Cost the benefits

Given his remarkable success in getting through the policy for special economic zones (SEZ) despite the finance ministry's strenuous objections, it is likely that Commerce Minister Kamal Nath will be able to get his way in increasing the current cap on SEZs from the present 150 to 300 at the Group of Ministers' meeting to be held later this week. Though Mr Nath has argued this will increase the potential investments in SEZs by another $5 billion, compared with the current $6 billion in the 150 cleared proposals, it is important to put this proposed investment in context. Since the major attraction of this investment will be the huge tax breaks, it is obvious that they will have an adverse impact on other investments planned. According to a report in this newspaper some months ago, the top 300 firms in the country were planning a combined investment of around $20 billion over the next 18 months. It is unclear how much of this would go into the SEZ window were this to be opened up once again. That is, the additionality of investment is not clearly spelt out.

Given that the finance ministry is already quite concerned about the Rs 158,000 crore spent each year in giving tax breaks to existing units, and wants to bring these to an end, it is obvious that any move to increase the number of SEZs has to be accompanied by an exercise to determine its cost-benefit ratio. It is important to assess the net benefit the country gets from the tax concessions given to the existing units, and from those being extended to the SEZs. Indeed, as on date, there is no information, at least not in the public domain, of even what the value of the tax sops to the 150 SEZs is going to be. After all, it is only when such information is made available will it be possible to see if the SEZ-sop route is the best way to go. On the face of it, construction is one of the more employment-intensive industries. So, tax sops on an equally large scale to this sector may deliver the same results. In any case, with just a fourth of a multi-product SEZ's land to be reserved for export processing, the SEZs will have scope for a large real-estate play.

One of the arguments made by the commerce ministry in favour of increasing the cap is that this will put an end to the secondary market that has developed in the SEZ market""that is, some developers, having got their SEZs approved, are now hawking them for a premium. While sections of the government may frown upon this profiteering, it may not be a bad thing from even the government's point of view. For, if a tax is to be levied on the profits made by hawking the licence (this will probably be done by selling the shares of the company/SPV that has the SEZ licence), the government can recover a part of the tax benefits originally promised. Also, if the cap is now to be raised to 300, why shouldn't it be raised to 350, or 400? This sounds like an invitation to a greater demand for tax sops, and even increased litigation from those that don't make the grade the second time around.