Govt got its Act right, ministry didn't

EXIM MATTERS

The controversies surrounding special economic zones do not seem to go away. Recently, the finance ministry informed Parliament that the country may have to face losses exceeding Rs 1 lakh crore by 2009-10 due to tax holidays to SEZs.

When asked if this would mean a review of the SEZ policy, Commerce Minister Kamal Nath said, "The finance ministry should have brought all this to our notice before the Act was passed. Now we would go ahead with our plans for SEZs."

Nath missed the point that when the SEZ Act was mooted, the impression was that the SEZs here would be similar to the Chinese SEZs, each of which covers over 20,000 hectares of land in coastal areas, with easy access to the ports and world class infrastructure.

Indian SEZs were expected to create integrated townships primarily to cater to a large variety of labour intensive manufacturing activities. Few expected that we would have a large number of SEZs, most of which would be captive SEZs of industrial houses or that many multi-product SEZs would be developed in the hinterland and that too on very fertile land.

Nath surely will know that the mischief is not in the SEZ Act but in the SEZ Rules. It is the rules, notified by the commerce ministry, that conceived the idea of sector-specific SEZs with much lower minimum area requirement and only 25 per cent processing area. The mushrooming of SEZs is a consequence of the rules.

The commerce ministry has allowed many industrial houses to establish their SEZs to cater only to their expansion plans. Many of these plans were already finalised and investments were to be made in the domestic tariff area (DTA).

These investments are being diverted to SEZs. Such captive SEZs do not create any infrastructure except for their own activities. What they get are tax breaks as SEZ developers and SEZ units.

The commerce minister says that the so-called revenue losses are notional as investments would not have materialised in the first place had the SEZ legislation had not been put in place. There is some merit in the claim but not too much.

The multi-product SEZs would not come up without the tax breaks that the SEZ Act gives. However, a large number of units, especially in the IT sector, would have come up anyway.

They are now finding their way to SEZs only for income-tax concession of 15 years. That is equally true about a number of industrial houses setting up SEZs to put up their own units.

So instead of reacting angrily to the concerns of the finance ministry, Kamal Nath, even now, can take another look at the SEZ Rules and pursue the objective of establishment of large multi-product SEZs where world-class infrastructure will be created.

He should close the window for smaller SEZs. Allowing too many smaller SEZs may bring in some fresh investment but not better infrastructure. Only large multi-product SEZs can do that.

tncr@sify.com