Finance, commerce min war over SEZs continues

Written by Arun S | New Delhi, Jan 28 | Updated: Jan 29 2008, 07:58am hrs
A week ahead of the empowered group of ministers (eGoM) meeting on special economic zones, major differences persist between commerce and finance ministries on the agenda items. While the commerce ministry is pitching for commercial viability of SEZs, the finance ministry has apprehensions on the revenue outgo due to tax exemptions and SEZs being turned into realty projects.

On the issue of service tax exemption to developers, co-developers and units, the commerce ministry has cited the SEZ Act, which accords exemption to services provided for an authorised operation, irrespective of whether it is within or outside SEZs. The revenue department has said such tax exemptions should be given only for services provided for consumption within the SEZ and not outside of it.

The eGoM on February 4 would also discuss allowing developers to build additional facilities in the non-processing area (where there is no industrial activity) without tax concessions. Permitting additional facilities would result in more and larger social amenities (like educational institutions, hotels, hospitals, entertainment and recreational facilities as well as business and housing complexes) coming up in the non-processing area. The revenue department has opposed the plan, saying this would make SEZs a pure-play real estate activity.

However, the commerce ministry says the revenue department's stance will affect the profitability of such projects as curbs on the size and number of such social amenities will prevent developers from fully using the permissible construction on the SEZ land as per individual state policies.

There is also the issue of considering amendments to drawback/duty entitlement pass book scheme rules. Such changes would allow these benefits to developers and co-developers of SEZs against payment in rupees for materials bought by them from the domestic tariff area (DTA, or area in the country outside SEZs) for authorised operations in the SEZ. The law says DEPB and drawback are given only for such exports which are paid for in forex. SEZ units earn forex through exports. But the RBI says developers and co-developers cannot avail of this benefit as they are not forex earners.

The commerce ministry, while calling for amendment of the DEPB/drawback provisions, has argued that if developers and co-developers are not given such benefits, they would resort to importing cheaper goods for SEZ development, instead of making purchases from the DTA.