The Hindu Business Line : `Export' the discrimination

IT WAS ONLY to be expected. An exporter association has voiced strong views on the lack of tax concessions for exporters from the Domestic Tariff Area that are currently available for units operating in the Special Economic Zones. Specifically, the Federation of Indian Exporter's Organisation Northern Region has expressed its anxiety about the lack of tax parity and insisted that units in the DTA should also be granted total exemption of incomes earned from exports as the SEZs are. Under the Special Economic Zone Act of 2005, that is awaiting notification but whose provisions are in force, SEZs and units within them will be exempt from income-tax for the first five years, and only 50 per cent of the export earnings will be taxed for the next two years. This is one of the special benefits and incentives that are being highlighted to attract investors to SEZs — islands of privilege that will be treated as "foreign territory for trade operations and duties and tariffs," according to the official Web site.

With its concern about tax parity, the FIEO has raised some fundamental issues of policy that will need addressing sooner than later. To start with, it seems most inappropriate to have discriminatory practices at a time when the national economy is moving towards some kind of harmonisation in the fiscal regime. If exports have to be encouraged, then it is only fair to exempt all export earnings, regardless of their place of origin. Policymakers must remember that to date the non-SEZ areas have been the highest export earners, as studies and the Commerce Ministry data have shown. Under the circumstances, to remove the umbrella of Section 80HHC that provides exemption from over their heads so as to fall in line with WTO requirements must appear particularly galling when that same concession is available to the SEZs. A universal exemption will surely draw the ire of the WTO but so may the provisions of the SEZ Act. And if push comes to shove, one can always point the finger back at the developed nations that have persisted with subsidies for their farmers.

Exports have been growing smartly over the last two years despite sluggish world growth rates, regional trade groupings and high domestic transaction costs imposed by poor infrastructure. The fact that the growth has come largely from the domestic tariff area demonstrates that income-tax exemption or other tariff concessions, however, are not really the most efficient way of boosting exports. Better would be to create an environment that is friendly to exporters. Ironically, the authors of the SEZ Act recognise this very well but undercut the advantages of an efficient environment by narrowing the geographical application. Providing serviceable infrastructure and lowering Customs duties under an open and transparent regime for the economy as a whole will boost exports more than discriminatory provisions of services and facilities.