Column: Stimulating SEZs

Published: February 20, 2015 1:53 AM

Budget FY16 must scrap MAT and DDT on SEZs, and open up external commercial borrowing for them

A tax policy is a choice that a government makes keeping in mind the macro- and micro-economic aspects. However, implementing it is always a tricky one! As we countdown to February 28, 2015, when the finance minister would present his first full-year budget, it is time to start articulating what the industry expects. Not too long ago, the government unveiled the SEZ scheme with a big bang, wherein the scheme envisaged giving a boost to manufacturing, attracting investments, driving up exports, creating jobs and providing a world-class infrastructure for businesses set up in these zones. Across the board, fiscal sops were extended for setting up SEZs and carrying out authorised operations.

The SEZ scheme took-off well with a large number of investors lining up to seek government approvals. However, over the years, implementation and operational challenges started daunting investors. There has been a continuous flip-flop by the government on the regulatory framework and providing fiscal incentives to SEZs. As a result, this sector continues to be affected and has not been able to scale up as envisaged. A large number of SEZs remain underutilised and underdeveloped and several investors have even exited from the scheme. Needless to mention, manufacturing sector remains the Achilles’ heel of our economy.

From a fiscal standpoint, as we step into yet another year, there is hope that in order to revive SEZs, several unfinished items in the agenda will be taken up by government in this forthcoming budget.

The Finance Act, 2011, broadened the scope of MAT and DDT by bringing in SEZ developers and units under the ambit of MAT, thereby diluting the benefits offered under the SEZ scheme. While there is a lot to be done to revive investor interest in SEZs, removal of MAT and DDT on SEZs remains an important aspect that needs to be addressed by the government in this budget. Levy of MAT/DDT during the tax holiday period increases burden on developers and units and also increases uncertainty.

A foreign company can set up a unit in a SEZ as a branch; however, a branch is restricted from carrying out any DTA transaction or a transaction with its affiliate in a DTA and has to operate on a standalone basis. While there is no restriction on a SEZ on carrying out DTA transaction, such anomalies act detrimental in attracting foreign investors.

There is a need for enabling external commercial borrowings for large projects like SEZs for opening up of low-cost financing for developers and, consequently, cheaper infrastructure for businesses.

As per the provisions under Section 10AA of the SEZ Act, 2006, there is no requirement with regard to the employment of new employees in order to claim tax deduction. Accordingly, the condition of ‘new employees’ cannot be imposed while examining the eligibility of the taxpayer for the deduction under Section 10AA. In this regard, the department of commerce has also clarified that there is no limitation on transfer of manpower to SEZ units. The CBDT clarification capping transfer of manpower from existing unit to a new unit to 50% should, therefore, be withdrawn, in keeping with the recommendations of the Rangachari Committee.

To encourage India to become a global manufacturing hub, DTA sales are inevitable. However, high customs duty levied on such domestic sales is a big deterrent. This custom duty on DTA sales gets levied even on value-addition in India—labour, material, etc, which is at a rate higher than FTA rates on certain items. Customs duty should be levied on a duty-foregone basis on domestic sales from SEZs and no customs duty should be levied on valued-addition in India.

Under the SEZ scheme, SEZ developers/units and the contractors/sub-contractors appointed are entitled for CST exemption on inter-state procurement of goods used for setting up and for authorised operations, on furnishing a duly signed Form I. However, under the CST Act there is no enabling provision or rule which provides for issuance of Form I to the vendors of contractors or sub-contractors appointed by the developer/units. This results in additional cost to the SEZ unit to the extent of CST charged by the suppliers to sub-contractor. This defeats the very intention of providing fiscal benefits to SEZ developers/units.

Success stories of SEZs can be witnessed even in neighbouring China, where a limited number of large, self-sustainable, confined enclaves have been created near ports to boost exports. The SEZ success story so far, and its benefit to the Indian economy, cannot be denied. SEZs contribute about 25% of India’s export and generate significant employment.

SEZs remain an important mainstay for supporting the Make-in-India campaign and boosting India’s exports. Clearly, the onus of stimulating investment in SEZs now lies with the government. The future of SEZs would greatly dependent on the ability of the government to bring stability to this policy regime and reinstate the fiscal incentives carved out under this scheme.

The author is senior manager (tax & regulatory services), PwC India.

Views are personal

Kiran D Mehra

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition