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,Phd Ex-Member of Parliament firstname.lastname@example.org 4th December 2006
Major 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 (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 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 Farmers/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 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 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.) 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 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.) 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