DESH Bill: Finmin says ‘no’ to 15% benign tax | The Financial Express

DESH Bill: Finmin says ‘no’ to 15% benign tax

The finance ministry’s stance may delay the introduction of the DESH Bill in Parliament, although the commerce ministry is making all efforts to finalise the draft and introduce it in the winter session, usually convened in November-December.

DESH Bill: Finmin says ‘no’ to 15% benign tax
SEZs have been fast losing their appeal due to the withdrawal of a slew of incentives. (IE)

The finance ministry has stuck to its opposition to key provisions of the Development of Enterprise and Services Hub (DESH) Bill, including a benign corporate tax rate of 15% until 2032 for the units in these proposed hubs. The DESH Bill will replace the Special Economic Zones (SEZ) Act.

According to official sources, in its formal comments on the Bill, the ministry has also expressed its reservation on a proposal to integrate the hubs with the domestic market, unlike SEZs that have clear export obligations.

The finance ministry’s stance may delay the introduction of the DESH Bill in Parliament, although the commerce ministry is making all efforts to finalise the draft and introduce it in the winter session, usually convened in November-December.

In the past, the finance ministry had, in internal deliberations, raised similar concerns over granting tax incentives to SEZs, in sync with its bid to prevent fiscal erosion and its vision to herald an exemption-free and simplified tax regime. It had also resisted the idea of allowing SEZ units to sell goods in the domestic market at zero or nominal tax, instead of the usual customs duty.

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However, its opposition, especially on the issue of freezing the concessional tax for greenfield and certain brownfield DESH units in both manufacturing and services sectors for a decade, was expected to soften in the light of the fact that it had already trimmed such a tax to 15% for new manufacturing units that begin operations by March 2024.

The commerce ministry had inserted these provisions in the draft Bill to make it more attractive for investors to set up units in these specially delineated zones. SEZs have been fast losing their appeal due to the withdrawal of a slew of incentives.

To resolve the issues, however, the commerce ministry will likely hold consultations in a week or two with the finance ministry and others who have raised queries on the draft Bill or concerns over certain provisions.

The new Bill was necessitated to woo investors after the government set a sunset date for SEZ units to start operations (June 30, 2020) to be eligible for a phased income-tax holiday for 15 years.

Moreover, India lost a case at the World Trade Organization (WTO) filed by the US, which had claimed New Delhi was offering illegal export subsidies through these SEZs.

Consequently, the draft Bill has proposed to scrap the primary requirement for an SEZ unit to have positive net foreign exchange (NFE) for five years; instead, the unit’s performance will be evaluated on the basis of “net positive growth” (NPG) under the proposed Bill. The NPG of a unit will be based on certain parameters, including employment generation and economic activity.

However, the finance ministry’s fresh reservation about the lack of export focus of these units stems from the concern that it would spur demands for similar incentives for firms outside these zones, said one of the sources.

The draft DESH Bill proposes to allow units in such hubs to sell goods in the domestic tariff area (DTA) by paying basic customs duty on just inputs, instead of finished products. It also proposes customs duty deferment for imports of inputs and capital goods by units with no interest liability.

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