The Hindu Business Line : To cap or not to cap SEZ

The extant rules have built-in checks and balances to obviate abuse if only the members of the Board of Approval exercise proper vigilance before approving fresh proposals.

New Delhi , Aug 24

Predictably, the Empowered Group of Ministers (e-GoM) meeting to review the existing cap on establishing special economic zones (SEZs) in the country on Wednesday has recommended lifting the self-imposed cap of 150 SEZs but would review the position after 75 SEZs become fully operational, as against the extant 25 fully operational ones.

A lot of avoidable misperceptions about the viability of SEZs only helped the e-GoM to pitch for removing the cap while factoring in the requisite caution to render the sustainability of such SEZs in the long run.

The reasons are not far to seek. The inter-ministerial differences between the Ministry of Finance and the Ministry of Commerce & Industry over permitting a large tract of the country to operate in a tax-free zone, particularly when there has been an indiscriminate rush to set up more SEZs by private players, have unfortunately become both strident and unseemly.

Finance Ministry concerns

The Finance Ministry's apprehensions are not unfounded as it found that a large number of existing export units, faced with the phase-out of income tax exemption on export profit under 80 HHC, began to relocate themselves in the SEZ areas in a brazen bid to qualify themselves for all the tax breaks.

This was not the intention of the SEZ scheme as it is basically designed to attract fresh investment in greenfield projects in a vast area, declared a deemed foreign territory for all practical purposes to give the units a zone of comfort from the high transaction cost and other structural disabilities the domestic industries otherwise face.

With existing export units masquerading as SEZ units or routing their exports through SEZs, the concerns of the Finance Ministry became credible, prompting the Group of Ministers to set the ceiling on SEZs at 150.

Amendments to Rules

Lest this alone should not suffice, the Department of Commerce brought some significant amendments to SEZ Rules on August 10 to preclude diversion of exports and production activity to SEZs.

It prescribed companies operating in SEZ units to make fresh investments on plant and machinery. In another amendment the department sought to define trading activities by clarifying that trading should mean import for the sole purpose of re-export after due value addition in order to claim tax rebate. These two amended SEZ rules, though late than never, might douse the dread of the mandarins in the Revenue Department that the avenues for abuse have at long last been plugged.

Land deals

The second worry of the Finance Ministry is that SEZs are not really oriented to export and they are all land deals. A top Government official told Business Line here that one SEZ developer sought to build a golf course in the non-processing areas at SEZ-rate acquired land and not on commercial rates. Here a caveat is in order.

In multi-product SEZ where 30 per cent area is processing, the balance 70 per cent is set apart for building other infrastructure such as roads, hospitals, schools and even golf course for recreation purposes. Here, the Board of Approval (BoA) can extend tax breaks to the extent desirable to make the SEZ an attractive destination, especially when it is cut far away from the city.

Since there is a representative of the Finance Ministry in the BoA for SEZs, he should submit a dissent note if he senses that the land cost for construction of recreation purpose is too low to be granted, particularly when it entails loss of revenue to the exchequer.

Checks and balances

An official of the Commerce Department in strict anonymity concedes, "Finance ministry people are worried about land gamble or land scam. Where is the land scam? I am unable to understand. The SEZ developers while building the infrastructure must submit a detailed project report and well-laid guidelines are prescribed for them." So the extant rules have built-in checks and balances to obviate abuse if only the members of the BoA exercise proper vigilance before approving fresh proposals.

If investment of Rs 100,000 crore over the next three years in infrastructure development of SEZs and in setting up units therein has been forecast, more SEZs proposals need to be cleared subject to the rules being scrupulously followed.

Trade analysts set store by SEZs the world over because these exclusive export enclaves have transcended the limits and constraints in physical infrastructure a nation could undertake on a massive scale by fostering an enabling environment to engender self-contained world-class services within dedicated areas for a hassle-free operation of trade.

Once SEZs begin showing results, this is bound to have a demonstrative effect in terms of transforming the image of a country itself as China had showcased to the world through its massive SEZ in its provinces.

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