The Hindu Business Line : Time to give SEZs a break

The Finance Minister would earn the goodwill of EOU/SEZ units if he exempts them from certain taxes. Any notional loss from such exemption would be offset by the multiplier effect of investments and additional employment set in motion by these growth engines.

G. Srinivasan

The concept of special economic zone, aimed at not only bolstering but also boosting the triad of export, employment and investment in the Indian economy, is now being increasingly questioned, although the country has embedded the SEZ into the statute by notifying the SEZ Act on June 23, 2005, and the SEZ Act and SEZ Rules have been operational from February 10, 2006.

EPZ, the precursor

It is not that India abruptly discovered the virtues of SEZs. Way back in the mid-1960s the idea of Export Processing Zones (EPZs) was floated and from 1965 to 2000 seven such EPZs were functioning, with hassle-free and dedicated services were offered to them.

These seven EPZs were converted into SEZs subsequently. But in the early 1980s it was realised that in a country of immense geographical spread and locational disadvantages, the facility of “inbond manufacturing” at other parts would not be feasible for exporters in far-flung places to come and set up their units only in these seven EPZs.

This gave rise to the concept of 100 per cent export-oriented Units (EOUs) qualifying them for ‘inbond manufacturing’, under which they were freed from Customs/excise bonding and other constraints and were provided some incentives.

Today, more than 2,363 EOUs, operating in 30 States, are engaged in real manufacturing activities as they are debarred from undertaking trading activity, with their investment in building technology, plant and machinery growing higher year by year.

These EOUs also come under the jurisdiction of the Development Commissioner of various SEZs, of which 42 SEZs have now been functional discharging their export remit, though the EOUs have a different set of tax-breaks and are facing problems of their own.

The second birthday of SEZ Act, after it was notified, was on February 10, 2008. But at the incipient stage itself, several protests and much controversy had been sparked over the land acquisition for industrial development, using prime land for real estate purposes in the name of creating export enclaves where the demarcation between processing and non-processing areas has blurred and with undue tax breaks being bestowed on SEZ developers and units.

In fact, some of the State Governments, particularly Goa, have even threatened to scrap some of the SEZs that have been notified by law after the Board of Approval of SEZs verified land records and other formalities.

The Finance Ministry too has forwarded its views on the advisability of providing tax breaks to both developers and units of SEZs, estimated at Rs 1,02,621 crore for the period 2006-07 to 2009-10.

Tax breaks

No doubt, SEZs were conferred certain tax exemptions including in the import/domestic procurement of goods for development, operation and maintenance of SEZ units. Units were given 100 per cent income-tax exemption on export income under Sec 10AA of the Income-Tax Act for the first five years, 50 per cent for the next five years thereafter and 50 per cent of the ploughed back export for the next five years.

For the developers, income-tax exemption for 10 years in a block of 15 years in a consecutive order and exemption from dividend distribution tax were accorded. For both the developers and units, tax exemption was extended from minimum alternate tax (MAT), Central sales and service taxes.

Changing lane

It may be recalled that the SEZ Act came into being primarily to provide a measure of stability and continuity in policy so as to reassure investors, both domestic and international, that no mid-course withdrawal or dilution would take place.

When the Act postulates 15 years of graded tax relief for SEZ units and 10 years in a block of 15 years in a consecutive order to developers, how could the Finance Ministry scuttle the statutory provisions of relief by pleading for a review or removal of these benefits when not even the first phase of five-year 100 per cent tax exemption on export income generated by these units is over?

Job opportunity

According to the Director-General, Export Promotion Council for EOUs and SEZ Units, Mr L.B. Singhal, the exports earned by 42 functioning SEZs amounted to $10 billion during the first nine months of the current fiscal.

Compared to the first year result of Rs 34,700 crore (2006-07), these SEZs would clock 100 per cent growth to generate export worth Rs 67,300 crore as the fiscal year ends in a few weeks.

As the Department of Commerce has granted formal approval (by which land is already in the possession of the SEZ developers) to 428 new SEZs, of which 200 have been notified, the potential for export and employment, both direct and indirect, once these units go on stream, could be huge.

The biggies in biz

The new SEZs, some of which have already begun manufacturing, are big names such as Nokia SEZ (mobile phone), Mahindracity SEZ (textiles), Divis Laboratories (pharmaceuticals), Jaipur SEZ (gems and jewellery), Mahindracity Industrial Park (auto components), Moser Baer India Ltd (non-conventional energy), Biocon (biotechnology), Apache SEZ (Adidas shoes), Flextronix SEZ (telecom), Infosys (IT), Wipro (IT), Suzlon Infrastructure (hi-tech engineering products), Reliance Infrastructure, Jamnagar (multi-product), Mundra Port (multi-product), Bajaj Auto Ltd (engineering sector) and Wockhardt SEZ (pharmaceuticals).

Self-contained units

Mr Singhal contends that one of the stated aims of SEZs is creation of infrastructure that includes industrial, commercial and social so that these are self-contained facilities and do not exert strain on extant infrastructure.

He cites the case of Sriperumbudur area, near Chennai, where within the vicinity of five km, three SEZs, viz., Nokia SEZ, Flextronix SEZ and SIPCOT-Motorola SEZs are coming up fast, promising to provide direct employment to around one lakh people in the next three years.

If people have to come from Chennai and contiguous area and the social infrastructure is not created nearby by these SEZs, the strain on the existing infrastructure provided by the Chennai Municipal Corporation or State government in undertaking massive physical and social infrastructure would be unimaginable, given the tenuous finances of the State government that cries for competing public and social services.

No wonder, proponents of the concept of SEZ, whether bureaucrats or developers or units, do not countenance the central bank (RBI) view of treating SEZs as a real estate activity.

In fact, the funds they need from financial institutions are meant for creating not only for industrial (processing) purposes but also for non-processing areas encompassing commercial and social infrastructure for recreation and other requisite amenities (such as schools, hospitals) needed for day-to-day living in these zones.

Where the State finds it difficult to make provision for public programmes for paucity of funds, the least it could do to help entrepreneurship to thrive is to facilitate an enabling environment for constructive and purposeful works, they say.

Early implementation

Both SEZ developers and units seek only early implementation of some of the provisions in the SEZ Act, such as exemption from service tax, duty entitlement passbook benefit for supplies to SEZ developers, proper clarification on Section 10 AA of the SEZ Act for tax exemption on export income, and single-window implementation by the State governments.

SEZ developers are entitled for getting duty-free inputs sourced domestically as per SEZ Act and SEZ Rules.

Hence, SEZ rules as well as foreign trade policy provides for the facility of DEPB for supplies of goods to the SEZ developers. SEZ developers are not foreign exchange earner and hence cannot have foreign currency account to make payment in foreign currency.

As such, they are not getting the input credit benefits and how can a developer develop these SEZ when he is not reimbursed for input credit and the tax benefits flowing to him remain on paper!

As the Finance Minister is in the midst of presenting his final Budget, he would truly earn the goodwill of exporting community, in general, and EOU/SEZ units, in particular, if he proceeds on the fundamental postulate that taxes are not exported but only goods and services.

No doubt, Mr Chidambaram’s notional loss would appear huge but the multiplier effect of investments and additional employment and economic activities set in motion by these engines of growth would not only far offset any notional loss but augment the coffers in terms of substantial tax income in other forms by the beehive of activities these export enclaves eventually represent.