Jul 1. – The excellent India-focused site Tax Guru has highlighted some of the issues that Indian SEZs are facing in their well thought out piece “Quick review by government needed in respect of Income Tax Concession to SEZ.” In it, the writer points out the problems faced by SEZ’s in relation to the revised draft of the new Indian tax code, which we have written about on India Briefing.
Indian SEZs, upon which so much faith has been placed in terms of FDI generation, have apparently been disregarded by the government in the new draft. Tax Guru states:
“The special economic zone (SEZ) scheme seems to be in trouble. The revised draft of the Direct Taxes Code does not envisage continuation of the income-tax concessions for units that may be set up after the end of the current financial year. The uncertainty means that many
SEZ developers — especially those whose projects are under implementation — are not very hopeful of leasing their space to entrepreneurs who want to set up manufacturing, services or trading units in SEZ. They might prefer to get their SEZs de-notified. Some of them have already opted to do so.”
There also seems to be disagreement between Indian Ministries as to the validity of Indian SEZs. India’s Commerce Ministry claims that the SEZ scheme has delivered investment of about US$3.2 billion, direct employment to over 500,000 people and exports of about US$4.7 billion from SEZs during the fiscal year 2009-10. Out of 578 formal approvals, 353 have been notified and 111 are operational.
However, as Tax Guru points out, these figures deserve a closer scrutiny. They do not tell that much of the investment, employment and exports would have taken place anyway and that attractive tax breaks have only facilitated migration of investments to SEZ, especially in the information technology sector. In fact, the situation has gotten so bad that Tax Guru concludes:
“The Indian SEZs were expected to provide world-class infrastructure, similar to what China offers in its SEZs. In reality however, some SEZs have been created to accommodate only one unit — that of the developer. Such captive SEZs avail themselves of the tax breaks but build infrastructure to meet their own requirements only. The units have come up as a substitute for expansions in India’s domestic markets and export orders from domestic units have been diverted to the new SEZ units to obtain the tax benefits. Basically, they are real estate ventures.”
India’s Finance Ministry has rightly been concerned with so many duty-free enclaves springing up, and apart from the revenue losses, has been apprehensive about the administrative hassles. Now, the ministry seems convinced that it is time to check further proliferation of SEZs. Land acquisition issues, global economic uncertainty and now, uncertainty about tax breaks have contributed to lack of enthusiasm about the SEZ scheme but more important, serious questions are being raised about the social benefits of the SEZ scheme. Consequently, the potential death toll of the Indian SEZ in its current form has been rung.
In many ways, it’s a situation that only Indian bureaucrats could arrange to mess up. While rightly recognizing the value of introducing SEZs as an investment platform to attract FDI, and lauding the highly admired Chinese approach to SEZs as a legitimate vehicle in doing so, the Indian government omitted to understand the very nature of the SEZ structure. While in China, the SEZ is run by the government, and the tax incentives passed under strictly controlled administration and customs procedures to the tenants, in India the entire concept was passed to the private sector to run. Not surprisingly, the private sector has proven self serving and essentially hijacked the SEZ concept not as a nationally important vehicle to encourage foreign investment, tax revenues and employment, but as a means to evade domestic taxes for themselves. It is a colossal mistake.
Whether it was collusion between the SEZ regulatory authorities and Indian property developers, a lack of the understanding of the entire SEZ concept as how China made it work, or sheer poor management over approvals procedures, the issue is now quite clear. The majority of Indian SEZs are a conceptual failure, designed to line the pockets both in decreased tax revenues, and site development purely on behalf of the land owners. The motivation of the SEZ has been manipulated well away from the primary goal of attracting foreign investment. The Finance Ministry is right to clamp down on the abuse, and should discard the entire current structural weaknesses. Indian commercial behavior within the private sector as concerns SEZs have demonstrated that they are not essentially fit and proper wardens of what should have been strictly an Indian Government controlled enterprise, and in China definitely is.
It is apparent that SEZs can function properly only under the watchful eye of the regulatory authorities, tax department and customs. A unified Indian government body, established without the involvement of the private sector, needs to be created and managed by the local government under state supervision to verify under strictly controlled guidelines the investment capabilities of SEZs. Only then can India’s second generation of SEZs be properly introduced and be incentivized to act as vehicles for attracting FDI, tax revenues, domestic employment, and an overall rise in localized wealth that such zones can bring.
Source : 2Point 6Billion