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 kirit@vsnl.in4th 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.