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Commerce ministry tells North Block not to worry about SEZ tax drain
August, 26th 2006
At a meeting of an empowered group of ministers (eGOM) meeting on Wednesday, the commerce ministry allayed North Blocks concerns over 150 SEZs causing a direct tax drain of over Rs 1 lakh crore. The commerce ministry argued that on the contrary, the additional economic activity on account of these SEZs would enrich the exchequer by Rs 92,000 crore. According to the ministry, this works out as follows: If there is a direct tax outgo of Rs 1 lakh crore as estimated by the finance ministry, then the export profit of 150 SEZs would be Rs 4 lakh crore, considering an average 25% direct tax incidence. If export profit is reckoned to be 20% of the total economic activity of the SEZs, which, again, is as per the revenue foregone statement of the finance ministry released along with Budget 2006-07, then such activity would be worth Rs 20 lakh crore. That is, barring export profits, the economic activity is worth Rs 16 lakh crore. According to the Economic Survey 2006-07, the tax to the GDP ratio is 10.4%. This, of course, takes into account the agri income, which is barely taxed. SEZ income is generated from manufacturing or services; there is virtually no agri income. So, the tax to income ratio could be higher at around 12%. Thus, the tax revenue from this corresponding domestic economic activity would be 12% of Rs 16 lakh crore or Rs 1.92 lakh crore. So the additional tax revenue would be Rs 92,000 crore. The finance ministry had claimed that the SEZs would result in an indirect tax drain of around Rs 28,000 crore, in addition to a loss of Rs 1 lakh crore on the direct tax front. The commerce ministry argued that 15-20% of products manufactured in SEZs are sold off to the domestic market. This will result in indirect tax gains. The Calculation If there is a direct tax outgo of Rs 1 lakh crore, then the export profit of 150 SEZs will be around Rs 4 lakh crore, with an average 25% direct tax If export profit is 20% of the economic activity, it will yield Rs 20 lakh crore. So barring export profits, the economic activity is worth Rs 16 lakh crore Since SEZ income is from manufacturing or services, tax to income ratio could be at 12%. So tax revenue from this activity will be Rs 1.92 lakh crore. Barring the outgo, Rs 92,000 crore could be gained The commerce ministry projected that the 150 SEZs would result in direct employment of 5 lakh and indirect employment of at least twice that figure. This, the ministry said, would include the currently unemployed rural youth. The commerce ministry argued that Board of Approval comprised 19 members from different departments and was equipped to take a holistic view. It may be noted that North Block had raised doubts over the legal tenability of the such an approval system. Pitching for an open system, the commerce ministry pointed out any cap would result in distortion of the system by generating pressures from vested interests. The attraction of the SEZ schemes were its tax concessions and the single window clearance, the ministry officials said.
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