Finmin opposes liberalising SEZ policy

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | Kirtika Suneja | New Delhi | Updated: Jul 6 2012, 07:23am hrs
Says commerce ministrys suggestion for change in norms will only facilitate land grabbing by pvt sector

Finance ministry has strongly opposed the proposal to further liberalise the norms for Special Economic Zones (SEZs), saying the commerce ministrys suggestion will only facilitate land grabbing by the private sector.

The commerce ministry recently sought relaxation in the minimum area requirement and the land contiguity norms for SEZs in a bid to prop up export growth from these zones. Growth in exports from SEZs is still in double digits, but lower than overall export growth, raising questions over the need for these enclaves that enjoy sundry tax sops. Commerce ministry also recommended opening up of the facilities such as schools and hospitals that are built with duty free imports for SEZ employees, to outsiders too.

Finance ministrys concern is that if the minimum area requirement is reduced, the developers of the 389 notified SEZs and another 200 formally approved ones would use their surplus land acquired with government backing at below market rates for real estate activities. This, the ministry reckons, will defeat the very purpose of these zones to serve as engines of economic growth. North Block had earlier taken much of the sheen off the SEZs by proposing in the direct taxes code Bill that only zones notified before March 2014 will be entitled to the I-T exemptions. Also, from assessment year 2012-13 onwards, SEZs will be subject to minimum alternate tax on book profits.

There are a large number of SEZ projects that acquired land cheap and received either in principle or formal approvals but were not notified. Only less than half of the notified SEZs are actually exporting. North Block suspects that the real intention of SEZ developers is to grab land cheap with state support. Besides, many of them, who availed duty free imports for construction, do not meet their obligation of being a net foreign exchange earner that is, earning at least one dollar more than their cost of raw material and other imports.

We cannot short change the public like this...We are deeply concerned about these proposals, said a government official, who cannot be named because of the sensitivity of the discussions.

Commerce ministry officials seemed to be open to diluting their proposals in the light of opposition from the finance ministry. Discussions for finalising the policy are on and all suggestions are welcome, one official said. The official emphasized that views from all government departments concerned will be accommodated.

When contacted for finance ministrys official position on the proposal, finance secretary RS Gujral told FE, We are examining the proposal. It is premature to comment on it now.

The other proposal that finance ministry is upset with is opening up the social infrastructure like schools, hospitals and convention centres for people outside the SEZ. Duty free import is allowed for construction of these facilities as an incentive for making exports and earning foreign exchange, not to do business in the domestic tariff area, the finance ministry feels.

North Block is also upset with the fact that in spite of the many reported cases of abuses of SEZ benefits, the Directorate of Revenue Intelligence has extremely limited and conditional access to these zones to probe any suspected tax evasion or smuggling. Before entering SEZs, investigating agencies have to take permission from the development commissioner appointed by the commerce ministry, which is often hard to come by, said a field officer of an investigating agency.

Finance ministry wants the commerce ministry to study the reasons for the decline in the rate of export growth from SEZs from over 121% in 2009-10 to only 15% in 2011-12 before any policy relaxation is granted. While the high growth in the previous years make it difficult to maintain matching performance in the subsequent years, commerce department considers the imposition of minimum alternate tax on SEZ developers and units as well as the dividend distribution tax on developers have made projects unattractive for investors.