Finmin figure of Rs 100,000-cr loss due to SEZ sops is exaggerated'

TIMES NEWS NETWORK[ TUESDAY, NOVEMBER 28, 2006 03:05:21 AM]
 
The Issue of the “revenue (to be) foregone” by the government due to the tax concessions for the special economic zones (SEZs) seems to be too intense to be settled under duress. Despite the Group of Ministers-brokered deal of compromise with the commerce ministry, which is apparently bullish on SEZs, the finance ministry is still haggling over what it sees as the SEZs’ adverse impact on the government finances.

It recently said in Parliament the revenue loss on SEZs in the next five years would be Rs 100,000 crore. North Block would also like to keep alive the debate on whether the SEZ developers’ should have tax relief on sale of urban infrastructure in SEZ to anyone other than the SEZ units.

PricewaterhouseCoopers executive director Vivek Mehra has dwelt upon the subject. Speaking to KG Narendranath, he refutes the MoF estimate which is ‘based on incorrect assumptions of tax.’ Taking the MoF estimate of fresh SEZ investment of Rs 360,000 crore during 2005-2010 for granted, Mehra says in that case, the revenue loss attributable to the various forms of tax relief for SEZs would be just Rs 33,000 crore.

This, he says, would be more than offset by the additional tax revenue of Rs 148,350 crore, on account of the additional economic activity worth Rs 845,160 crore due to the SEZ sales in the export and domestic markets. Excerpts:

One contention is SEZs would lead to unfair enrichment of a few and deprivation of the rural people of agricultural land. This, it is argued, would worsen rural poverty and catalyse undesirable migration of unskilled labour to the urban areas.

The growth of Indian economy, despite the recent strides, has occurred haphazardly. The services sector, driven mainly by IT and IT-enabled services, would hardly suffice to offer employment to the unskilled and semi-skilled from the rural India, where two-third of India still lives. About 71 million people are being added to the working age population every year, and their employment must come mainly from manufacturing, given the constraints of agriculture.

Even as commercial spaces are being built with gusto, living and working spaces remain grossly inadequate. India cannot wait. A large number of new factories along with working and living spaces have to be built at an unprecedented scale and in a shorter period of time than ever before.

 

The government, as it has proven, cannot create these facilities out of its own resources in an efficient manner. That is where the private sector has a role, and this is being facilitated by the SEZ policy. SEZs are going to be the platform for spending money in development of areas.

Of the 237 formal approvals for SEZs, 61% are for IT and IT-enables services There are going to have a tiny size, as compared to the mega SEZs being developed in China and the US. Multi-product SEZs, which can contribute substantially for the kind of infrastructure development you speak of, have a share of 4% in the formal approvals.

The minimum size of an IT SEZ is just 10 hectares with a minimum 50% built-up processing area. In comparison, multi-product SEZs will have a minimum size of 1,000 hectares and at least 35% built-up processing area. Which makes it clear that multi-product SEZs will have a larger role in the setting up of office and living spaces. But the reality is that it will take at least 3-5 years for any of these proposed big zones to start operations.

The developmental and job creation activities cannot be put in abeyance since the multi-product zones come up. Even the smaller IT, gems and jewellery, biotech SEZs and various other sector-specific SEZs which have a stipulated minimum size of 100 hectares have a contributory role in the whole plan. Even a dispersed model like the STPs have proven to be successful.Your take on the finance ministry stand that the central exchequer will suffer a revenue loss of Rs 100,000 crore during 2005-10 due to tax sops to SEZs

To make this estimate, the ministry assumes the SEZ investments in the period would be Rs 360,000 crore. Earlier, the ministry had estimated the notional revenue loss at Rs 1,75,847 crore, pegging the revenue foregone on raw materials used for exports from SEZs at Rs 77,792 crore. Since tax incurred on inputs used for export production is anyway refundable under various export promotion scheme, this loss of Rs 7,792 crore is totally fictitious. The ministry says the direct tax loss would be Rs 55,531 crore.

This again is exaggerated, as EoUs, STPs, etc are anyway eligible for exemption till March 31 2009. The loss, on account of SEZs would be limited to that during 09-10, which would be just Rs 22,913 crore. The ministry has computed indirect tax loss on SEZs at 10% customs duty and 16% CVD which is also an over-estimate. EoUs and STPs are allowed to import capital goods at nil duty. Moreover, for exports from DTA, there is concessional 5% customs duty and nil CVD under the EPCG scheme. I have reckoned the average customs duty to be around 3%, which revises the revenue loss down to Rs 10,152 crore. The total loss would thus be Rs 33,065 crore.

On the other hand, the additional economic activity due to exports and domestic sales of SEZs would be Rs 845,160 crore. This, assuming the tax-GDP ratio at 10.4%, income tax rate at 33.6% and indirect taxes at 27.6% would enable the centre to earn an additional Rs 148,352 crore as tax revenue. So, the SEZs would add to the Centre’s tax revenue.

Again, the revenue department is of the view that the tax benefits for the urban infrastructure in the SEZs should be linked to SEZ units’ actual use of the facilities. Norms for notifying the authorised operations by the developer have been notified.

We will have to make the zones viable. It is going to be a long-haul. In the process, there could be a few who would extract undeserved gains. But our priority should be to facilitate the setting up of these zones in the larger interest of the economy and the unemployed. Micro-management like the one the finance ministry is reportedly mulling over, would make things too bureaucratic and cumbersome. This is not what we want.
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