Section 10AA, inserted by the SEZ Act, could turn out to be another money laundering mechanism
There appears to be a streak of bravado in Section 10AA inserted into the Income-Tax Act by the Special Economic Zones Act, 2005 (SEZ Act), when it steers clear of the expression `convertible foreign exchange' much less make earning thereof the precondition for the sumptuous tax exemption offered by it.
That the SEZ Act has broken free of and abandoned this leitmotif, nay mantra, that invariably held sway in the earlier regimes of exemption for export income given by the income-tax law is quite revealing. The Section has dropped the earlier insistence that the export proceeds be in hard currency. Diehard optimists and chest-thumping patriots may gloat over the mood of optimism that underpins this abandonment. But realists might wonder whether this was at all necessary given the potential and innate fluidity of the Indian forex scenario.
The liberal definition of exports represented by earnings in hard currency or other has a mischief potential, which seems to be lost on the policymakers. In the absence of any such stipulation as to hard currency, which marked the earlier exemption regimes, the hawala route may get a leg up. In the past, there have been instances of junk and wastepaper masquerading as export of valuable items only to fulfil the obligations under capital goods import scheme which consisted in duty-free import of machinery in return for export obligation many times over within the prescribed time. This at once facilitated return of black-money stashed away abroad after duly laundered thus. The new regime contained in Section 10AA could permit something equally sinister given the slackness on the type of currency one must denominate exports in. It is entirely possible that the so-called exports may be to countries having slack physical and procedural controls so that the money salted away can be brought back under the garb of export proceeds.
Message of confidence?
May be the Government wants to send out a signal to the world about its confidence in the state of the economy. The forex reserves of $150 billion or thereabouts is considered sufficient to tide over any crisis major or minor. Time alone will tell whether this is not just smugness given the fact that China has built an envious forex reserves of nearly 8-9 times but still has ravenous appetite for hard currencies and the unrelenting pressure we face periodically on the oil import front.
Economists would perhaps also read a more seminal message in this heralding of full convertibility of the rupee. But this much is certain. Section 10AA promises to be another fecund money laundering mechanism. The participatory note dispensation under the FII regime has been attracting flak precisely for this reason. The tax exemption to developers of SEZs ushered in by the SEZ Act in the form of Section 80-IAB is no less sumptuous 100 per cent relief from income-tax for a period consecutive of ten consecutive assessment years out of the initial block of fifteen years. But for a few variations, this is of a piece with exemption given for residential house developers.
Lured by the tax sop, many wannabe house developers jumped into the fray just as SEZ developers are falling over themselves principally enamoured of the income-tax exemption. But unlike the residential house developers, SEZ developers are taking a big risk. What if there aren't many takers?
(The author is a Delhi-based chartered accountant.)