Revenue loss may lead to reversal of SEZ policy: Study

The Financial Express, February 15, 2008

The much-touted special economic zones policy runs the risk of being reversed, in terms of attractive tax exemptions it offers, with the Government’s finances coming under stress, a study has said.

The study noted that tax incentives extended to SEZs may lead to a loss of four to five per cent of the total tax revenues.

“The (SEZ) policy is yet to be fully tested, especially with regard to the potential adverse impact on tax revenue and an increased disparity in development across regions. This could lead to some review of policy which will clearly affect developers’ plans,” a study by brokerage and investment banking firm CLSA has said.

With the government’s finances not in good shape, the potential for large tax revenue losses arising from the SEZs has been a key concern, it said.

“While tax receipts are increasing and fiscal deficit decreasing, many are arguing that India cannot afford the loss of tax revenue from export business growth in SEZs,” it said.

On one hand, Commerce Department’s refrain has been that without suitable tax concessions, developers would not invest and that corporate tax concessions apply to export incomes, while on the other questions have been raised by the Finance Ministry, RBI, IMF, WTO and OECD about “financial feasibility of the scheme”.

According to the Finance Ministry estimates, revenue loss from SEZs could be over 25 billion dollars, more than the earlier estimate of 23 billion dollars for the period 2007-10.

“Nevertheless, should revenue losses become too great there is a risk that the government could reverse the policy and reduce exemptions,” the study said.

However, the study goes on to add that a pick up in organised sector employment arising from the new SEZs should lead to improved tax administration which could partly offset losses due to tax concessions. So far, more than 600 SEZs have been cleared, of which 187 have been notified.

Another study conducted last year by think-tank CUTS had found that the revenue loss concerns of the Finance Ministry were notional and benefits accruing from the tax-free zones would exceed the potential tax losses.

The CLSA study further identifies extension of export schemes such as Software Technology Parks of India and Export Oriented Units beyond March 2009 as a factor that could affect the growth of zones.

Both the schemes provide similar incentives as the SEZs and industry has been lobbying with the government for their extension, the study said.

“More than 50 per cent (226) of the formally approved SEZs are IT/ITeS sector specific and the reversal of these schemes could cause a mismatch in supply and demand from IT and export manufacturing businesses, potentially affecting the ability of the developers to attract tenant businesses to their SEZs,” it said.

Land acquisition has also proved to be the biggest hurdle for SEZs, the study says. Amid rising land prices across the country, the SEZ policy has come under fire as a means of land grabbing by developers, allowing the removal of land in return for inadequate compensation and “conversion of valuable fertile farm land into industrial zones”.

The study estimates that projected investment in SEZs over the next 10 years could be 213 billion dollars, if 75 per cent of the formally approved zones and 25 per cent of the in-principle approved SEZ land is developed and operational.

Exports from the SEZs during the 10-year period could touch 352 billion dollars, nearly half of India’s total annual exports, with IT and ITeS SEZs contributing 30 per cent at 105 billion dollars.

The zones are also projected to create 14 million direct and indirect jobs, leading to a 30 per cent rise in the current organised employment….

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