SEZ sops under review

The commerce and industry ministry's proposal for an Ordinance to introduce tax incentives in the Special Economic Zones Bill was referred to a group of ministers (GoM) following objections raised by the finance ministry that the incentives would kill units in the domestic tariff area.

The Ordinance for the SEZ Bill was discussed at the Cabinet meeting last week. During the meeting, Finance Minister P Chidambaram also said the overseas banking units in these zones would become a parking lot for bank funds and encourage diversion of balances from domestic banks.

"The finance minister raised the point that since SEZs were deemed foreign territory and overseas banking units would not be regulated by the mandatory stipulations of RBI applicable to other domestic banks, it would encourage the diversion of funds from domestic banks to these overseas banking units," a government source said.

The proposed SEZ Bill formulated by the commerce and industry ministry states that the guidelines for overseas banking units will be framed by the RBI and that such units will have to obtain clearance from the RBI before entering the SEZs.

The objections raised by the finance minister were backed by Law Minister H R Bhardwaj who pointed out that the Bill did not deal with law and order issues in SEZs such as a possible murder committed in these zones since these are deemed foreign territory.

The government had announced an SEZ policy in 2000 but did not table a Bill to enact the incentives for these zones.

The previous National Democratic Alliance (NDA) had formulated the draft of an SEZ Bill that was modified by the present regime after consultation with stakeholders. The modified Bill increased the income tax benefits to SEZ units by 10 years to 20 years.

There have been differences between the finance and commerce ministries on several issues pertaining to SEZs. While the finance ministry wanted to retain control over the policy matters governing these SEZs, the commerce ministry was keen to keep this under its purview to ensure continuity or stability of policy regime for investors in SEZs.

The government has already cleared 33 SEZs in different parts of the country.