The government on Monday proposed to levy Minimum Alternate Tax (MAT) of 18.5 per cent on the book profits of Special Economic Zone developers and units, which was termed as a 'setback' by the players.

Both the developers as well as units in the tax free enclaves were earlier exempted from MAT under Section 115 JB of the Income Tax Act.

"As a measure to ensure equal sharing of the corporate tax liability, I propose to levy MAT on developers of Special Economic Zones (SEZs) as well as units operating in SEZs," Mukherjee said.

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Changes in the tax rate would be effective April, 2012. MAT was introduced in 1987 to bring under the tax net companies that paid no or very little tax after taking advantage of the exemptions provided by the Income Tax Act.

The government has also proposed to impose dividend distribution tax on SEZ developers, which would take effect from June this year.

Experts termed the step as "retrograde" and said that it would discourage investments in SEZs. "It is a major setback for both developers and units in the SEZ," Raheja Developers Vice President Manoj Goyal said.

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Raheja Developers operates an IT/ITeS SEZ in Gurgaon. "The imposition of MAT on SEZ developers and units is retrograde as it seeks to impose tax on income received from investments made with a commitment of tax exemption," KPMG Deputy CEO and Chairman Tax Dinesh Kanabar said.

Kanabar said that the move is advancing the negative impact of the Direct Taxes Code (DTC).

Jones Lang LaSalle India Chairman and Country Head Anuj Puri: "SEZs have been brought under the purview of MAT, which basically diminishes the benefits that SEZs offer for developers over other commercial real estate asset classes."

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However, as a relief to the zones, a new scheme is also being introduced by which units in SEZs will be able to obtain tax-free receipt of services wholly consumed within the zone and get their refunds in a much easier manner.

Exports from SEZs contribute about one-third of the country's total exports. Shipments from these zones during April-December 2011 grew by 47 per cent to Rs 2,23,132 crore (Rs 2,231.32 billion) over the same period last year.

Finance Minister Pranab Mukherrje in his Budget has marginally raised the MAT from 18 per cent to 18.5 per cent on companies' book profits.