Killing SEZs

This newspaper has opposed the government's policy on special economic zones (SEZs) on primarily two counts. One, the projected tax loss of Rs 175,000 crore during 2005-10 is going to be a huge drain that the country cannot afford, accounting as it will for perhaps close to 5 per cent of total tax revenue each year. Second, they will create an unlevel playing field between various types of investors, and investment decisions that get taken will be guided more by tax breaks than good commercial sense. Indeed, the finance ministry has projected that, by the fourth year of the scheme taking off, all incremental exports will take place from SEZs. Since export profits are taxed, it does not make sense not to locate all new export units in the SEZ, where they will continue to get tax breaks. The commerce ministry, for its part, has countered this by pointing to the additional economic activity that will result""merchant exporters setting up shoe factories in China, for instance, could set them up in India if it offered similar tax breaks. This then will lead to large numbers of jobs and other incomes (from suppliers) which will be taxed even under the SEZ regime. But even if you buy the commerce ministry's arguments, the irony is that the slew of amendments being planned now to ensure that there is no leakage of revenue, ironically by the ministry of commerce itself, will result in making the whole idea unattractive and perhaps even still-born.

One of the criticisms of the SEZ policy is that, with the export-processing area kept at a minimum of 35 per cent in large zones, SEZ developers will use the remaining area to develop shopping malls, housing complexes and mini-townships that will have a tax-free status as far as the developer is concerned. So, to plug this gap, one of the proposals doing the rounds is to fix a ceiling for the amount of shopping space that can be built (50,000 square metres is one of the numbers mentioned) ""anything above this will not qualify for a tax break. The idea is that an area of 50,000 square metres is needed to meet the shopping needs of those who live/work in the SEZ and are involved in exports. Similarly, 10,000 square metres is the number being talked of when it comes to social infrastructure like schools and hospitals. Other such lists are being drawn up.

It is not hard to imagine the havoc this micro-planning will cause, and the paperwork that will be entailed as an army of bureaucrats will now descend on these zones whose USP (apart from the tax holiday) is the lack of bureaucratic hassles. If a tax break is to be allowed to the developer on shopping areas up to 50,000 square metres in a multi-product SEZ (should it be the same for product-specific SEZs?), then someone has to calculate the tax breaks if the shopping area is 51,000 square metres. If social infrastructure is tax-free till 10,000 square metres, someone has to certify that the entire tax break can be used up by schools instead of being shared between hospitals and schools, and so on. Even without being a great supporter of the idea of SEZs, it is easy to see that the amendments being planned will kill the whole scheme, apart from landing the government in a slew of fresh legislation as those whose projects have already been cleared go to court against the new restrictions planned.