FM throws spanner in SEZ works

New Delhi, Jan 22 | Updated: Jan 23 2007, 05:30am hrs
Finance minister P Chidambaram on Monday proposed a fresh provision in the Special Economic Zones Act that would deny tax benefits to developers and units in SEZs unless they fulfilled a certain export obligation.

According to government officials, Chidambarams proposal was opposed not only by commerce and industry minister Kamal Nath, but also by Planning Commission deputy chairman Montek Singh Ahluwalia and the law ministry in the meeting of the empowered group of ministers.

Chidambaram proposed that SEZ units should not be eligible for tax sops if they did not meet an export obligation of 30-50% of total production. He was also keen that developers be denied direct tax concessions if the units did not meet the obligation.

The eGoM, chaired by external affairs minister Pranab Mukherjee, failed to take a decision on 21 crucial issues, including land acquisition, a rehabilitation policy and misuse of tax incentives since Chidambarams proposal deflected the entire course of the discussion.

Kamal Nath said such a provision would divert huge investments to other countries as Indian and foreign units in the 23 operational SEZs now sell up to 70% of their production in the domestic tariff area (DTA). Even the law ministry said it was not legally tenable to penalise developers for units in their SEZs not meeting such an obligation.

House Divided

Finance: Units must fulfill export obligation for tax sops
Commerce: Provision will
divert investments
Law: Developers cannot be
penalised for non-compliance
Plan panel: Lower DTA sales will impact indirect tax revenue

The commerce ministry was of the view that the current requirement of posting net foreign exchange earnings was enough to ensure adequate exports. The Plan panel, too, said if sales to DTA were low, consequent indirect tax revenue would be minimal.

Pending a final view by the eGoM on other issues and the announcement of a national rehabilitation policy, all decisions concerning 300 fresh proposals, 237 proposals that have received the BoAs formal approval, and another 164 granted in-principle clearance have been put on hold.