The commerce ministry and its finance
counterpart seem to be heading for a face-off over direct tax benefits enjoyed
by units within special economic zones (SEZs), which are proposed to be
scrapped after March, 2011. That the direct taxes code, released this August
and scheduled to be implemented from March, 2011, does not have provisions to
provide income tax relief to SEZ-based factories, IT firms and BPOs, is making
the situation grave for these two bodies. Though the code mentions that the
existing benefits enjoyed by SEZ units operational by March, 2011, will
continue to do so (a provision technically termed as grandfathering), it is not
clear how this will be implemented. In addition, the code says that developers
of the tax-free industrial enclaves will enjoy income tax benefits only till
they recover their capital and revenue expenditure (which excludes cost of
land). The underlying principle behind not allowing income tax incentives to
the SEZ units is that new code discourages profit-based exemptions. While
commerce ministry and SEZs maintain that the provisions of the SEZ Act of 2005,
which provides tax relief to units and developers of the zones, should
continue, finance ministry officials feel otherwise. “The proposed code has
specific provisions dealing with the tax treatment for SEZ units and developers.
Whatever is there will be adhered to,” said a finance ministry official. At the
moment, there are over 700 SEZs under various stages of approval. These SEZs,
proposed after the SEZ Act was operationalised in February, 2006, have seen
investments of Rs 1,10,605 crore. There are 2,301 functional units inside SEZs
and employ over 2,50,000 people. Meanwhile, the SEZ developers and units have
been calling up commerce ministry and the Export Promotion Council for EoUs and
SEZs, enquiring about the fate of their tax benefits. “The taxes code has lead
to lot of uncertainty for prospective investors and developers who have put in
money in the zones. The finance ministry should clarify how the tax benefits
will be grandfathered. More over, the tax benefits to SEZs should continue,
other wise, no units will set up shop inside the zones,” said L B Singhal,
director general of EPCES. Addressing a seminar organised by Assocham on
Friday, Singhal pointed out that SEZs are long gestation projects and hence
investors need to have clarity on the benefit that they will get. “A
multi-product SEZ, which has to be developed over a minimum of.1,000 hectares,
normally takes seven years to become operational and such projects involve huge
investments. These projects need to be assured of long-term continuity of the
scheme,” Singhal said. – The
Financial Express,
NEW DELHI, SEPTEMBER 26, 2009