More SEZs mean less revenue, says FM

Increasing sops will affect state finances, up fiscal deficit, warns Chidambaram.

It was not just revenue slippages and the clever relocation of industries to benefit from fiscal incentives available to special economic zones that had the finance ministry worried.

Finance Minister P Chidambaram has put it on record that the original intention of the government was to have only a "few SEZs with world-class infrastructure".

He has also warned that the revenue losses, unless offset by increased direct taxes, will result in the government missing the FRBM (Fiscal Responsibility and Budget Management Act, 2003) targets. In turn, this will also affect state finances and eventually increase the fiscal deficit.

Having highlighted fears that SEZs would distort and alter land, capital and labour costs which would encourage relocation of industries, Chidambaram linked the issue of economic inefficiency in the manufacturing sector with the distortions caused by the present indirect tax regime.

Given that any reform of the indirect tax structure entails significant revenue loss in the medium term, the FM had told Commerce Minister Kamal Nath that this must necessarily be compensated by direct taxes through removal of exemptions and tax incentives, failing which the government would miss the FRBM target.

"The slippage in the FRBM targets by the Centre will have an adverse demonstration effect on the fiscal management at the state level. The overall impact will be a sharp increase in the fiscal deficit of the combined government which in turn will seriously undermine the confidence of foreign investors," he said.

Although the Empowered Group of Ministers (EGoM), that met here on June 6, is reported to have decided to restrict the number of zones to 150 pending a review, Chidambaram had made a case for restricting the number of zones to "not more than 100 in the first instance".

He also pointed out the "heavy concentration" of zones in some states. Accordingly, he had proposed that in addition to the 100 zones, another 25 could be sanctioned in states that did not have any zone so far.

However, Chidambaram wanted that exclusive SEZs for research and development activities, non-conventional energy and bio-technology should continue to be sanctioned.

He had also highlighted the need for specifying the qualifying criteria for selection and approval of new zones. (A checklist of 17 parameters has been drawn up since.) He suggested a review of the situation a year later.