The Hindu Business Line : Thorny issues in the Industrial Park Scheme, 2008

In a bid to provide the much-needed boost to the manufacturing sector, which has been showing signs of deceleration, the Government announced the long-awaited Industrial Park Scheme, 2008. But the welcome initiative may prove to be a myth, fear Gagan Pahwa and Sunil Kumar, senior tax professionals with Ernst & Young.

“The scheme puts to rest the ambiguity that prevailed about the fate of industrial parks, and confers all the benefits that the industry looks forward to, but with a conditional path that may eventually never lead to the industry reaping such benefits,” they bemoan, during a recent e-mail interaction with Business Line.

The scheme in its current form could do with some refining which may go a long way in turning into reality the Government’s intention of providing benefits to the industry, suggests the duo.

Excerpts from the interview, in which Pahwa and Kumar highlight thorny issues in the ‘park’ scheme, such as the exclusion of the services sector, minimum constructed area, completion date, counting a group’s units as single, ceiling on allocable area, and retrospective application.

For starters, a look at the history and the scheme details.

The Industrial Park Scheme was first introduced by the Government of India in 1997 to give impetus to the infrastructure sector. The scheme was revised in 2002 and was valid up to March 2006. A Draft Industrial Park Scheme was prepared in 2006. And the new scheme was finally introduced this year.

The scheme extends 100 per cent tax holiday on profits derived by an undertaking from the activity of developing, developing and operating, or maintaining and operating an Industrial Park and is applicable to all Industrial Parks set up between April 1, 2006 and March 31, 2009.

The objective of providing a tax holiday is to promote and incentivise capital investment. The industrial units set up under the new scheme can undertake certain specified manufacturing activities.

To gain the tax benefits, a developer essentially needs to comply with certain conditions, such as minimum requirement of 30 units, all units of same group would be considered as a single unit, a single unit cannot occupy more than 25 per cent of total area, minimum area of 50,000 sq mt needs to be developed, etc.

Your take on the services sector exclusion.

The services sector — for example, information technology (IT) — has been excluded from the new scheme. This, despite the services having contributed more than 50 per cent of India’s GDP (gross domestic product) since financial year 1998, and the principle growth engine being the IT/ITES (IT-enabled services) industry.

Given such phenomenal contribution and the fact that 75-80 per cent of the total demand for office space is from the IT/ITES industry, exclusion of the services sector from the new scheme results in depriving a prominent section of the industry from reaping the benefits of a key step taken by the Government towards India’s industrial development.

Some of the developers had even invested in IT Parks after March 31, 2006, on the belief that tax holiday would continue to be available. And there was no indication during the last two years from the Government to suggest the withdrawal of tax holiday for such new developments.

The Indian growth story which started from the IT sector may be derailed since the IT sector is already struggling to come to terms with an appreciating rupee; lack of infrastructure may prove to be the final blow to the IT sector.

Most State Governments have announced State-level incentives to attract the development of IT Parks, which would help in creating infrastructure and generating employment. This initiative may also be hampered if the income-tax benefits are taken away.

Why is the specification of minimum constructed area a constraint?

According to the new scheme, the developer needs to develop a minimum of 50,000 square meters of constructed area. It seems the condition has been imposed to bring the scheme on a par with the FDI (foreign direct investment) policy in the real-estate sector.

However, it may be appreciated that in the case of industrial parks for the manufacturing sector (as provided in the new scheme), the developer typically does not construct a factory. He merely provides land on lease with surrounding infrastructure since every manufacturer wishes to construct a factory according to his own requirement.

Do you think the specified completion date is too close?

To get the tax benefits the undertaking is required to complete the development process by March 31, 2009. However, due to lack of clarity on the industrial park policy, some of the developers had been following a wait-and-watch approach. So, under the current completion requirement, even if the developers fulfil all other conditions, completing the development activities by March 31, 2009, would be a Herculean task.

How does the treatment of group units as a single unit pose a problem?

All units of a group company would be treated as a single unit for the purpose of minimum units requirement. Purely because of common interest, different entities of a group are not going to be able to co-locate. The Government may, therefore, consider allowing the development to take place according to market demand and requirements.

A developer may choose to set up an IT park for a single user or for multiple users depending upon commercial prudence. Imposing a condition of minimum number of units for tax holiday is an artificial and unwarranted mechanism, which may cause supply scarcity.

Is the ceiling in allocable area a dampener?

The new scheme requires that no single unit will have more than 25 per cent of allocable area. The market reality is that entrepreneurs demand large spaces at single location. Hence, the area restriction for a single unit may come in the way of benefits of scale an entrepreneur might otherwise wish for in a single industrial park.

On the retrospective application.

The new scheme is applicable retrospectively. Many of the developers had gone ahead with their projects in accordance with the Draft Scheme.

The new scheme being substantially different from the Draft, these developers are in a fix, and they fondly wish that the Government allows the development of industrial park according to the Draft Scheme for applications submitted prior to issuance of new scheme.

D. MURALI

http://Detaxification.blogspot.com

More Stories on : Interview | Taxation | Industrial Policy | Detaxfication

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Inclusive education

Energy policy: Band aids for bullet wounds

Deductibility of debt for wealth tax

Countering tax evasion the Kautilya way

Opening the doors of learning wider

Fed: Sending the wrong signals?

Thorny issues in the Industrial Park Scheme, 2008

No restraint on departmental appeals

Wary of sovereign wealth funds