FinMin view on direct exemptions for SEZs rejected

The commerce ministry has rejected the finance ministry's view that direct tax exemptions to special economic zones (SEZs) should be done away with to make exports from these zones compliant with international norms.

The finance ministry has proposed doing away with direct tax exemptions to exporters based in special economic zones .

In one of its many arguments, North Block has maintained that direct tax exemptions may be viewed as a subsidy by importer countries, which may then impose countervailing duties on exports from Indian special economic zones .

The issue is pending with the Empowered Group of Ministers on special economic zones headed by External Affairs Minister Pranab Mukherjee.

"There are special economic zones in more than 100 countries which provide direct tax exemption to exporters. Tax exemptions in these zones vary from a period of two years to 50 years. No importer country has so far imposed countervailing duty on exports from SEZs from any other country," said a commerce ministry official.

The commerce ministry maintains that exports from Indian SEZs have never been subjected to countervailing duties. "Export processing zones, predecessors to SEZs, have been in existence since 1965. SEZs became operational in 2000. The SEZ Act of 2005 came into place official.

"There is an unwritten rule in the international community on not imposing countervailing duties on exports from SEZs. Because if one country imposes it, the other country will follow," he said.

The finance ministry is keen to impose a direct tax on SEZs as it feels the slew of tax exemptions are leading to a large revenue loss of around Rs 1,02,621 crore per year.

Officials say the tax exemptions to SEZs can be rolled back only if the commerce ministry agrees. "Even if the issue is bought up in the Budget proposals, it will require Cabinet approval and Commerce Minister Kamal Nath will not agree to it. Moreover, matters related tospecial economic zones are under the terms of business of the commerce ministry and not the finance ministry," he said.

Exports from special economic zones are likely to cross Rs 67,088 in 2007-08, a 200 per cent increase since 2005-06, when the special economic zones Act was operationalised. The commerce ministry expects exports from the zones to cross Rs 1,00,000 crore by 2008-09.