10-yr tax holiday for SEZ likely

RUN-UP TO THE BUDGET 2005

Finmin wants to drop 'duty forgone' for export units.

The finance ministry is in favour of granting income tax exemption to units in special economic zones for 10 years, instead of 20 years as proposed by the commerce and industry ministry.

North Block is also keen on doing away with the concept of 'duty forgone' on sales by SEZ units to those in the domestic tariff area (DTA). The commerce ministry has accordingly suggested that SEZ units be asked to pay only a part of the 'duty forgone'.

At present, a SEZ unit buying inputs from the DTA does not have to pay any excise duty. Therefore, the unpaid amount on purchase from the DTA is termed duty forgone.

The finance ministry has suggested that duty forgone should be paid as countervailing duty along with Customs duty at the time of a sale from an SEZ unit to a DTA unit.

The commerce ministry has suggested that SEZ units be asked to pay 50 per cent of the total Customs and duty forgone on all its sales to DTA.

These changes, a part of the minutes of the Group of Ministers on SEZs, will be considered by the Cabinet at its next meeting on February 24. The Cabinet was expected to do it today but did not take up the matter due to paucity of time.

The revised draft SEZ Bill, circulated by the commerce and industry ministry, had proposed a 100 per cent income tax exemption for SEZ units for the first five years of operation, 50 per cent exemption for the next five years and another 50 per cent exemption on profits reinvested for the next 10 years.

The finance ministry, however, wants to exempt SEZ units from paying income tax for 10 years. The original draft had proposed 100 per cent exemption for five years, 50 per cent for the next two and 50 per cent exemption on profits reinvested for the last three years

Officials told Business Standard that Finance Minister P Chidambaram had also proposed that members of the Board of Approvals be given veto power. Officials, however, pointed out that the veto issue might not garner support as it was not possible to have unanimity on all issues.

Another suggestion by North Block is to have an empowered Group of Ministers to consider all issues that cannot be resolved by the Board of Approvals.

The previous National Democratic Alliance (NDA) had formulated the draft of an SEZ Bill which was modified by the present regime after consultation with stakeholders. The modified Bill increased income tax benefits to SEZ units for 20 years instead of 10 years.

There have been differences between the finance and commerce ministries on several issues pertaining to SEZs.

While the finance ministry wanted to retain control over policy matters governing SEZs, the commerce ministry was keen on keeping this under its purview to ensure continuity or stability of the policy regime.

North Block proposals

SEZ units be asked to pay 50 per cent of the total Customs and duty forgone on all its sales to DTA

Members of the Board of Approvals be given veto power

An empowered Group of Ministers to consider all issues that cannot be resolved by the Board of Approvals

Exempt SEZ units from paying income tax for 10 years and not 20 years as the commerce ministry had proposed