ARE FISCAL BENEFITS REALLY ESSENTIAL TO SEZs?

The SEZ Act provides for very liberal fiscal benefits to SEZ developers and SEZ units. These benefits far exceed those available under earlier export promotion schemes and hence have attracted criticism.

Units in an SEZ are exempt from customs duty on imports of capital goods and inputs and excise duty on purchases from the domestic market. These units would be exempt from income tax for the first five years and would get 50 per cent exemption for another two years. Investment allowance of 50 per cent of reinvested profits is also available.

Domestic units supplying goods to SEZ units will be exempt from central sales tax and service tax and can claim income tax exemption under Sec 80 HHC as their supplies would be considered as deemed exports.

Tax benefits to SEZ developers are even more liberal. Apart from customs and excise duty exemptions on purchase of capital goods and other material, they get complete income tax exemption for 10 years. Individuals investing in SEZ developments are also eligible for tax exemptions.

The nature of the incentives being provided would ensure that several of these zones, mostly the smaller ones, would be utilized more as tax havens rather than attract any genuine investments.

Disproportionate fiscal incentives also feed development disparity in the country. If industrial units are being encouraged through such incentives in areas with location disadvantages, the longer-term viability of these units after the exemption period expires would be in question. The government should analyze if the rush to set up manufacturing units in states like Uttaranchal and Himachal Pradesh, which provide large tax incentives to new units, is sustainable in the longer term.

There are also serious concerns as to whether these incentives would be treated by the WTO as unfair practices since these incentives are tantamount to a form of export subsidisation. Incentives like the 80 HHC income tax exemption for export profits and the DEPB scheme have already been questioned by the WTO.

SEZs and some fiscal concessions to them are essential if they are to compete internationally. The SEZs require a huge investment and compared to their international counterparts where the governments provided the basic investments, they are driven by private sector investments in India.

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