Direct tax benefits for India’s special economic zones – are they WTO compliant?
CNBC- TV 18 has a report on differences of opinion between India’s finance and commerce ministeries on direct tax benefits for India’s Special Economic Zones (SEZs). Go to http://sezindia.nic.in/, for official information on India’s SEZs.
SEZs continue to be a bone of contention between the Finance Minister and the Commerce Minister. The Finance Ministry has been wanting almost all direct tax benefits for SEZs to be eliminated. Now, it has found new ammunition to drive home its point.
For long, the Finance Ministry has been driving home the point that SEZs are nothing but a huge revenue linkage tool. It is inventing new tools to ensure that it drives home this point. One contention that it is making right now is that rebating or exempting direct tax benefits to SEZ units and developers is not WTO compliant. Other countries might just impose countervailing duty, or CVD, on Indian exports from SEZs.
The other contention is that this is really not equitable in terms of a tax principle. It is a distortion and might also lead to an erosion of tax base, which could ensure that the government does not actually oblige or meet its FRBM targets.
Of course, the Commerce Minister has rubbished these claims saying that this is not really in the domain of the Finance Ministry anymore. It is an act of Parliament that governs it.
If at all there have to be changes, it has to be routed through the Parliament. It essentially means what the Finance Ministry is claiming-tax benefits to offshore banking units, re-imposition of MAT on developers or SEZs as well as units, as also a re-imposition of dividend distribution tax on developers of SEZs. So, they are trying to finish off the entire gamut of direct tax benefits or the very fiscal edifice on which SEZs are built.
Aradhna Aggarwal of ICRIER has a paper titled “Impact of Special Economic Zones on Employment, Poverty and Human Development”. Its available at http://www.icrier.org/publication/working_papers_194.html. The abstract:
This study aims at examining the impact of Special Economic Zones (SEZs) on human development and poverty reduction in India. It identifies three channels through which SEZs address these issues: employment generation, skill formation (human capital development), and technology and knowledge upgradation. It examines how the impact of SEZs is passed through each of these channels. The analysis reveals that ‘employment generation’ has been the most important channel through which SEZs lend themselves to human development concerns, in India. Employment generated by zones is remunerative. Wage rates are not lower than those prevailing outside the zones. Besides, working conditions, non monetary benefits (such as transport, health and food facilities), incentive packages and social security systems are better than those prevailing outside the zones, in particular, in the small/informal sector. The role of SEZs in human capital formation and technology upgradation is found to be rather limited. The study argues that the zones’ potential could not be exploited fully in India. This could primarily be attributed to the limited success of SEZs in attracting investment and promoting exports. The new SEZ policy gives a major thrust to SEZs. However the creation of SEZs alone does not ensure the realization of their potential. The government will need to play a more proactive role for effective realization of the full range of benefits from SEZs
