The SEZ controversy that has attracted public notice has been land acquisition. A combination of activist obstruction and hamhanded official response has turned an infrastructure policy into a political mess. But below the news radar, another issue has been attracting attention: taxes and SEZs. The ministries of commerce and finance have been debating the right tax policy for SEZs. The matter was referred by the Prime Minister to his economic advisory council, headed by C Rangarajan. The council has now recommended a compromise solution. It would be interesting to see if either party accepts this as a compromise. The commerce ministry has consistently favoured a liberal tax regime and no compulsory export target policy, other than the requirement that units in SEZ be net earners of foreign exchange. In plain language, exports must be greater than imports in SEZs. The finance ministry has argued that a liberal tax regime, if at all to be used, must be pegged to concrete requirements. It has also said it is not good policy to accord tax-free status to firms that will supply the domestic market and will compete with non-SEZ firms, which have to pay the usual taxes. The finance ministry, thus, wanted to impose an export requirement of 51% of production to ensure outward orientation of SEZ units. SEZs have typically been used to boost exports the world over, particularly in countries like China and Mexico.
The council, interestingly, has shot down the proposal to impose export requirements, while recommending the imposition of a minimum alternate tax of 10% on SEZ units. This is the compromise offered to the finance and commerce ministries. The proposal addresses, to an extent, both revenue concerns and the issue of disparity between firms operating inside and outside SEZs. The commerce ministry should have no major problem with the council?s recommendations since they do not, fundamentally, interfere with the special status granted to units in SEZs. Not that this is necessarily the end of the debate about how to frame SEZ tax policy. The two ministries can still work up a storm in files and counter memos. But the larger point is that the SEZ policy has been discussed and argued over for many months now and an end needs to be enforced. Maybe the PM can put his weight behind his council?s idea.