SEZs - Gainful or Lossy?

Special Economic Zones are expected to facilitate exports worth Rs 3,40,352 crore by 2009-10. But even if the target is met, it will cost Rs 22,913 crore in direct taxes foregone in the year, according to the revenue department. Calculations by the department show that exports from SEZs will grow from Rs 61,734 crore in 2006-07 to Rs 3,40,352 crore by 2009-10. The loss on direct taxes will grow from Rs 4,156 crore in 2006-07 to Rs 22,913 crore in 2009-10. (The profit margin on exports has been assumed at 20 per cent.) On the indirect side, the government will incur a tax loss of Rs 8,147 crore by 2009-10. Indirect tax foregone will, in fact, decline —from Rs 14,936 crore in 2006-07 to Rs 8,147 crore in 2009-10.

These estimates have been worked out taking into account only 70 SEZs. “After this, about 230 more SEZs have been granted approval. So you can imagine the volume of revenue foregone,” says a finance ministry source.

Total revenue loss has been estimated at Rs 1,02,621 crore for the period 2006-07 till 2009-10 — Customs concessions will amount to Rs 29,700 crore, excise Rs 10,368 crore and service tax Rs 8,813 crore. The total projected investment lined up to the first board of approval meeting is around Rs 1,75,000 crore, based on which the finance ministry has made these calculations.

Even as the controversy raged — and has now taken on deeply political overtones — finance ministry officials maintained that there were still many concerns on the SEZ policy. One, they argue, there is absence of a level playing field between manufacturing units within the SEZ and those in the Domestic Tariff Area (DTA). “It will soon not make any sense for anyone to operate in the DTA,” explains one official.

Then, there will be large revenue loss on account of tax concessions for exports of goods that are already being exported without such concessions. “The SEZ policy, and the tax concessions it offers, is coming at a bad time when we want to look at phasing out tax concessions and reducing the government’s total tax expenditures”, says one official.

The ministry is keen that a clear time frame should be set for phasing out all exemptions. Its view is that barring senior citizens, defense personnel and physically handicapped persons, all tax concessions on the direct and indirect side should gradually be phased out.