Tax-losses are not the right way to look at SEZs
Given how the CAG has calculated the tax losses to SEZs at R83,000 crore between 2007 and 2013, chances are the government will once again go on the backfoot when it comes to giving concessions to such units, or to the National Investment and Manufacturing Zones (NIMZs) that were conceived as being several times larger than SEZs. While the CAG is probably right about the tax numbers; indeed, the finance ministry puts out similar numbers in its tax forgone statement each year, the issue is quite different. For one, the tax numbers themselves mean little. The R23,000 crore tax loss for FY14 in this year’s budget document, for instance, pales into insignificance against the R3.76 lakh crore tax giveaways the same document talks of. What really matters is the investments and the jobs creation that this tax giveaway results in. Based on the data available with the commerce ministry, investments in SEZs have risen from R4,000 crore in February 2006 to R3 lakh crore today, and employment from 1.4 lakh persons to 12.8 lakh.
This is a large benefit by any yardstick. Indeed, SEZs and NIMZs were envisaged as large enclaves that could transform Indian manufacturing from what it is today to Chinese standards, with global infrastructure and labour standards. Indeed, as the NIMZ policy document put out admitted, if India had to increase its industry share to 25%, such enclaves were critical. Setting up such enclaves, however, requires not just huge tracts of land—if the Land Act is not changed, you can forget about SEZs and NIMZs—it requires significant tax concessions. Indeed, the SEZ Act promised a 100% tax incentive for the first 5 years, 50% for the next 5 and an amount equal to the reinvested profits for the next 5—instead, the finance minister levied MAT and DDT on SEZs. Important as it is for the CAG to point out such losses—the 2G scam would never have got the exposure it got, or A Raja arrested, had it not been for the CAG report—policy-makers need to take a larger view of what is the right path forward.