Windfall loss

Windfall loss

But the farmers are not the only ones who have been protesting against these special zones. An unlikely but forceful voice has been that of the ministry of finance. Though the commerce and finance ministries had drawn swords over the issue of whether sezs will result in a revenue loss or increase in investment, they have now agreed to disagree. The finance ministry claims that the country will lose Rs 1,60,000 crore by 2010 in revenues, while the commerce ministry claims that sezs will rake in investments worth Rs 1,00,000 crore by 2007. "The question of whether we will gain or lose is impossible to know," says Debroy.

The National Institute of Public Finance and Policy (nipfp), New Delhi, has very pointedly discouraged the kind of tax incentives being offered to sezs.It says perpetuating tax incentives for exports under the sez Act is questionable because the arguments that originally provided the rationale for setting up epzs and allowing tax concessions for export-oriented units have lost their force after liberalisation. Secondly, there is no evidence that tax benefits to special zones have helped promote exports. "The epz era was different. We needed them because we could not liberalise everywhere then," says Debroy. The nipfp report explains that special consideration towards exports was necessary when India's economy was heavily controlled and protected and epzs were conceived as 'islands' isolated from the restrictive environment. But in the liberalisation era, with no ban on import of foreign technology or flow of foreign capital, the extension of tax benefits for sezs seems uncalled for, constituting a needless drain on revenue. Not only are they unnecessary, concessions to sezs will create market distortions.

Critics of sezs say tax concessions alone don't do much to attract new investment. "Investments are mainly attracted towards good physical and social infrastructure and not for fiscal incentives," says Debroy. The nipfp report also gives fiscal incentives a low ranking, saying they may be used as a convenient channel for routing profits earned elsewhere through sezs to escape taxation. nipfp estimates that the revenue loss may be nearly Rs 10,000 crore from income tax breaks alone and says that tax holidays under other heads are unjustified and should be terminated.

"The biggest problem I see in sezs is that the incentives given are not linked to exports at all," explains Debroy, "Moreover, here you are giving full concessions (direct and indirect taxes) first to the sez developer to develop better infrastructure for units. Then why are you giving full tax holiday to the units again?" Also, the government claims that the entire infrastructure connected to the sezs will be built completely on private investment. "But indirectly this is public money. The revenue foregone in taxes could have been used for building public infrastructure," Debroy says.

"There is some sense in providing tax holidays for setting up industry on backward regions. What is the point in giving tax incentives to develop infrastructure and then to the industry, too?" PRASHANT BHUSHAN, SUPREME COURT LAWYER

The commerce ministry's optimistic claims are entirely predicated on the expectation that there will be long queues for setting up new units and an infusion of new investment to these sezs. But the assumption that there will be significant volumes of new investment is questionable. "It is very logical that existing units will fly to these zones, given the ready infrastructure and tax benefits," says Debroy. Therefore, it will only lead to a clustering of export units which are at present distributed over the country.

Another apprehension is specific to it sezs. Of the projects that have been formally approved in the last two boa meetings, 22 out of the 34 are it or it enabled services (64.7 per cent) and of the 32 sezs already notified, 19 are in that sector (59.3 per cent). The it sector has a tax holiday till 2009. The fear is that software companies will just migrate to these zones to avail the tax concessions after that date, without adding any new investment.

The Posco case has emerged as the benchmark for those who have been issuing dire warnings about the flight of old capital to sezs. (see box Special status)

"In the name of tax reforms, removal of exemptions and concessions is being encouraged. This step is regressive. They are not only messing up the fiscal regime but the land market as well," cautions Debroy. "If we want to provide better infrastructure and single-window clearances, then why not do it all over the country?" But leave alone developing infrastructure uniformly, the sez scheme looks set to exacerbate existing regional imbalances. This is clear even as project proposals have started coming in and approvals are being handed out. 12jav.net12jav.net