Commerce Secy Flays Finance Ministry On SEZ Tax.

Departing from his usually cautious approach, commerce secretary Rahul Khullar on Thursday took objection to the way the country’s special economic zone (SEZ) policy was drastically altered by the finance ministry in the budget.

Presenting the budget for the next year, finance minister Pranab Mukherjee had withdrawn the Income Tax exemptions given to SEZ units, one of the core attractions of the SEZ policy.

The move had drawn alarm from the commerce and industry ministry, which has been working on more and more schemes to make India an attractive investment destination and increase India’s exports to the world. SEZ policy, introduced six years ago, was seen as a compromise formula to prevent manufacturing from shifting to countries like China by giving units almost complete freedom from taxes in return for employment and exports.

Khullar said the withdrawal of the Income Tax exemption will dent both the viability of the SEZ scheme as well as India’s image as a safe place to invest.

“Till today, it was zero. Suddenly, out of the blue, tax of 20-21% is being imposed on you,” Khullar pointed out, “..if the MAT (minimum alternate tax) ends up altogether discouraging both foreign and domestic investments, what are we achieving?” he asked.

Khullar said that India should not have changed a policy so crucial to its attractiveness as an investment destination so abruptly.

He said foreign investors will not take any future policy by the Indian government seriously if they are changed so soon after being put in place.

Most of the SEZs have barely completed the investment stage and only just started producing and exporting.

“The rules of the game are changed, midway.. The greater damage here is that it will not do wonders for our credibility,” he said.

Khullar’s views were echoed by Chintan Patel, head for the real estate, industrial and hospitality advisory services of Ernst & Young, India.

He said income tax benefits, along with exemption from import and excise and sales tax, were provided to SEZs to match up to similar programs offered by countries like China.

The thinking at the time was that SEZs, considered outside Indian tax area and meant for exporters, would at least generate employment and foreign exchange, if not tax revenues.

“You are competing against countries like China,” he pointed out. “We were being able to price our offerings at competitive rates ... The new tax will have to be passed on to the pricing and to that extent, our offering will be less competitive,” he said.

SEZs are currently being used both by manufacturing companies, such as Reliance Industries’ Jamnagar refinery, as well as by large IT and BPO companies, that export ‘services’ to countries like the US.

While taxes of 20-21% on profits may not hurt big software companies, they will make life hard for manufacturing companies who have to deal with Chinese competitors who often pay much lower taxes and bills, Patel said.

“You cannot ask people to invest saying no tax and when they have, say that you will tax. If absolutely necessary, make it applicable to those who apply from now on,” he added.

Since their establishment, SEZ exports have grown in leaps and bounds, doubling their exports every year. They accounted for exports worth $50 billion last year — almost a quarter of India’s goods, IT and BPO exports during the period. They are on track to hit $75 billion this year, Khullar said.

The Commerce ministry is especially worried over the fast rising gap between what Indian earns and what it spends in the rest of the world and sees manufacturing and exports as the only way to ensure a bankruptcy free future.

Thanks to a $110 billion shortfall in its goods exports compared to its imports, India had a net deficit of $38 billion in its ‘current’ transactions with the rest of the world.

“We have a problem because you want to bank that this [shortfall] is going to be financed by booming exports of services [IT & BPO] and remittances, that is a very risky way to plan your finances.. The best way to address the issue is to dramatically increase your exports,” Khullar reiterated.

Source : dnaindia.com