INDIA BUSINESS WORLD - AUGUST 2006
THE MONTH THAT WAS...

RBI FEARS SEZS MAY CREATE IMBALANCE IN ECONOMY

THE Reserve Bank of India (RBI) has voiced concern that the growth of special economic zones across the country could aggravate uneven development by pulling out resources from less developed areas. Moreover, the central bank has said the revenue loss suffered by states on account of tax breaks can be justified “only if the units in SEZs establish backward and forward linkages with the domestic economy”.

The SEZ Act 2005 provides several incentives to reduce transaction costs and improve competitiveness of exports. The simplification of procedures and tax breaks as envisaged by the Act are expected to attract investments of about Rs 1,00,000 crore and help create 500,000 jobs. Developers are allowed to set up sector-specific and multi-product SEZs.

The Act provides for a minimum area requirement of 1,000 hectares for multi-product SEZs and 100 hectares for service sector SEZs. The large SEZs plan to have their own power generation and water supply in addition to other urban infrastructure.

To encourage exporters to move to SEZs, the Act incorporates fiscal incentives for exporters. This includes full income-tax exemption to SEZ units for the first five consecutive years and 50% exemption for further five years. SEZ units and developers are also exempted from paying Customs duty on imported inputs and excise duty on products sourced from the domestic market.

The finance ministry is worried about the potential loss of revenue arising out of existing exporters moving to SEZs to avail of the tax breaks. At an empowered group of ministers' meet, finance minister P Chidambaram had expressed concern that there would be revenue loss estimated at over Rs 1,00,000 crore. The government, however, plans to go ahead with SEZs, without fixing any cap on the number of zones that can be set up in the country. The expectation is that the new economic activity would more than make up for the loss on account of tax revenue foregone.