What is a 'Special Economic Zone'? This question is very relevant to the common man in the light of what transpired at Nandigram and Singur. Is there any real benefit to be derived for the common man from these institutions? Or do the ills (loss of tax revenue for the government, displacement of local people, potential money laundering and loss of revenue to offshore financial instiutions associated with the SEZ and long term damage to small scale industries) outweigh all potential gains. This article from the Statesman addresses some of these issues.
A country within a country
Perhaps the most debated and controversial socio-economic issue today is Special Economic Zone (SEZ). The Left Front government in West Bengal is perturbed over the issue. The Centre too is in a fix to find modalities of SEZ.
Obviously, the ordinary citizen has some questions like what is SEZ, does it work for the welfare of the common man, what is the employment potential and so on. We should also try to find answers to questions like how much revenue would the exchequer lose every year and what would happen to small and medium enterprises and other social issues.
Origin: It can be said that SEZ is a product of foreign policy initiatives of 1999 with the basic objective of phenomenal growth of export performance. The legislative enactment is the Special Economic Zone Act 2005. SEZ comprises more or less 10,000 hectares (which has been reduced) with manufacturing, real estate and service facility.
One of the earliest and most famous SEZ was founded by the People’s Republic of China under Deng Xiaoping in the early 1980. SEZs have been established in several countries, including Iran, Jordan, Poland.
Characteristics and functioning: The significant characteristics of SEZ is, it enjoys a host of fiscal and non-fiscal concessions and exemptions provided by the government and geographically treated as a “place outside the host country”. One may call SEZ a tax-haven. The implication is that supplies from domestic (in SEZ language, it is called “domestic tariff area” or DTA) to SEZ is export from the country and reverse movement of goods is treated as imports into the country.
In other words, SEZ is a “Country within a Country”. It can be formed by the public, or by joint sector or by state governments. An unit approval committee is the competent authority for approval of units and required to execute a legal undertaking with the development commissioner. The efficiency of an unit of SEZ is measured by the fact that each unit is required to be a positive “Net Foreign Exchange Earner” (NFE).
Fiscal and non-fiscal concessions and exemptions:
Income-tax: Entrepreneurs of SEZs are allowed 100 per cent deduction from their income for consecutive five years after commencement of production and thereafter @50 per cent deduction of income for next five years. Dividend distribution clause is not applicable to SEZ developers or units. Minimum Alternate Tax (MAT) is not applicable in SEZ. sales tax, service tax, excise duty and customs duty:
a) Units of SEZs, which are registered are exempt from payment of CST on supplies from domestic tariff area.
b) Taxable service provided to a developer or an unit are exempt from Service Tax. c) No excise duty is leviable in case, goods brought from domestic tariff area to SEZ. d) There is all round exemption of customs duty enjoyed by the developers and SEZ units, both for import and export in respect of goods and services.
Though readymade data is not available, one can say that loss of revenue on account of the foregoing exemption and deductions, is huge and substantial and for a considerable period of time. Can our economy afford to absorb such loss every year?
Therefore certain amendments are required as a damage control measure. In respect of Income-Tax exemption, tax holiday for developers and units may be curtailed/reduced to three years and one year, respectively. Likewise, dividend distribution tax may be imposed with a reduced rate.
The central government is expanding base of service tax every year. SEZs should not be given total exemption from service tax. Either tax (service) holiday for initial two years may be allowed or a reduced rate of service tax may be imposed.
Other concessions and implication:
i) SEZ units can be set up to manufacture items reserved for the small scale sector. If this happens, the small scale sector would lose the level playing field in the domestic tariff area and would face unfair competition from big sectors enjoying a host of tax concessions. ii) Domestic product laws are not applicable to SEZ. This exemption may create unfair trade practice.
iii) Units engaged in the manufacture of drugs, have been exempted from registration under the Drugs and Cosmetics Act. The efforts are praiseworthy but the concession may result in violation of norms and even production of poor and inferior quality of medicines. iv) Another significant concession is full exemption from stamp duty to any instrument executed by or on behalf of or in favour of the developer or unit of SEZ. This concession is going to affect revenue of the state government. v) The SEZ units are allowed to have external commercial borrowing up to $500 million a year without maturity restriction. vi) International financial centres (off-shore banks) are permitted in SEZ. vii) Export proceeds may be repatriated without any time limit.
Employment opportunity:
No doubt during the construction period till commencement of production, a large work-force both skilled and unskilled would be required. However, this exercise will last for a limited period. Due to technological innovations and requirement of highly qualified professionals, both at the manufacturing facility and service sectors, unskilled and unqualified workers would not find jobs in sufficient numbers. Having regard to the size of SEZ, and capital deployment, one cannot expect a bright employment opportunity at SEZs.
Damage control:
Recently, after the Nandigram debacle, the Centre had changed certain parameters of SEZ like, land ceiling of 5,000 hectares (12,500 acres), promoters would directly negotiate with farmers before acquiring their lands and providing job to at least one member of the displaced family. In other words, efforts are being made to humanise the whole SEZ episode. But promises are more political than practicable.
Unanswered questions:
If environment impact assessment is not required for setting-up of SEZs, governments must come out to say that SEZ gas emissions are within tolerable limits and each SEZ has taken adequate steps so far the pollution norms are concerned. There is no second opinion that SEZs would contribute to a substantial volume of formation and emission of green house gases and consequently to global warming.
A reasonable estimate should be tabled in Parliament to show the reduction and loss of crop production, state-wise, due to occupation of fertile lands not by farmers but by SEZ owners.
Obviously, the ordinary citizen has some questions like what is SEZ, does it work for the welfare of the common man, what is the employment potential and so on. We should also try to find answers to questions like how much revenue would the exchequer lose every year and what would happen to small and medium enterprises and other social issues.
Origin: It can be said that SEZ is a product of foreign policy initiatives of 1999 with the basic objective of phenomenal growth of export performance. The legislative enactment is the Special Economic Zone Act 2005. SEZ comprises more or less 10,000 hectares (which has been reduced) with manufacturing, real estate and service facility.
One of the earliest and most famous SEZ was founded by the People’s Republic of China under Deng Xiaoping in the early 1980. SEZs have been established in several countries, including Iran, Jordan, Poland.
Characteristics and functioning: The significant characteristics of SEZ is, it enjoys a host of fiscal and non-fiscal concessions and exemptions provided by the government and geographically treated as a “place outside the host country”. One may call SEZ a tax-haven. The implication is that supplies from domestic (in SEZ language, it is called “domestic tariff area” or DTA) to SEZ is export from the country and reverse movement of goods is treated as imports into the country.
In other words, SEZ is a “Country within a Country”. It can be formed by the public, or by joint sector or by state governments. An unit approval committee is the competent authority for approval of units and required to execute a legal undertaking with the development commissioner. The efficiency of an unit of SEZ is measured by the fact that each unit is required to be a positive “Net Foreign Exchange Earner” (NFE).
Fiscal and non-fiscal concessions and exemptions:
Income-tax: Entrepreneurs of SEZs are allowed 100 per cent deduction from their income for consecutive five years after commencement of production and thereafter @50 per cent deduction of income for next five years. Dividend distribution clause is not applicable to SEZ developers or units. Minimum Alternate Tax (MAT) is not applicable in SEZ. sales tax, service tax, excise duty and customs duty:
a) Units of SEZs, which are registered are exempt from payment of CST on supplies from domestic tariff area.
b) Taxable service provided to a developer or an unit are exempt from Service Tax. c) No excise duty is leviable in case, goods brought from domestic tariff area to SEZ. d) There is all round exemption of customs duty enjoyed by the developers and SEZ units, both for import and export in respect of goods and services.
Though readymade data is not available, one can say that loss of revenue on account of the foregoing exemption and deductions, is huge and substantial and for a considerable period of time. Can our economy afford to absorb such loss every year?
Therefore certain amendments are required as a damage control measure. In respect of Income-Tax exemption, tax holiday for developers and units may be curtailed/reduced to three years and one year, respectively. Likewise, dividend distribution tax may be imposed with a reduced rate.
The central government is expanding base of service tax every year. SEZs should not be given total exemption from service tax. Either tax (service) holiday for initial two years may be allowed or a reduced rate of service tax may be imposed.
Other concessions and implication:
i) SEZ units can be set up to manufacture items reserved for the small scale sector. If this happens, the small scale sector would lose the level playing field in the domestic tariff area and would face unfair competition from big sectors enjoying a host of tax concessions. ii) Domestic product laws are not applicable to SEZ. This exemption may create unfair trade practice.
iii) Units engaged in the manufacture of drugs, have been exempted from registration under the Drugs and Cosmetics Act. The efforts are praiseworthy but the concession may result in violation of norms and even production of poor and inferior quality of medicines. iv) Another significant concession is full exemption from stamp duty to any instrument executed by or on behalf of or in favour of the developer or unit of SEZ. This concession is going to affect revenue of the state government. v) The SEZ units are allowed to have external commercial borrowing up to $500 million a year without maturity restriction. vi) International financial centres (off-shore banks) are permitted in SEZ. vii) Export proceeds may be repatriated without any time limit.
Employment opportunity:
No doubt during the construction period till commencement of production, a large work-force both skilled and unskilled would be required. However, this exercise will last for a limited period. Due to technological innovations and requirement of highly qualified professionals, both at the manufacturing facility and service sectors, unskilled and unqualified workers would not find jobs in sufficient numbers. Having regard to the size of SEZ, and capital deployment, one cannot expect a bright employment opportunity at SEZs.
Damage control:
Recently, after the Nandigram debacle, the Centre had changed certain parameters of SEZ like, land ceiling of 5,000 hectares (12,500 acres), promoters would directly negotiate with farmers before acquiring their lands and providing job to at least one member of the displaced family. In other words, efforts are being made to humanise the whole SEZ episode. But promises are more political than practicable.
Unanswered questions:
If environment impact assessment is not required for setting-up of SEZs, governments must come out to say that SEZ gas emissions are within tolerable limits and each SEZ has taken adequate steps so far the pollution norms are concerned. There is no second opinion that SEZs would contribute to a substantial volume of formation and emission of green house gases and consequently to global warming.
A reasonable estimate should be tabled in Parliament to show the reduction and loss of crop production, state-wise, due to occupation of fertile lands not by farmers but by SEZ owners.
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