Tax, other sops likely to be restored
Given their large potential to create both jobs and stimulate investments, the government has done well to decide to reconsider the tax sops for SEZs. At her 100-day press conference, commerce minister Nirmala Sitharaman indicated the government was re-examining the removal of tax sops for both units in SEZs as well as for the developers of SEZs. The minister also said the government was examining the possibility of exempting such units from the cumbersome land acquisition Act. Given that, between February 2006 and now, investments in SEZs have risen from R4,000 crore to R3 lakh crore and employment from 1.4 lakh persons to 12.8 lakh, the potential of SEZs is obviously large, and far greater than the notional tax loss of around R23,000 crore assumed in the budget document, more so in the context of the R3.76 lakh crore of total tax giveaways to all sectors in FY14. It also needs to be pointed out that, since the sops were part of the original SEZ Act, withdrawing them was tantamount to a retrospective amendment. Indeed, if it wasn’t bad enough that both DDT and MAT were being imposed on such units, in July the taxman came up with yet another amendment to the section under which SEZs get their tax exemptions, this one adding more riders if units wanted a tax exemption.
Worse, there is also a proposal to ensure that all units in SEZs do at least 51% physical exports. Right now, not all units make physical exports, their exports are what are called ‘deemed exports’—the only condition in the SEZ Act is that, taken together, all the units are together export-positive. Take the case of Unit A in an SEZ which imports $100 of goods, does $10 of value addition and then sells $110 worth of goods to Unit B in the SEZ which, in turn, does value addition and sells it to Unit C for $120 and that, in turn, exports it for $130. The SEZ as a composite whole is clearly forex positive by $30, but Unit A and B are not. Under the new proposal, Unit A will have to physically export $55 worth of goods and Unit B $60. Unit B and C, in turn, will have to import goods since their suppliers, A and B respectively, will no longer be able to meet their needs fully. As in the case of the tax sops, this is something Sitharaman needs to examine. SEZs,and their much larger cousins NIMZs, are an integral part of the manufacturing-revival story, and the government needs to remove all hurdles in their path.