FinMin rejects provision for tax benefits to SEZs under DESH Bill

Says proposed incentives would "create havoc" for units outside the zones

The Union finance ministry has turned down the commerce ministry’s proposal to provide tax incentives to units set up in special economic zones (SEZs) as part of the Development of Enterprises and Services Hub (DESH) Bill, 2022, holding that it would “create havoc” for units outside such zones.
 

It has been explicitly communicated that they (the commerce department) should do whatever it takes to make the scheme beneficial to encourage these units but tax incentives should be kept out of the scheme. Such concessions under the proposed scheme may help one identified sector, but it will create havoc for the other business units. So it has been suggested that one should not create islands of no taxation within the country,” a senior finance ministry official privy to the development told Business Standard.
 

First proposed by Finance Minister Nirmala Sitharaman in her FY23 Budget speech in February this year, the DESH Bill aims to replace the existing special economic zone (SEZ) law. “This will cover all large existing and new industrial enclaves to optimally utilise the available infrastructure and enhance competitiveness of exports,” Sitharaman said.
 

Key tax proposals under the Bill devised by the commerce ministry include allowing SEZ units to sell in the domestic tariff area (an area within the country that falls outside the zones) on payment of duties foregone on raw materials. It also offers a concessional corporate tax rate of 15 per cent for an extended period to greenfield as well as brownfield units in such development hubs.
 

With the revenue department in the finance ministry objecting to the proposed benefits, the government may have to modify the Bill and that can delay the implementation of the proposal of the Bill. According to sources, the Bill is unlikely to be presented in the upcoming Winter Session as the scheme needs to be reworked.
 

Further explaining the rationale, the official said that if the proposal under the DESH Bill to allow SEZ units to sell within the country is accepted, the country will have one business unit which is in a “DESH area” and is not required to pay taxes, another similar unit in “videsh area” which is required to pay taxes.
 

“This will lead to conflict and disparity which is not the idea,” he added.
 

Experts too feel that tax incentives should be examined carefully. "Providing fiscal incentives to identified sectors or business areas in terms of the DESH scheme should be carefully calibrated as the objective is to make them more competitive in the global arena,” said M S Mani, partner, Deloitte India.

A taxing affair

• The DESH Bill proposes a concessional corporate tax rate of 15 per cent for an extended period to greenfield, as well as brownfield units in development hubs
• It allows SEZ units to sell in domestic tariff areas (parts of the country outside these zones) on payment of duties foregone on inputs, and not on final goods
• The finance ministry's revenue department is of the view that offering incentives to such SEZs could create tax disparity among sectors  
• The Union Cabinet will take a final call in this matter