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Manufacturing zones staring at Direct Tax Code hurdle
April, 25th 2011

Ahead of a key meeting under Prime Minister Manmohan Singh to discuss the countrys manufacturing strategy, the proposed national manufacturing and investment zones are facing some fundamental objections from the finance and environment ministries.

While finance minister Pranab Mukherjee had in Budget 2011-12 announced that the government would come up with a National Manufacturing Policy, the Direct Taxes Code has no room for the kind of tax giveaways that the commerce and industry ministry has lined up for the zones.

The draft policy prepared by the commerce and industry ministry in early 2010 proposed to include special economic zones, domestic tariff areas and export oriented units in the national manufacturing and investment zones (NMIZs). Accordingly, it said that the NMIZs would enjoy all the tax benefits that the SEZs, EOUs and DTAs enjoy.

However, a year since the policy was drafted, the finance ministry has introduced a complete makeover of the countrys income tax laws with the proposed Direct Taxes Code. The Code has suggested doing away with all profit-linked tax incentives and instead replacing them with investment-linked tax incentives. The move will effectively do away with the blanket income tax exemptions that SEZs currently enjoy.

Though the issue has not yet been referred to us, this is a tax principle which has been laid down. We do not think it would be possible or correct to change the policy and go back to profit-linked tax incentives for any particular project, an income tax official said.

Meanwhile, the proposed NMIZs will also lose out on the tax benefits given to EOU schemes as these have run out after March 2011. Under the EOU scheme, companies used to get tax exemptions under Section 10B of the Income Tax Act. Though the commerce and industry ministry had lobbied for further extension of the scheme, Budget 2011-12 was silent on the issue.

This is not all. The proposed NMIZs are also facing resistance from the environment ministry which is unhappy with the plan to provide early and easy environmental clearance to these zones. The draft policy has said that in case environmental clearance is not given within a year, it would be deemed as granted.

Earlier, the labour ministry has also raised objections to the draft manufacturing policy that suggests labour law relaxations.

To address these differences, the Prime Minister is scheduled to hold a meeting with about six ministries early next month. Commerce and industry minister Anand Sharma, finance minister Pranab Mukherjee, labour and employment minister Mallikarjuna Kharge, environment minister Jairam Ramesh, corporate affairs minister Murli Deora, HRD and telecom minister Kapil Sibal and Plan panel deputy chairman Montek Singh Ahluwalia are expected to attend the meeting.

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