Are vested rights available in SEZ-tax holiday?
SEZ-policy, considered as a key tool to revive investments, has received a set-back due to the tax-policy flip-flop. Government while introducing the policy in 2006 committed a 15 year tax holiday & later went back on its word. The Government amended the law to introduce Minimum Alternate Tax (MAT) and also removed the DDT exemption.
This action of the Government was also subject to judicial scrutiny. Karnataka HC held that withdrawal of exemption to SEZ units, developers, etc. was valid in law. HC had held that the "Doctrine of Promissory Estoppel" could not be made applicable in the present case to nullify the amendments. HC had also held that the amendment removed a flaw in the law [no sunset clause for the exemption], removed the inequality between SEZ companies and other companies with regard to taxation, and restored the tax base of the country which was being eroded by the exemptions.
The two recent court decisions got me thinking on whether taxpayers can agitate against the levy of tax on SEZ.
The Supreme Court's recent decision in favour of taxpayers on Sec 80IB deduction holds that the 2005 amendment introducing commercial area restriction in housing project would apply prospectively. Further, projects that are already approved by 31 March 2005 (before the amendment is effective) would not be affected and tax-deduction cannot be denied to such projects even if completed later (within the stipulated time). Supreme Court in its order stated that -
a) As per the prevailing law (before 2005), builders got approval for projects including commercial area.
b) Taxpayers planned their business on the basis of law and the completion date of projects.
c) The assessee acted on the basis of law and acquired a vested right which could not be taken away.
Recently, in another judgment involving tax holiday to oil & gas-exploration businesses, Gujarat HC struck down the explanation added to Section 80 IB(9) by the Finance Act (No.2) of 2009. HC had held that the right given to oil & gas exploration companies for enjoying 7 years tax holiday on each well/cluster of wells or on each undertaking in the block under NELP, was an accrued and vested right which could not be taken away expressly or by necessary implication.
An interesting trend in both the rulings on the vested right available to the taxpayers based on the provision of the law and which has been later taken away by amendment in the law.
Investments in SEZs were committed on the basis of the tax concessions offered by the Government and the levy of MAT, which certainly affects the project cash flows and IRR. Now applying the ratio of the above rulings, can it be said that SEZ law (introduced in 2005-06) created a vested right? And should SEZ investments made prior to amendment in the law be excluded from levy of tax ?
It will be interesting to see how these SEZ challenges due before other High Courts shape up in the light of these judicial developments.