Are Special Economic Zones (SEZs) heroic attempts to create world-class exporting zones, or just tax havens and land grabs? The Left Front and many other critics have demanded a totally new look at the SEZ law.
Finance minister Chidambaram worries that excessive tax breaks for SEZs and will cost Rs 70,000 crore of foregone revenue. Export units in SEZs will get a 100% tax holiday for five years, 50% tax break five more years, and a further tax break for five years on production based on reinvested profits. SEZ developers will enjoy a tax holiday for 10 years.
Chidambaram would like to restrict SEZs to 150 in number, thus limiting the tax foregone. But commerce minister Kamal Nath, backed by many chief ministers, opposes any ceiling on SEZS (388 applications have already been received, and 150 SEZs cleared).
He argues that Chidambaram’s projections of tax foregone are highly exaggerated, since exporting units already enjoy many tax breaks. After the initial holiday, he argues, SEZs will create a huge tax base. So, far from losing revenue for the exchequer, he estimates that SEZs will provide a net tax gain of Rs 44,000 crore.
Which estimate is right? I suspect the actual outcome will lie in somewhere in between. It will also depend on what sort of SEZs come up. Ideally, India should have such good infrastructure that the whole country is an SEZ. But till that utopia arrives, we need to create enclaves with world-class infrastructure.
A good model is Shenzhen, China’s premier SEZ, which covers almost 20,000 hectares, exports more than the whole of India, and attracts more FDI than the whole of India. I have long favoured large SEZs like Shenzhen, which are in effect composite cities with their own ports, power stations, water supply and airports.
However, India’s SEZ law does not emphasise either size or infrastructure. Sector-specific SEZs need be no more than 100 hectares in size, and no more than 50 hectares in special category states. SEZs for information technology, biotechnology and jewellery can be as small as 10 hectares, smaller even than some schools.
Clearly these mini-SEZs are not going to be enclaves of world class infrastructure. They are simply going to be tax havens. The tax holiday for software and BPO exporters is coming to an end in 2009. Moving into mini-SEZs will enable them to extend their tax holiday for another decade.
Some lobbies admit candidly that these mini-SEZs are tax havens, but justify them on the ground that the IT industry needs another tax-free decade to achieve its full potential. I have to disagree. Our IT companies are not infants needing protection, they are prize athletes.
The top ones have sales exceeding one billion dollars and operating margins of over 30%. How can you ask old industries with a thousand problems to pay tax, but not IT?
Far from becoming world-class enclaves of infrastructure, the mini-SEZs will be burdens on existing infrastructure. Small SEZs in or near existing cities will add to road congestion, power shortages and water shortages.
What about large SEZs? Reliance’s mammoth 14,000 hectare SEZ is coming up at Navi Mumbai. Many will view this as one more example of the company’s legendary skill in “managing” the environment. Yet it conforms to my preference for mega-zones with captive infrastructure.
Reliance is building a port at Rewas, just south of its SEZ, with a draft of 22.5 m. (against 8.5 m. for Bombay Port and 12.5 m. for JNPT). The SEZ will have 2000 MW of captive power. Reliance plans a small dam on the Balganga for water supply. And it will utilise the new airport coming up at Navi Mumbai for air cargo.
Will this be an unwarranted tax haven? Anand Jain, who heads the SEZ project, points out that Reliance has never paid any corporate tax anyway and only pays the Alternative Minimum Tax. The central and state governments offer so many tax breaks, he argues, that no fast-growing company pays corporate tax. So, a tax break for SEZ developers makes no difference.
Actually, it does make some difference. SEZs are exempt from Alternative Minimum Tax, and that will entail some loss of revenue. However, the loss must not be overestimated. Tax breaks are already given for the development of all infrastructure — roads, power, dams, power, telecom, even large housing projects. So, tax breaks for developing SEZs are not exactly revolutionary.
Up to 75% of the area of any SEZ can be devoted to residences, schools, banks hospitals and green belts. The bonded factory zone can be no more than 25% of the SEZ area. Critics say this looks more like real estate promotion than export promotion.
Mukesh Ambani, however, provides a rather different perspective. To compete against Shenzhen in China or Jebel Ali in Dubai, he argues, his SEZ must offer comparable facilities and terms. The other two offer industrial land almost free and he will have to do the same.
The others offer world class residential accommodation, schools, medical facilities, green belts and golf courses. He will have to offer the same. So, he will lose money on the industrial land, the green belt, and perhaps on educational and medical facilities.
His profit (20-25% on equity) will come from the residential area, along with its banks and shops. To attract foreign investors to a zone far from existing city limits, he needs to create a new world-class city. Such a city needs to have plenty of residential and recreational area.
Is this a real estate play parading as an SEZ? No, he says, since the flats in the residential area cannot be sold. They can only be leased to the exporting units. This makes it very different from a real estate development.
Reliance is widely viewed as a master of spin, and with good reason.
Yet Mukesh Ambani’s arguments appear valid to me. They reinforce my own preference for large SEZs, competing with the likes of Shenzhen. They also reinforce my misgivings about small SEZs.
ET
Finance minister Chidambaram worries that excessive tax breaks for SEZs and will cost Rs 70,000 crore of foregone revenue. Export units in SEZs will get a 100% tax holiday for five years, 50% tax break five more years, and a further tax break for five years on production based on reinvested profits. SEZ developers will enjoy a tax holiday for 10 years.
Chidambaram would like to restrict SEZs to 150 in number, thus limiting the tax foregone. But commerce minister Kamal Nath, backed by many chief ministers, opposes any ceiling on SEZS (388 applications have already been received, and 150 SEZs cleared).
He argues that Chidambaram’s projections of tax foregone are highly exaggerated, since exporting units already enjoy many tax breaks. After the initial holiday, he argues, SEZs will create a huge tax base. So, far from losing revenue for the exchequer, he estimates that SEZs will provide a net tax gain of Rs 44,000 crore.
Which estimate is right? I suspect the actual outcome will lie in somewhere in between. It will also depend on what sort of SEZs come up. Ideally, India should have such good infrastructure that the whole country is an SEZ. But till that utopia arrives, we need to create enclaves with world-class infrastructure.
A good model is Shenzhen, China’s premier SEZ, which covers almost 20,000 hectares, exports more than the whole of India, and attracts more FDI than the whole of India. I have long favoured large SEZs like Shenzhen, which are in effect composite cities with their own ports, power stations, water supply and airports.
However, India’s SEZ law does not emphasise either size or infrastructure. Sector-specific SEZs need be no more than 100 hectares in size, and no more than 50 hectares in special category states. SEZs for information technology, biotechnology and jewellery can be as small as 10 hectares, smaller even than some schools.
Clearly these mini-SEZs are not going to be enclaves of world class infrastructure. They are simply going to be tax havens. The tax holiday for software and BPO exporters is coming to an end in 2009. Moving into mini-SEZs will enable them to extend their tax holiday for another decade.
Some lobbies admit candidly that these mini-SEZs are tax havens, but justify them on the ground that the IT industry needs another tax-free decade to achieve its full potential. I have to disagree. Our IT companies are not infants needing protection, they are prize athletes.
The top ones have sales exceeding one billion dollars and operating margins of over 30%. How can you ask old industries with a thousand problems to pay tax, but not IT?
Far from becoming world-class enclaves of infrastructure, the mini-SEZs will be burdens on existing infrastructure. Small SEZs in or near existing cities will add to road congestion, power shortages and water shortages.
What about large SEZs? Reliance’s mammoth 14,000 hectare SEZ is coming up at Navi Mumbai. Many will view this as one more example of the company’s legendary skill in “managing” the environment. Yet it conforms to my preference for mega-zones with captive infrastructure.
Reliance is building a port at Rewas, just south of its SEZ, with a draft of 22.5 m. (against 8.5 m. for Bombay Port and 12.5 m. for JNPT). The SEZ will have 2000 MW of captive power. Reliance plans a small dam on the Balganga for water supply. And it will utilise the new airport coming up at Navi Mumbai for air cargo.
Will this be an unwarranted tax haven? Anand Jain, who heads the SEZ project, points out that Reliance has never paid any corporate tax anyway and only pays the Alternative Minimum Tax. The central and state governments offer so many tax breaks, he argues, that no fast-growing company pays corporate tax. So, a tax break for SEZ developers makes no difference.
Actually, it does make some difference. SEZs are exempt from Alternative Minimum Tax, and that will entail some loss of revenue. However, the loss must not be overestimated. Tax breaks are already given for the development of all infrastructure — roads, power, dams, power, telecom, even large housing projects. So, tax breaks for developing SEZs are not exactly revolutionary.
Up to 75% of the area of any SEZ can be devoted to residences, schools, banks hospitals and green belts. The bonded factory zone can be no more than 25% of the SEZ area. Critics say this looks more like real estate promotion than export promotion.
Mukesh Ambani, however, provides a rather different perspective. To compete against Shenzhen in China or Jebel Ali in Dubai, he argues, his SEZ must offer comparable facilities and terms. The other two offer industrial land almost free and he will have to do the same.
The others offer world class residential accommodation, schools, medical facilities, green belts and golf courses. He will have to offer the same. So, he will lose money on the industrial land, the green belt, and perhaps on educational and medical facilities.
His profit (20-25% on equity) will come from the residential area, along with its banks and shops. To attract foreign investors to a zone far from existing city limits, he needs to create a new world-class city. Such a city needs to have plenty of residential and recreational area.
Is this a real estate play parading as an SEZ? No, he says, since the flats in the residential area cannot be sold. They can only be leased to the exporting units. This makes it very different from a real estate development.
Reliance is widely viewed as a master of spin, and with good reason.
Yet Mukesh Ambani’s arguments appear valid to me. They reinforce my own preference for large SEZs, competing with the likes of Shenzhen. They also reinforce my misgivings about small SEZs.
ET