Mumbai: Extension of the minimum alternate tax, or MAT, paid by firms on their book profit, to developers and tenants of special economic zones (SEZ) in the budget presented on Monday has surprised many.

Contrary to wishes of seeing the MAT rate come down, it was hiked by half a percentage point to 18.5%. Finance minister Pranab Mukherjee has also extended the tax to developers of SEZs and units operating within them “as a measure to ensure equal sharing of the corporate tax liability".

The hike in MAT rate was to keep its effective rate at the same level after reducing the surcharge on corporate taxes to 5% from 7.5% earlier, according to Mukherjee.

“The government should not deflect from the declared policy of tax exemptions as this gives the wrong signal to investors in such projects," said Lalitkumar Jain, chairman and managing director of Kumar Urban Development Ltd and vice-president of Confederation of Real Estate Developers’ Associations of India, (Credai), an industry lobby said.

Dinesh Kanabar, deputy chief executive and chairman, tax, at consulting firm KPMG, said 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.

Mukherjee’s colleagues in the government appeared unprepared for such a move. In an interview to CNBC-TV18, commerce minister Anand Sharma acknowledged that MAT on SEZs came as a surprise to him and that his ministry would urge the finance minister to review the decision.

“A marginal increase on minimum alternative tax...for corporates and inclusion of SEZ developers under the MAT purview is not in the interest of India Inc, as SEZs were set up to sharpen the competitive edge at the time of formulating the SEZ Act," said Gautam Adani, chairman of the Adani Group, which owns Mundra Port and Special Economic Zone Ltd. “This was discussed in detail and it was decided not to levy MAT from SEZ developers and units in SEZ. This midway change has surprised many investors," Adani said.

Mundra’s share price on the Bombay Stock Exchange fell 6.36% on Monday to close at 138.4 a share. The bourse’s benchmark index Sensex gained 0.69% to close at 17,823.4 points.

Kaustuv Roy, executive director of Cushman and Wakefield, a property consultant, said the impact of MAT on SEZ developers could be an increase in cost of space charged to tenants, with developers passing on at least a fraction of the incremental cost.

Rahul Bajaj, chairman of Bajaj Auto Ltd, however, supported the finance minister’s move to bring SEZs under the purview of MAT. “I support the move to tax SEZs under MAT. From the point of equality, there is no need for such undue benefits (to SEZs)," Bajaj said.

Bajaj would have liked to see the surcharge on corporate tax to be done away with completely as it “may not have been a major revenue loss for the government".

Apart from SEZ tenants and developers, the hike in MAT rates would hurt all firms that enjoy some form of tax holidays, like in information technology, infrastructure, and those operating in backward areas, said Sunil Shah, partner at tax advisory firm, Deloitte Haskins and Sells.

“The increase in MAT rate, when it is felt that it is already high, would not have a beneficial effect on the industry, although this would be marginally offset by the reduction in surcharge. The imposition of MAT on SEZ developers will have an adverse effect on SEZs," said H.M. Nerurkar, managing director of Tata Steel Ltd.

Shah said changes in MAT and surcharge rates were “fractional", and stated that the effective MAT rate that companies would have to pay would go up by around 80 basis points to 20.01%, while the effective rate of corporate tax for domestic companies would come down by 77 basis points to 32.45%, after adjusting for surcharge and cess. One basis point is one-hundredth of a percentage point.

Akhil Sambhar, associate director, oil and gas practice, Ernst and Young, said the increase in MAT rates would negatively impact upstream and refining companies during their tax holiday term.