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Home > India > Business > Business Headline > Report

Special economic zones = Tax losses?

BS Reporter in New Delhi | May 30, 2008 11:15 IST

Since the time the special economic zones with large tax concessions were first proposed several years ago, most economists have been pointing out that the scheme would result in large tax losses as existing units would migrate to these exclusive zones.

Also, new units which were going to come up anyway would now come up in SEZs instead of in a domestic tariff area.

In other words, there would be tax diversion on a significant scale. Indeed, this was the argument made by finance ministry officials, and internal estimates of the tax losses due to the SEZ scheme were put at several thousand crores of rupees.

All along, the ministry of commerce, the proponent of the scheme right from the time that Murasoli Maran used to be the minister during the National Democratic Alliance regime, argued that such losses were purely notional and that it was the huge tax concessions which were, in fact, attracting the investments.

So, if there were no tax concessions, these units wouldn't have come up anyway. Indeed, consultants who favoured SEZseven gave examples of footloose investment that would have gone to China but decided to come to an Indian SEZ where the tax breaks were now at par with those available in China.

Despite a host of studies on either side, the debate has never been settled. When a finance ministry-sponsored study on SEZs showed there would be no losses due to SEZs, even at that time this was widely contested within the ministry.

But would industry invest money just to obtain tax breaks? What about the costs of poor infrastructure and regressive labour policies?

Those in favour of SEZs argued that it was precisely this constraint that SEZs sought to address. The infrastructure would be world class, thanks to the involvement of some of the country's top industrial houses, it was argued.

As for labour laws, the government would find it easier to allow flexible hire-and-fire policies in these limited enclaves since it wouldn't affect the labour policies in the rest of the country. Sure, it was unfair to allow more flexible labour laws in SEZs, but at least it was a start.

All of this, as a series of news reports in this newspaper has shown, is now in grave danger. While various state governments have proposed more liberal labour laws within the SEZs in their states, they have had to submit them to the Centre for its approval since labour is a concurrent subject under the Constitution.

The Centre has, however, turned down the proposals of various states including Maharashtra and Andhra Pradesh.

What this means is that a lot of the investment that would have come to these SEZs, in industries that are labour-intensive (such as manufacturing of shoes or readymade garments) may not actually take place. For units that are not labour-intensive, such as petrochemical plants, quality infrastructure in SEZs may prove to be more important.

This is clearly a huge blow to those planning to develop SEZs, and it is possible that several of them will now become unviable. It also means that the estimates of the huge employment potential of the SEZs will have to be pared considerably, and it also weakens the case for SEZs.

The only saving grace is the possibility that some states may have come up with liberal labour laws for SEZs before the UPA came to power, and so these laws may still stand -- Gujarat and Uttar Pradesh, as a report in this newspaper stated, are two such states.

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