India's finance and commerce ministries are locked in a dispute over a tax on export hubs announced in Budget, adding to a sense of regulatory uncertainty in the crisis-hit government. The commerce ministry wants to strike down an 18.5% duty on book profits in Special Economic Zones (SEZs), hubs with long tax holidays that were set up in the footsteps of Asian giant China to foster manufacturing growth.
Commerce minister Anand Sharma expressed ?surprise? at the Budget announcement made by his counterpart in the finance ministry, Pranab Mukherjee, and wrote a letter in protest amid worries of an exodus of developers in the zones.
On Thursday, commerce secretary Rahul Khullar , said the tax would likely act as a brake on rapid growth in the zones and send the wrong signal about India's investment climate.
Exports have grown at a huge clip from SEZs because people have made investments , because people have received assurances that there will be tax breaks,? Khullar told reporters. ?If the MAT (Minimum Alternate Tax) ends up altogether discouraging both foreign and domestic investment, what are we achieving?? he said.
The levy of MAT acts as a disincentive in two ways. One is that rules of the game are changed midstream, so somebody is going to turn around and say it?s not fair,? Khullar said. ?The second and more serious implication is this. Supposing you are a prospective investor, wanting either to set up an SEZ or invest in a SEZ by establishing a unit, you are not going to do it.?
India rolled out the policy of SEZs hoping to create millions of new jobs, attract investment and boost manufacturing via tax breaks and fiscal incentives. Government wants SEZs to raise manufacturing output to catch up with years of IT- and services-driven economic boom. The merit of the zones has been debated since their inception, both on economic performance and on social cost of land acquisition needed to create profitable SEZs in a country with hundreds of millions of rural poor.