IMF’s Rajan slams SEZ scheme
NEW DELHI, AUG 31: International Monetary Funds’ chief economist Raghuram Rajan has blasted the government for extending tax holidays to developers of special economic zones. Such “perverse economic incentives”, he has said, will bring little additional investment, and definitely a lot less revenue.
In a piece in the September issue of Finance & Development, IMF’s quarterly magazine, Rajan has said such tax holidays not only made the government forgo revenue it could ill afford to lose, but also offered firms an incentive to shift existing production to SEZs at a substantial cost to society.
While the Centre has said that only new investments in SEZs will qualify for tax sops, Rajan doubts if the government can judge what new investment is, given the corrupt tax administration. Moreover, according to him, firms will shift all investment that would have taken place outside the zones to the new zones, depriving the government of revenue.
Rajan seems to be pretty much aware that the government is divided over the concept of SEZs with some of its segments supporting tax holidays being pushed by interest groups.
The commerce and industry ministry has been one of the most vocal proponents of SEZs, stating they will bring in foreign direct investments of $5 billion before 2007-end and create 1.5 million jobs. The finance ministry and the Planning Commission oppose tax holidays, with estimates that the move will result in a whopping revenue loss of Rs 1,70,000 crore between now and 2009-10.
A recent study by the National Institute of Public Finance and Policy had projected the total revenue loss at Rs 97,000 crore between 2005 and 2010. The RBI, too, said SEZs would lead to an uneven pattern of development. In its annual report released on Wednesday, the RBI said the tax breaks could be justified only if SEZ units established backward and forward linkages with the domestic economy.
Coming down heavily on the government, Rajan said, “It will be increasingly important for India to exchange its paternalistic, directive government, which seeks to remedy every wrong through a subsidy, a quota, or a scheme.” The government must focus instead on getting the environment right to increase opportunities.
http://www.financialexpress.com/fe_full_story.php?content_id=139078
In a piece in the September issue of Finance & Development, IMF’s quarterly magazine, Rajan has said such tax holidays not only made the government forgo revenue it could ill afford to lose, but also offered firms an incentive to shift existing production to SEZs at a substantial cost to society.
While the Centre has said that only new investments in SEZs will qualify for tax sops, Rajan doubts if the government can judge what new investment is, given the corrupt tax administration. Moreover, according to him, firms will shift all investment that would have taken place outside the zones to the new zones, depriving the government of revenue.
Rajan seems to be pretty much aware that the government is divided over the concept of SEZs with some of its segments supporting tax holidays being pushed by interest groups.
The commerce and industry ministry has been one of the most vocal proponents of SEZs, stating they will bring in foreign direct investments of $5 billion before 2007-end and create 1.5 million jobs. The finance ministry and the Planning Commission oppose tax holidays, with estimates that the move will result in a whopping revenue loss of Rs 1,70,000 crore between now and 2009-10.
A recent study by the National Institute of Public Finance and Policy had projected the total revenue loss at Rs 97,000 crore between 2005 and 2010. The RBI, too, said SEZs would lead to an uneven pattern of development. In its annual report released on Wednesday, the RBI said the tax breaks could be justified only if SEZ units established backward and forward linkages with the domestic economy.
Coming down heavily on the government, Rajan said, “It will be increasingly important for India to exchange its paternalistic, directive government, which seeks to remedy every wrong through a subsidy, a quota, or a scheme.” The government must focus instead on getting the environment right to increase opportunities.
http://www.financialexpress.com/fe_full_story.php?content_id=139078
posted by Sudarshan Rodriguez at 12:42 PM
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