SEZs oppose govt move to phase out corporate tax exemptions

Rising SEZ numbers, falling exports leads to calls for streamlining of the industry

Exporters operating from Special Economic Zones (SEZ) have strongly opposed the recent move by the finance ministry mandating the rollback of most tax benefits as sudden brakes on growth but falling export figures amidst growing SEZ numbers point at deeper issues.

In line with the overall aim of instituting a simpler and predictable tax code announced in the last budget, corporate tax rates would be reduced from the current 30% to 25% over the next four years.

This would be accompanied by a corresponding phase-out of several exemptions and deductions by 2017-18.

PLUMBING THE DEPTHS OF SPECIAL ECONOMIC ZONES

• Of the 327 SEZs that have received all requisite clearance certificates and been notified as of November 2015, only 204 are currently operational
• Exports from SEZs declined to Rs 4.63 lakh crore in 2014-15, from Rs 4.94 lakh crore a year back
• Nearly Rs 3.5 lakh investments in SEZs with Rs 1.5 lakh additional investment proposed

On the eve of commerce secretary Rita Teaotia’s meeting with SEZ developers on December 10, export oriented units (EOU) located in SEZs claim the move will adversely affect them, especially on the back of falling exports.

According to government data, exports fell for the 11th consecutive month in October dropping to $21.35 billion. Exports from SEZs declined to Rs 4.63 lakh crore in 2014-15 from Rs 4.94 lakh crore a year back.

P C Nambiar, Chairman of the Export Promotion Council for EOUs and SEZs (EPCES), termed the move as 'regressive'. The high rate of Minimum Alternate Tax – 20.5% of book profits for SEZs, Nambiar said already combines with indirect taxes to offset any gains made from corporate tax deductions and resulted in ‘severe liquidity issues’.

The government has set March 31,2017 as the date after which sunset clauses with regards to tax exemptions will be renewed. After that, no weighed deduction will be applicable for operation, maintenance and development of export units in SEZ, as is the case now.

Currently, the sunset date for SEZs is 10 years from the date of opening.

The government maintains the current corporate tax effectively measures up to 23%, due to many exemptions and deductions. In 2014-15 the government is estimated to have forgone revenue worth Rs 62,398 crore in corporate taxes on account of various incentives, up from Rs 57,793 crore a year ago.

The corresponding figures for deduction of export profits for export oriented units (EOUs) located in SEZs was more than Rs. 18,000 crore in 2014-15, up by more than a thousand from a year ago.

Official data by the commerce ministry shows that even though 327 SEZs have received all requisite clearance certificates and been notified as of November, 2015, currently only 204 are operational.

The developers of a large number of SEZs face allegations of inactivity even after receiving land at discounted rates which are later sold off at a premium when the entity opts out citing lack of interest among producers to set up units.

SEZ owners maintained justify this saying the currently prevailing weak investment climate along with rollback of benefits meant businesses were not incentivized enough to move operations inside SEZs. The Rs 1,50,000 crore proposed investments are also looking to exit, they allege.  

Arpita Mukherjee, economist at the Indian Council for Research on International Economic Relations said identifying the operational players in the industry was instrumental to reviving interest in SEZs. She added it will be key for such businesses to start operations before then to utilise the tax break.

While macro economic factors have influenced falling international demand, a glut in the immediate regional space has also contributed.

The Asian Economic Integration Report, 2015 by Asian Development Bank points out that in the 1995-2015) period, the number of SEZs exploded from about 500 to over 4,300.

While the report says the existence of SEZs in a country correspond to 82% greater Foreign Direct Investment levels, it cautions  that diversification of production bases away from assembly of imported inputs and increase in sales of own branded merchandise in domestic markets is important for long term success.

According to a senior commerce ministry official, this has not been the case in India where rather than becoming a major part of the national manufacturing growth narrative, SEZs have remained only as ‘special export zones’, appropriating benefits to produce goods which have high profit outlay.

Rahul Gupta, Vice Chairman of EPCES, pointed out that to offset this trend, idle units in SEZs have been proposed to be let out to domestic manufacturers who are in want of facilities.

Sophisticated plant and machinery, conforming to international standards form the bulk of the nearly Rs 3,50,000 crore investment into SEZs, he added.

The draft schedule for phasing out these exemptions was put up in the public domain for comments by the Central Board of Direct Taxes on 20 November and is available till 5 December.·