As exports continue to shrink, the commerce department has asked the finance ministry’s revenue department to allow special economic zones (SEZs) to do job work for domestic firms located outside such zones — at least for export purposes — so that they can utilise their massive idle capacities.
The commerce department feels such a move will help SEZs not just in bad times like these but also in lean order seasons in good years as well, sources told FE. “Even in a good year, the flow of supply orders from abroad typically slows for a while after Christmas, resulting in unutilised capacities at the SEZs. However, domestic demand for finished goods remains robust even after Christmas,” said one of the sources.
Currently, many of the SEZs are operating at 70% of their capacities due to subdued global demand and the imposition of an 18.5% minimum alternate tax (MAT) on SEZ developers and units and a dividend distribution tax (DDT) on such developers.
Some SEZs have been forced to operate at even less than 60% of their capacities, one of the sources said.
As part of its efforts to provide a leg-up to SEZs, one of the six priority areas identified by the commerce ministry earlier this month to reverse a persistent slide in the country’s exports, the commerce department has also sent afresh proposals to the revenue department asking it to scrap MAT and DDT for SEZs. It has also asked the revenue department to allow SEZs to sell products in the domestic market at concessional tariff rates (the lowest rates at which India imports such items from its free trade agreement partners).
The commerce department argues that these are exceptional times for exports, given the gloomy external environment, and its proposals need to favourably considered. Earlier, the revenue department had turned down such proposals for various reasons, the main being the huge “revenue losses” to the exchequer to any such incentives to SEZs — something that has been fiercely contested by the commerce department.
India’s merchandise exports contracted for 16 months in a row through March and recorded a 16% decline in 2015-16 to $261 billion.
The government imposed MAT on SEZ developers and units and DDT on developers in 2011-12. Before MAT and DDT were imposed, the growth in exports from SEZs was as high as 121% (2009-10) and 43% (2010-11), far exceeding the increase in the country’s overall goods exports for these years.
However, such high growth dropped consistently since the taxes were imposed and even contracted by over 6% in 2014-15, worse than the 0.2% drop in the overall merchandise and services exports for that fiscal.