The government enacted the SEZ Act, 2005, to signal its commitment to a stable SEZ policy regime. However, the last five years have witnessed numerous controversies related to SEZs and in response, dilution of the policy through frequent amendments in the SEZ Rules. The Direct Taxes Code (DTC) Bill, 2010, is now seeking to dilute the incentive package offered in the SEZ Act by covering SEZs under the MAT and DDT regimes and replacing the profits-linked tax benefits with investment-linked ones. By virtue of Section 51 of the?SEZ Act, the provisions of the Act have?overriding effect on the provisions contained in any other Act. A pertinent question is: If an Act passed by Parliament is not implemented in its entirety, should it not be considered as the subversion of the sanctity of Parliament?
It may be noted that the draft DTC Bill, 2009, released by the finance ministry in August 2009 had offered tax incentives only for SEZ developers; no such provisions were made for SEZ units. The commerce ministry, which fathers the SEZ scheme, voiced strong objections to the Bill and made several representations until the revised version restored some relief to the SEZ units. This is a clear demonstration of how uncertainty dogs policymaking.
The DTC can have both pros and cons. While citing only pros, the government claims that the investment-linked incentive regime is more efficient and better targeted, and that it will result in less revenue loss. An important positive effect of the scheme will, however, be that it would expedite the process of setting up of at least those SEZs that have already been approved. Since the investment-linked incentive regime simply means that the specified businesses will get accelerated depreciation, this will be less preferred to the existing one by most business houses. So, they will attempt to take advantage of the time limits set in the DTC Bill for the new scheme to be operative. In the long run, however, the change in the incentive regime will not only signal uncertainty and lack of commitment to the policy but will also affect the attractiveness of SEZs. In today?s global economy where capital is highly mobile across boundaries and incentives-based competition is intense, the dilution of incentives would probably mean that the SEZ would not attract investment. Further, the new regime will tend to favour more capital intensive industries. Employment intensive industries, including the IT sector, which have less capital requirement, would be adversely affected. This is in direct contradiction with the primary SEZ objective of generating employment.
Experience of the successful countries indicates that a strategic SEZ policy requires a clear vision, concerted efforts, continuity in efforts, pragmatic and flexible approach, dynamic learning, and institution-building. China, for instance, announced the SEZ programme as a means of absorbing new technologies and testing liberal economic policies not destined for the rest of the economy. SEZs were subject to lucrative preferential policies. With superior geographical locations, attractive incentives, excellent infrastructure and extensive administrative powers, SEZs developed great competitive advantages over other areas in attracting investment. Encouraged by the sound experience of SEZs, the Chinese government extended the programme and developed a myriad of different investment zones across the country with lucrative incentives. Over the past three decades more than 3,000 SEZs have emerged and they have become areas with the largest foreign investment and the highest economic growth in China. National level tax incentives have now been withdrawn but these zones are still offered provincial level incentives with clear directives of promoting high-tech industries irrespective of ownership.
The first export processing zone in Taiwan was set up in 1966 as part of the government policy of expanding exports of the labour-intensive products. Between 1989 and 1997, the focus shifted to capital intensive industry. During 1998-2001, EPZs moved up the value chain when the government encouraged technology intensive units in EPZs. Since 2001, the emphasis has been on logistic firms. In this evolutionary process, the government used well-targeted tax incentives as an important tool.
SEZs have made significant contribution to those economies where they have succeeded. And they have succeeded where there is strong leadership support to them. Zones fail because of the hesitation of the governments implementing the benefits and the terrible temptation/pressure to set down prescriptions of different kinds. In this fiercely competitive world, India cannot be complacent and will have to accelerate efforts to promote SEZs.
The author is associate professor, Department of Business Economics, Delhi University