Too many SEZs may impact tax collection

EXIM MATTERS

The Special Economic Zones (SEZ) Act, 2005 and SEZ Rules, 2006 have come into effect from February 10, 2006. While announcing it, Commerce Minister Kamal Nath said the government had approved 51 proposals for setting up SEZ, so far, and had approved in principle 66 more proposals.

He also expected Rs 100,000 crore investment in the SEZs in the next three years leading to creation of over 500,000 jobs.

The minister claimed that the land-use patterns were different in India from that in China and so, the policy provided for approvals even for the SEZ having a minimum land area of 1,000 hectares for a multi-product SEZ. For services SEZ, the minimum land area may be 100 hectares.

For information technology-related SEZ, built-up processing area may be 100,000 square meters and for bio-technology, non-conventional energy or gem and jewellery SEZ, the minimum land area may be 10 hectares.

The minimum land area in SEZ, set up in Jammu and Kashmir, Sikkim, Himachal Pradesh, Uttaranchal, Goa, North-eastern states and Union Territories may be only 200 hectares. It is enough if the processing area is only 25 per cent of the SEZ land area.

With such relaxed norms and given the tax exemptions for SEZ developers and SEZ units, the country might see hundreds of SEZ in due course of time. Given the scheme of legislation and delegation, the commerce ministry will have its own empire with thousands of small kingdoms littered all over the country administered through the development commissioners reporting to the commerce ministry.

We will be creating our own version of two countries in economic terms""one more privileged that does not pay taxes and the other less privileged that pays taxes. That could lead to unintended consequences.

As it is, the bigger companies want their expansions and greenfield projects to be covered under the SEZ scheme so that they can take advantage of the benefits available to developers.

Their basic idea is to get construction material like steel and cement at cheaper prices, because the supplies of such items form domestic tariff area (DTA) and will be treated as exports that earn duty drawback and duty entitlement passbook (DEPB) credits. Such incentives are more likely to divert investments to SEZ tax havens and create an illusion that it is the SEZ policy that is responsible for investments.

The fact is that there are enough opportunities in the Indian economy as a whole to attract investments and mere diversion of investments to SEZ might only mean lesser taxes to the exchequer.

Every policy has its advantages and advocates of SEZ have pointed out hassle-free environment, tax exemptions and single-window clearance as the major ones.

Certainly, the notification of SEZ rules and giving effect to the SEZ Act give a stable legal framework that assure investors that the current dispensations will not be tampered with.

The scheme is also worked out after gaining enough experience with the free-trade zones and export processing zones and after getting enough inputs from the trade. But, a plain reading conveys an uneasy feeling that the scheme in its present form is a bit too populist.

Creating too many SEZ might show better export figures but cause too much tax avoidance.

tncr@sify.com