special economic zones (sez) (concept of economic development) suggestions for healthy, transparent...
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Special Economic Zones (SEZ) (Concept of Economic Development)
Suggestions for Healthy, Transparent & Effective Implementation
Dr. Kirit Somaiya,B Com,FCA,Phd
Ex-Member of Parliament
SEZ – EVOLUTION & EVALUATION
Concept:Thrust on Export, FDI, New Township/Infrastructure, Manufacturing Concessions: exemptions/relaxations in tax, labour,other laws- deemed
foreign territory, land acquisition
Execution of 6 years resulting into public debate
> Dilution, deviation, diversion, manipulation, loophole to be checked > Healthy implementation of SEZ concept need of the hour.
These are suggestions for improvement.Dr. Kirit Somaiya,B Com,FCA,PhdEx-Member of Parliament [email protected] December 2006
Major IssuesMajor Issues
Commitments for Export, FDI, Manufacturing diluted/removed
Impact on agricultural land
Compensation & Rehabilitation of PAP/Farmers
Tax Heavens – Revenue losses of State & Center
Abuse of large scale business/services to DTA
Level playing field for other industries in DTA
Major Issues Major Issues (contd.)(contd.)
Impact on democratic system-monopoly be avoided
Small SEZ additional burden on present infrastructure
Abuse-Real Estate Business-75% Non-Processing Zone
Abuse:Housing, Hotel, Mall, Profit motive Health & Education business-illogical Tax Benefits
Transparent decision making process- Better coordination & screening required
500 approvals/applications till now. Need to study need-demand to avoid abuse & default
Commitments for Export, FDI, Manufacturing diluted/removed
Export clause diluted to ‘Economic Activity’
No need/commitment for foreign exchange- Positive inflow- 1 dollar enough in 5 years
Developers/unit holders planning/executing business for DTA
Suggestions
50 to 60 % Production Mandatory for Export
All benefits enjoyed should be surrendered with penalty for all DTA transactions
Disincentive to small-metro city sez
Impact on Agricultural LandImpact on Agricultural Land
Issue concern with Mega Sez only IT, single sector developer/applicants have own land Disproportionate controversy Of 400 SEZ applications, few will require fertile land Mega SEZ will require crop/fertile land
Suggestions: Screening of Mega Sez applications & land requirements State Govt. be asked to be careful about fertile land Size of SEZ be restricted to 1000-2500 hectares to minimize the
above problem.
Compensation and Rehabilitation of Compensation and Rehabilitation of Farmers/PAPFarmers/PAP
An important issue
Differences between State and Centre
Different approaches in various States
Transparency required in compensation policy
Bad experience in Maharashtra CIDCO project
Commitments not fulfilled after 25 years
Compensation and Rehabilitation of Compensation and Rehabilitation of Farmers/PAP (contd.)Farmers/PAP (contd.)
Suggestions
Government help for acquisitions needed
Farmers as stake holders with 15-20% stake in developed land
Developers to provide houses to every affected family
Employment to one member of the family
Time bound implementation with monitoring system
Security/bank guarantee be provided for the fulfillment of the commitment
Tax Heavens – Revenue LossesTax Heavens – Revenue Losses
• Dilution, diversion, migration and manipulation going to cause actual revenue losses
• Centre and State have not thoroughly studied the implication of tax exemptions
• Abuse of provision by developer-cum-unit holder for business activity in non-Processing Zone
• Abuse of tax benefits for DTA business.
•Tax arbitrage
Tax Heavens – Revenue Losses (contd.)Tax Heavens – Revenue Losses (contd.)
Suggestions All indirect taxes, stamp duty availed by developer/unit holder for
export business will have to be surrendered in proportion to DTA business
Benefit of indirect taxes on erection/installation/ capital investment should be disallowed for DTA business (proportionately – e.g. Power Plant)
Non-processing Zone business activity taxes at par with DTA –Presently Employee in SEZ liable for Income Tax
CBDT, CBEC be asked to study and come out with corrective measures
Provision of “Enabling Clause”
Impact on Domestic IndustriesImpact on Domestic Industries
Developer/unit holder in SEZ inclined for DTA business e.g. Nokia Sez
Getting benefit of indirect taxes for installation, erection
Domestic unit will be at disadvantage Domestic/DTA units will demand similar
benefits to compete Several IT/ITES SEZs in and around metro cities Existing IT/ITES EOUs sufferers
Impact on Domestic Industries (contd.)Impact on Domestic Industries (contd.)
Suggestions Penalty for DTA business of developer/unit
holder Disincentive for SEZ in and around metro cities Either all benefits given to SEZ unit/developer
for Non Export business be extended to domestic unit
Reconsideration of EOU Sunset Clause Level playing field for Domestic Industry
Impact on Democratic System
Several mega SEZs by couple of private individuals-concentrating of economic power
So much power in the hands of developer/Development Commissioner 400 approved/applied for SEZs will swell to 800 Instrument to become zamindars/state within state? No country including China such private foreign territory created
Suggestions Monopoly-Concentration of Economic Power developers be avoided Size of SEZ be restricted if land acquisition is through Government
process More Sez of 1000-2500 Hectares be developed Proper codification and regulatory system
Transparent Decision Making Process
Piece-meal, non-scientific, ad-hoc decision making system Conflict, contradiction within Commerce, Finance Ministries, RBI, etc. No proper coordination between State and Centre Ambiguity-Size of Processing Zone from 25% to 35% with power to
relax to 25% Provision regarding export commitment and tax relaxation.
Suggestions Ambiguity be removed Ad-hoc powers not required System of coordination and fresh controversy be avoided Ad-hoc decision-making system like non-Processing Zone of 75% be
avoided.
Real Estate - Non-Processing Zone Business
75% non-Processing Zone-No scientific provision Such provision not in other Countries Private developer getting land through compulsory acquisition Abuse of housing, medical, education, mall, entertainment business Mega SEZs in and around Mumbai and Delhi.
Suggestions 50 to 65% Processing Zone Codification of Work in Non Processing Zone in Social Infrastructure Social infrastructure in proportion to employees working and residing in SEZ No tax benefit for additional business/profit-making so-called social
infrastructure Direct/indirect tax benefit only for revenue earned in foreign exchange No direct/indirect tax benefit for business/profit making so-called social
infrastructure including housing, hospital, education business, etc All activities in Non Processing Zone shall be at par with DTA incl taxes.
Revenue-Tax Relaxation for Non-Processing Zone
Abuse of tax deviation for profit-making hospital, medical, educational business
Tax arbitrary for various services, etc. Developer, unit holder same.Suggestions All business activities, where Service Tax is applicable, sold to
DTA should be taxable Housing construction be allowed only for employees working
and residing in the Processing Zone activities Development of non-Processing Zone be allowed in proportion
to the export activities.
Infrastructure
Concept to have New Township away from developed area Additional world class infrastructure Execution says-Devt in & around Metro Cities Mumbai-Delhi SEZ within Metro adding burden on existing infrastructure
Suggestions Insistence for additional-new infrastructure Applications in-around Metro be discourage Housing etc for employees be insisted Devt for all region
Global Experience
Comparison with China illogical Nowhere in the world 75% non-Processing Zone Concept of private developer and real estate
business only in India In China, Government develops cities and private
entrepreneurs asked to set up EOU Units Some country no tax benefits for DTA to SEZ Export only-Disincentives for sale to DTA
Global Experience (contd.)
Suggestions Incentive, benefits for export units Commerce Ministry should be asked to study
concept and experience of SEZ in 10 countries
Developed-Developing Countries Tax relaxation, Real estate business etc Role & relaxation to Private Enterprenuers
SEZ Policy & Issues & Suggestions (At a Glance)
S. No.
Issues Issues Action Needed
1 Export Focus The units in SEZs should have export focus.
Strong fiscal disincentive for SEZs to sell in domestic market.
2 Non-Processing Zone
Non-processing area in SEZs should have focus alinged with the objective
Only foreign exchange receipt by the units in non-processing area should be given tax incentives. Any sales to domestic market should be taxed appropriately.
3 Financing of SEZs
Who will finance SEZ projects and units in SEZs.
Ministry of Finance in consulatation with RBI and SEBI should announce a clearly laid down policy for financing of SEZ projects. Support for Processing Zone.
4 Location Location of SEZs is imporatnt for infrastructure development and regional disparity
We should not allow SEZs in metro cities as instead of creating infrastructure they will be a burden on the metros' infrastructure
5 Domestic Units
Level Playing Field and to stop abuse from SEZ to DTA
non SEZ units and they should not be competitively disadvantages. Tax abuse be stopped, e.g. Power Plant
6 Role of state governments
Views of state government are important before giving any approval
The Centre should ask for state's views/recommendations before granting any approval.
SEZ Policy & Issues & Suggestions (At a Glance)
SEZ Policy & Issues & Suggestions (At a Glance) (contd.)
7 Limit on number of SEZs
Any limit on number of SEZs will create market distortions
There should not be any upper limit on number of SEZs
8 Transparency Transparency in approval process is key to success of the SEZ concept
A transparent policy framework should be created to discourage corruption and ensure proper growth of SEZs.
9 Promoters' Credibilty
We need to have promoters with proven credibility for developing SEZs. Good quality of promoters can really make this concept a grand success.
Government needs to conduct due dilligence before giving approval thwarting any attempt of fly by night operators.
10 Non-transferibility
Government should allow only serious promoters with long-term perspective to develop SEZs.
We should not allow trasfers of undeveloped SEZs. Promoters should not be able to sell any part of SEZ without developing it.