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SEZ reliefs face the heat

New Delhi, Feb. 4: North Block will stick to its guns on capping the number of special economic zones (SEZs) at 63 as it feels a larger number will lead to huge revenue losses.

It also holds that unless export is made mandatory, the tax breaks to SEZ units could be challenged in the courts. This is because they may not, in legal terms, be viewed as any different from factories in the domestic tariff area.

The finance ministry, which is working on the Union budget, feels the propensity to set up SEZs needs to be curbed to plug huge losses of revenues. SEZs are considered duty-free zones, with units enjoying full corporate, sales and service tax exemptions for the first five years. Calculations show this could lead to a revenue loss of more than Rs 1 lakh crore over the period.

The ministry is also against giving extra tax advantages to SEZs which other ministries have been demanding. “The tax advantages already given can well be challenged in court by industry elsewhere ... new tax advantages being sought for personal taxation of employees or exemptions in other areas would only complicate the case,” revenue officials said.

They also said to justify the tax exemptions before law, the government needed to impose some obligations on SEZs. “That is why we have been demanding that a 50 per cent export obligation be imposed on all SEZs .... without that there is no difference between a factory in the domestic tariff area and one in an SEZ. If there is a legal challenge from those who own industry in non-SEZ areas, we would find it difficult to explain why specific tax breaks have been given to SEZs and not to other industrial estates,” officials said.

They also feel that exemptions should not continue beyond five years. Current rules say that there will be a 50 per cent corporate tax concession for two years beyond the first five.

“Sops have a tendency to create a lobbying constituency and we find them difficult to phase out. That is why we want a sunset clause. So many years and no further. Also we would like to spell out the last year when these tax breaks will be available. Otherwise people could buy the land, sit on it, trade with it, and then maybe after 10 years, set up a factory and claim a five-year tax holiday,” officials said.

“We want those who get the land to set up factories as soon as possible. After all, one of the big justifications for SEZs is that it will create additional jobs,” officials added. They indicated the ministry would like to place a ban on further tax breaks to SEZ units beyond a specified date.

Besides the central tax breaks, SEZs also enjoy exemptions from local taxes such as mandi tax. The ministry feels that local governments also need to consider whether they should allow competition to develop among themselves on this count. “It could negate the understanding between states not to compete with tax breaks as these ultimately mean losses for the exchequer,” officials said.

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