The Hindu Business Line : Taxing zones

No policy of this Government has had such a resounding response as the Special Economic Zone, a concept that has so fired the imagination of industrial houses that they are in queuing up before the Commerce Ministry for approvals. Ever since the SEZ Act was passed, less than a year ago, corporate houses in a variety of product lines have been eager to set up the exclusive, tax-free enclaves. States too have caught the SEZ fever, with some, like Maharashtra, Gujarat and Tamil Nadu that get the bulk of investments anyway, willing to gift away tax revenues. The success of the SEZ is worrying the Finance Ministry enough to voice fears of not simply a leakage but an absolute decline in tax revenues. Suddenly, the dream concept is turning a nightmare as the Finance Ministry watches in rising alarm the number of companies lining up before the Commerce Ministry seeking to set up the privileged economic zone. Not too long ago, there was talk of restricting the number of approvals; now the Finance Minister has openly voiced his anxiety about the SEZs, and the baneful effect their privileges could have on the government's fiscal management programme.

This is a legitimate fear and it is surprising that it should be so late in coming. In February, when the Commerce Minister announced the scheme, investments of Rs 1 lakh crore were expected and 117 proposals were under consideration. The latter number has zoomed and the revenue implications of decade-long tax holidays for SEZ developers are now dawning on policymakers. At work here is a policy stance that is dangerous from more than the treasury point of view. For, States too are offering excise duty concessions with little thought to the impact on their capacity to invest in basic services such as education. It is becoming apparent that differentials in excise duties often lead to a form of tax avoidance as units shift their production process from high to low excise States. The fiscal incentive, therefore, does not result in capacity expansion.

It is not unlikely that the SEZ policy will suffer a similar fate as producers transfer production or its final stage from the domestic tariff (high tax) area to the exclusive zones (no tax area) instead of building new capacities. For these and other reasons, as studies have shown, the overall benefits of SEZs have been limited; the DTA has been earning more forex, providing more jobs, and tax revenues ever since the Export Processing Zones were started more than two decades ago. Beyond a point, inter-regional variations in fiscal freebies encourage tax avoidance practices without adding to employment or the national product. There is a need to rethink the tax-break policy that has become the lazy man's guide to economic growth and concentrate instead on providing better roads and primary education for the entire nation.

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