In what looks like building a case for denying tax incentives for new special economic zones (SEZs) as proposed in the draft Direct Taxes Code (DTC), the government has started an exercise to ascertain whether and how these sops are being misused by the zones.
Finance minister Pranab Mukherjee has written to all chief commissioners and field formations in the direct and indirect tax departments to bring to the table all the cases of violations and tax evasion or tax avoidance by SEZ developers, official sources told FE.
As per the revised discussion paper on DTC unveiled recently, the new code which will kick in from April 2011 would allow for grandfathering of tax sops for all SEZs notified till then, but new zones would be deprived of the benefit.
According to the sources, the finance ministry has also asked various wings of the government to bring to its notice of any incidence of probe into violations of rules by SEZs. In this regard, it has shot off letters to agencies like the Financial Intelligence Unit, Central Economic Intelligence Bureau, Department of Revenue Intelligence, Central Excise and Customs intelligence agencies, Directorate-General of Foreign Trade, narcotics department and Delhi police, sources said. This would enable the revenue department to coordinate the efforts of these agencies in tracking down violations by SEZs, an official said.
The idea is to ensure that SEZ developers do not misuse the tax holidays which enjoy under current regulations.
As earlier reported by FE, there have been many instances of SEZ units importing finished designer jewellery and plastic waste in violation of DGFT rules. Some of them also export power to domestic tariff area, forcing the finance ministry to impose a 16% import duty on such power sales in this year?s budget. Many SEZ units are not net foreign exchange earners and find ways to circumvent this obligation.
The DTC proposal to take away the incentive of profit-linked deductions for SEZs has disappointed the industry. The interest in SEZs already seems to be waning as evidenced by the drop in number of fresh applications. Many SEZs have queued up to get them de-notified.
The revenue department feels that continuing exemptions after 2011 will lead to huge revenue losses and shifting of existing industries to SEZs. In fact, they allege that growth in SEZ exports in recent years has been only at the cost of non-SEZ industries. As per section 10AA of the Income Tax Act, a unit operating in an SEZ is eligible to claim 100% tax holiday for the first five years and a 50% tax holiday for the subsequent 10 years. A recent study by ICICI Securities, while commenting on the DTC proposal, said that while the current profit-linked deductions available to SEZ developers have been protected for their unexpired period in the first draft of DTC, there is no mention of granting these profit-linked cuts in the case of units operating in these SEZs. So, the revised plan accord tax holiday protection enjoyed by units currently operating out of SEZs for the unexpired period.