Column: CAG in knots over SEZ

The auditor’s report on SEZs has no larger picture to offer for a possible course-correction

The Comptroller and Auditor General  (CAG) went into the audit of special economic zones (SEZs)without being clear if it wanted to support the policy which underlay their functioning. The report, consequently, runs all over the place and offers no evidence of any thought-through economic rationale for why it was undertaken.

Its major conclusion is that the SEZs have been run to the ground because of the withdrawal of two key tax concessions in budget 2011. These are the minimum alternate tax and the dividend distribution tax. But it offers no further insights and, indeed, offers no hint to the policy-makers if such concessions should be reinstated, considering that auditor looks bleakly at any such effort.

But having come to this conclusion in its report “Performance of Special Economic Zones” tabled in Parliament last week, the auditor also says the promoters are making money by selling de-notified land or land that was given to the zones, which had incidentally become useless as the tax concessions were withdrawn.

Nowhere does the auditor show any evidence in the report that the land being sold was not the property of the promoters. The SEZ Act and its rules allow for the land to be leased or transferred to the developers. Each of the land pieces sold that are mentioned in the audit report are clearly held to be the property of the developers; yet, the CAG holds those plots should not have been resold only because their value had appreciated from the time they were taken over for the development of the zones.

If one remembers right, this is the same issue that is being fought in the Kolkata High Court between the Tatas and the Mamata Banerjee-led government over who has the right to dispose of the Singur land (though not an SEZ land). The court is yet to decide on it but the CAG has decided that it can anticipate the answer and has built up a full chapter of its report on this. The burial of the legal question by the auditor has consequently grabbed the public attention as a question of illegal land grab by the SEZ promoters. The report also holds some of the promoters guilty of taking out mortgages on the land they have either leased out from the government or that has been allotted to them. The auditor is possibly unaware that a promoter of a SEZ cannot take debt for developing a zone, as per RBI guidelines, and the only way to get a loan from banks is to offer land as collateral. If a spectrum or a mine is offered as collateral for a bank loan, would the auditor find fault with those too?
Unlike the other seminal reports on allocation of coal mines or the pricing of natural gas, the SEZ report has consequently no larger picture to offer the government for a possible course correction from here except these nitpickings and culs-de-sac.

Does the report see any merit in the idea of keeping the zones alive after it had relentlessly chased down the finance ministry over the years for offering tax concessions to the zones? There is no answer to that.

Assuming there is land grab, should all the zones be scrapped? The auditor instead arrives at a painstaking decision that it is actually much harder to run a manufacturing enterprise in these zones than in the domestic tariff areas as it costs 37% more in tax liabilities to do so. It incidentally makes a valid point that calculation of the performance of a SEZ just as a net foreign exchange earner (NFE) is fundamentally flawed as it leaves a lot of room for mis-invoicing given the skeletal government reporting staff in each zone.

It also demonstrates that the rate of surrender of licences for the zones in the five major states of Andhra Pradesh, Tamil Nadu, Karnataka, Maharashtra and Gujarat shows that there is little oomph left in this export promotion plan.

So, here we have a situation where the auditor is convinced the zones are not really making money—the NFE argument is an evidence; as a result, huge numbers of them are surrendering licences and only those smart enough to have seen it all to never have started it all are the only beneficiaries as they can sell land, even if legally. And then the auditor questions the government why more SEZs were not set up, and especially in the backward states, where, apparently, they could have made inroads into remedying unemployment (sans tax concessions, on lease-hold land, despite zero infrastructure).  All this would happen, the CAG argues, even as it questions the record on employment creation (1.35 million) by the existing SEZs claimed by the latest commerce ministry fact sheet.

And just as a final conundrum, the report agrees with the finance ministry that the zones have been a terrible drain on the exchequer. The tax foregone report by the finance ministry for just FY 14 puts the sum lost because of SEZs at R23,531 crore. In eight and a half years the tax foregone is estimated at above R2 lakh crore. Commerce ministry data shows the total investment made on all of them since 2006 till September 2014 was only R3.8 lakh crore, so at a 22.5% effective rate of taxation it would mean the zones have made nearly R8.9 lakh crore of profit? And yet the promoters fled? The CAG report has no clue.

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