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Commerce ministry may seek tax breaks for hi-tech firms at SEZs
February, 09th 2016

In a fresh bid to revive special economic zones (SEZs) by linking them to the government’s Make in India initiative, the Union commerce ministry may request the finance ministry to give income-tax benefits to high-tech companies that open shop in SEZs and pursue higher value addition.

Guruprasad Mohapatra, joint secretary in the commerce ministry in charge of SEZs, said tax benefits for the SEZ units can be intelligently formulated. “For example, we can say if you bring high-tech industry into India in SEZs, you will get higher income -tax benefits. Then, we propel those kind of sectors to come to India where there is higher export potential. Similarly, those who employ large number of people or go for higher value addition can be given higher tax benefits,” he added.

Mohapatra said the idea was originally proposed by a study on SEZs by Indian Council for Research on International Economic Relations?(ICRIER), which was commissioned by the commerce ministry.

“We find the idea attractive. Some countries have such a taxation policy for SEZs. At present, we are examining it,” Mohapatra said.

Arpita Mukherjee, professor at the ICRIER and author of the SEZ study, said giving income-tax benefits to a high-tech firm is not prohibited by World Trade Organization (WTO).

“By making our SEZ incentives to net foreign exchange earnings, we have not only made them actionable under the WTO, but also we are treating industries with low and high import component at par. Incentives to SEZ units should always be performance-linked,” she said.

The commerce ministry has asked the finance ministry to allow the SEZ units to sell their products in the domestic market after paying the same preferential tariffs applicable to manufacturers in countries with which India has a free-trade agreement (FTA), Mint reported 28 January.

The ICRIER study also held that since India over the years has signed several FTAs, which have brought the preferential tariff on various products much lower than the most-favoured nation rates, this has put the SEZ units at a relative disadvantage in selling in the domestic market.

It has also suggested that if the finance ministry cannot remove minimum alternate tax (MAT) on all SEZ units in the upcoming budget to be presented on 29 February, it should at least do it for the manufacturing SEZ units.

The commerce ministry has consistently lobbied with the finance ministry to exempt units in SEZs from minimum alternate tax and dividend distribution tax imposed on them in 2011, holding that retrospective imposition of the taxes are against the spirit in which the SEZs were set up.

However, an imminent loss of revenue under the tight fiscal situation has prevented the finance ministry from doing so.

Falling global demand has hit SEZs as they are allowed to sell within the country only if they pay the customs duty on the product, since such enclaves are considered to be situated outside the tax jurisdiction of the country.

After the government imposed MAT and dividend distribution tax (DDT) on such units, investor interest in the SEZs dwindled significantly with many developers seeking to de-notify these enclaves.

Answering a question in Parliament, commerce and industries minister Nirmala Sitharaman in November last year said the finance ministry has rejected such proposals by her ministry. This is despite finance minister Arun Jaitley promising in his first budget in July 2014 that the government is committed to reviving SEZs and making them effective instruments of industrial production, economic growth, export promotion and employment generation.

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