Tax troubles for SEZs

Aug 22 2014, 09:17 IST
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There are also indirect tax incentives such as exemption from customs duty on imports for authorised operations. (Reuters There are also indirect tax incentives such as exemption from customs duty on imports for authorised operations. (Reuters
SummaryIf job creation and investment flows are to be pushed, then the SEZs should be actively promoted. But recent tax changes will only add to their problems

The concept of special zones for promoting exports first emerged in India with the establishment of the Kandla Export Processing Zone (EPZ) under the EPZ Scheme, 1965. By the late 1990s, seven more EPZs came into existence. In April 2005, to remove shortcomings of EPZs and similar formats, the government introduced the SEZ Act. Since then, about 570 special economic zones (SEZs) have been formally approved, of which 388 SEZs stand notified. Investments to the tune of R2,88,476.98 crore—as on December 31, 2013—have been infused in the SEZs and employment to 12,39,845 persons is being provided. Thus, SEZs are one of the important infrastructure levers in the country.

Like all infrastructure projects, SEZs are also showered with tax incentives to make them viable over the long term. For instance, the SEZ developer (an entity developing an SEZ) gets income-tax incentives—100% deduction of profits derived from the business of developing, operating and maintaining an SEZ for a period of 10 consecutive years from the date of notification. The SEZ developer has a choice of selecting a block of 10 years out of 15 years. The deduction from operation and maintenance profits is also available to the transferee developer. There are also indirect tax incentives such as exemption from customs duty on imports for authorised operations; exemption from excise duty on domestically procured goods for authorised operations and manufacturing activity carried on inside the SEZ; exemption/refund of service tax on input services procured for authorised operations; exemption from central sales tax on domestically procured goods for authorised operations; and exemption from sales tax/VAT on domestically procured goods for authorised operations, subject to provisions of state sales tax/VAT laws.

Similarly, the SEZ unit (entity setting up its business in SEZs) gets income-tax incentives such as deduction of export profits of an SEZ unit for 15 years: 100% for the first 5 years, plus 50% unconditional for the next 5 years, and a maximum of 50% for another 5 years, subject to conditions. As far as indirect tax incentives are concerned, these are similar to those available to the SEZ developer.

However, SEZs are yet to achieve their full potential. While there exist reasons for reduction in the interest levels in SEZs—such as difficulty in satisfaction of minimum contiguous land requirement, problems in land acquisition, slowing of global economies, high inflation in India, emergence of other alternate destinations, etc—the non-addressing of the tax issues, withdrawal of the

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