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Sops for SEZs

THE DIFFERENCES BETWEEN the Ministries of Commerce and Finance over the tax sops for Special Economic Zones may once again lead to undesirable delays and uncertainties in the development of such zones. It is rather surprising that within a week of the an nouncement by the Commerce Minister, Mr Murasoli Maran, about the Government's plan to offer a package of tax benefits for the SEZs, the Finance Ministry has expressed its reservations against open-ended tax sops.

The Commerce Ministry has made a case for according not only the income-tax exemptions to SEZ developers but also excise and Customs duty waiver on all types of materials which go into the construction of a self-sufficient zone, including residential col onies, hospitals and schools. However, the Finance Ministry is worried about the possible revenue losses. It has projected the revenue loss at Rs 1,000 crore in a single zone based on the assumption that the level of investment for developing infrastruct ure in one SEZ would top Rs 5,000 crore in the first phase itself. The Revenue Department has contended that a slew of concessions are, in fact, already available for units being set up in SEZs, including graded IT holidays under Sections 10 A and 10 B o f the IT Act, 1961 up to 2010. The Department does not think it feasible to extend further concessions at a time when the Government is exploring all avenues to shore up revenues both from indirect and direct taxes. The Department has also drawn attentio n to the rampant misuse of the exemption schemes already available to exporters.

Unless these inter-ministerial differences are resolved soon, there is a danger that the work on the already delayed SEZs may suffer further. It may be recalled that the earlier scheme of converting all existing export processing zones into Free Trade Zo nes, proposed by the then Commerce Minister, Mr Ramakrishna Hegde, in his Exim Policy announcement of March 31, 1999, never took off because of serious difference between the Commerce and Finance Ministries. However, this time around, there was evidence of much better co-ordination between these two crucial economic ministries thanks to prior consultations. In fact, within two months of the announcement of the Exim Policy 2000, the Finance Ministry had given clearance to treat the area under SEZs as `fo reign territory' for the purpose of duties and taxes. But the latest controversy shows that a lot more preparatory work remains to be done.

What is important is not the short-term revenue consideration alone but to ensure that the incentive package for the SEZs provides them a truly level playing field vis-a-vis such zones in China and elsewhere. Apparently, even after one year of mooting th e idea, the Government is yet to make a comparative study of tax and other incentives available for such zones in other countries. In fact, the Revenue Department sources have stated that: ``We will have to look at some of the international experiences t o ascertain whether there is a case at all for tax sops to promoters.'' Since the proposed SEZs are modelled on the highly successful Chinese experiment, the Government would do well to first make a quick study of the tax and other incentives offered to these zones, including for the initial infrastructure development, in China before finalising the package. Moreover, it should also be borne in mind that the gestation period in infrastructure development is relatively much longer and the returns are not so attractive.

The country has made a late and slow beginning in developing the SEZs as an important component of export promotion strategy in the emerging world trade environment. The success of these zones would ultimately depend not only on the quality of infrastruc ture that is built up within these zones but also extended to the rest of the country. Hopefully, the coming Budget and the Exim Policy will remove the confusion and uncertainties, and come out with an unambiguous package of incentives for the SEZs.