Units in Karnataka’s special economic zones (SEZs) are worried that they would require more cash in their kitties after the state announced a new policy for the economic enclaves that enjoy tax holidays and other financial benefits.

The new policy has revised the service tax structure, withdrawing the earlier blanket exemption. SEZ units will now have to pay service tax and claim refunds later.

These refunds could take no less than 8-12 months, an expert said. “This process will be time-consuming and results in working capital costs,” said Mahesh Jaising, a partner at consultancy firm BMR Advisors. “There is past experience by IT (information technology) and ITeS (IT-enabled services) exporters who’ve got notifications in place, but haven’t got refunds even in over three years.”

Additionally, a notification for changes pertaining to the 10AA clause announced by the finance ministry after it presented an interim budget in February is also not out yet. Earlier, under the 10AA clause, income tax exemption was limited to the income of an SEZ unit against the total revenue of the company. This was changed to providing an exemption to the income of the SEZ unit against the total revenue of that unit.

Jaising said there was a need for clarity on this. “This ambiguity puts investors, who want to invest in SEZs, in a shaky position because it’s not clear whether they’ll get the exemptions that are actually due to them,” he said.

To be sure, there’s some good news in the state’s new policy. It now says that SEZ units will be exempt from paying stamp duty to the extent of 8%, and will be fully exempt from paying value-added tax, which was earlier to be refunded.

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