance foreign investment and provide an internationally competitive and hassle free environment for exports[6]. Along with the SEZ Act, 2005 the government incorporated specific provisions[7] in relation to SEZ units under the Income Tax Act, 1961 through the Finance Act, 2005 which was specifically provided that the liability in relation to MAT and Dividend Distribution Tax (DDT) shall not arise on SEZ units.[8] While section 10 AA of Income Tax Act 1961, exempt profits of SEZs to the extent of 100 % in first five years, 50% in next five years and 50% of plough back of export profits for next five years. Not only this , SEZ Act 2005 provides for total exemption of all taxes and levies for SEZ developers and units in SEZ.

Imposition of MAT on SEZ and its Justification:

SEZs were set up and promoted in order to upgrade the industrial infrastructure in the country and to have specialized and Sectoral Zones to sharpen competitive edge of Indian entrepreneurs.[9] As per the budget proposals in 2011 budget, special economic zones is subject to levy of minimum alternate tax (MAT) under section 115JB of Income Tax Act which is now 0.5 percent higher @ 18.5 percent on book profits. Thus, from assessment year 2012-13, units operational in SEZ and developer of SEZ are fixed to shell out a tax called MAT @ 18.5% which is effectively 20.1% including cess.[10] The logic for MAT is to bring SEZs and units at par with other corporate entities in terms of sharing tax liabilities.[11] With applicability of minimum alternate tax and dividend distribution under Section 18 of Finance Act, 2011, there will not be much difference between SEZ units and other units and SEZs will lose their attraction and competitive edge. This will work as a ‘retrograde’ and goes against the spirit of promotion of SEZs in the country.

Mindtree Limited v. Union of India[12]:

In a recent case, Mindtree Ltd. v Union of India[13] constitutional validity of MAT on SEZ was questioned in the High Court of Karnataka. In addition to that, it was challenged that imposition of MAT on SEZ goes against the Doctrine of Promissory Estoppel and the Doctrine of Legitimate Expectation. The Karnataka High Court upheld the constitutional validity of MAT on SEZ by enunciating that it is not against the Doctrine of Promissory Estoppel and the Doctrine of Legitimate Expectation.

The contentions raised by the taxpayers were that the Government, at the time of instituting SEZ Act, promised investors that MAT and DDT would not arise in SEZ units. Hence, deviation from that promise will lead to infringement of promissory estopple. The withdrawal of this exemption would make exports less competitive in the international markets.[14] Therefore, the amendment is against the basic objective of the SEZ Act, 2005. Also, the Finance Minister has no power to make amendments to the SEZ Act, 2005 which comes under the purview of Ministry of Commerce.

Revenue’s contention was that the tax laws providing SEZ units from MAT and DDT did not have a sunset provision and as such that the challenged amendments are in harmony with the Constitution of India. Also, the amendments are made to stabilise the country’s tax base and are issued in public interest.[15]

The Karnataka High Court laid down an important principle that the Doctrine of Promissory Estopple does not apply to the legislature. Depending upon the exigencies of the financial year, the Parliament of India has legislative competence to introduce a new charge of tax even by incorporating it in any other statute[16]. Also, the Finance Minister has complete authority and power to amend the provisions of SEZ Act, 2005. In furtherance to that, The High Court held that the amendment was brought in to isolate the inequality between SEZ units and Non-SEZ units and no fundamental rights of SEZ developers have been infringed due to that. Hence, withdrawal of exemptions related to MAT and DDT is constitutionally valid owing to the fact that social and economic matters require experimental decisions which may be deregulated again in public interest.[17]


Special Economic Zones (SEZs) which contribute over 30 % of country’s exports have been adversely hit by MAT and DDT.[18] Having promised certain incentives, backing out mid way is nothing less than betrayal at its best and governance at its worst.[19] “There should have been stability in the policy.”[20] The SEZ sector has seen a sharp slowdown due to a number of reasons including withdrawal of exemption from MAT and Dividend Distribution Tax (DDT) provisions and similarly, the number of new SEZs set up in 2010-11, 2011-12 and 2012-13 (as on 23.11.2012) has been 16, 9 and 3 respectively.[21] But a silver lining among this situation is that Government is set to MAT on SEZ from 18.5% to 7.5%. This move is expected to be announce in the Budget in the Next Financial Year.[22]


[2] Id.


[4] Id.


[6] Id.

[7] Under the exiting provisions of section 115JB (6), an exemption is allowed from payment of minimum alternate tax (MAT) on book profit in respect of the income accrued or arising on or after 1st April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone (SEZ), as the case may be.

Under the existing provisions of section 115-O(6), an exemption is allowed from payment of tax on distributed profits [Dividend Distribution Tax (DDT)] in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (Whether interior, or otherwise) on or after 1st April, 2005 out of its current income. Such distributed income is also exempt from tax under section 10(34) of the Act.

See this in



[10] Id.

[11] Id.

[12] 2013 260 CTR 146(Karnataka), [TS-261-HC-2013(KAR)], 2013 34 250 (Karnataka), W.P.No. 16896/2012 C/W (Karnataka High Court)

[13] Id.

[14] Supra Note. 8

[15] Supra Note. 8

[16] Madurai District Central Cooperative Bank Ltd. v. ITO, 1975 101 ITR 24 (SC)

[17] Supra Note 8.


[19] Id.