Government needs to take a relook at the SEZ scheme

Government needs to take a relook at the SEZ scheme
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First Published: Fri, Jun 26 2009. 09 27 PM IST

Updated: Fri, Jun 26 2009. 09 27 PM IST
India’s special economic zone (SEZ) scheme has attracted a lot of public attention due to its requirement for land. The SEZ Act, 2005, stipulates a minimum area of 1,000 ha and 100 ha (approximately 2,500 acre and 250 acre) for setting up a multi-product and sector-specific SEZ, respectively. An added condition is that the land should be contiguous.
The intention of the scheme, which requires large parcels of contiguous land, seems to be to decongest the cities and take industrial investments to semi-urban or rural India. This is also borne out by the provision that allows SEZ developers to use up to 50% of the area notified for purposes other than processing, such as housing, retail, public amenities such as hospitals, schools, etc.
The dispensation granted to information technology SEZs in terms of land requirement lends the scheme a totally different dimension. The requirement of 25 acres or more of land with a minimum built-up processing area of 1 million sq. ft makes it feasible for information technology SEZs to be set up in large cities. The lure of the revenue generation potential of the non-processing areas in these SEZs have encouraged some developers to centre their business plans around the non-processing area rather than the other way round.
The consequences of change in land use do not appear to find consideration in the formulation of this scheme. This is evident in the absence of any provision in the law as regards the type of land that can be acquired by a developer for setting up an SEZ. After the incidents in West Bengal, some states have put in place safeguards that only single-crop land will be allowed for conversion to industrial and commercial use, but it appears to be a case of too little, too late.
There is also a flip-flop on the tax incentives. The exemption from service tax is a case in point on the differences in outlook between the finance and commerce ministries. From granting complete exemption to services consumed in the SEZ, to formulating a scheme which grants exemption by way of a refund, to doing a volte face and reverting to what seems like the earlier exemption, is bewildering.
Equally strange is the states’ approach to supplies made to SEZs. Some of them treat the same on par with exports and zero-rate the supplies to SEZs for the purpose of value added tax (VAT) while others require VAT to be charged and expect SEZ units to claim a refund of the tax.
SEZs also face problems due to lack of clarity in determining the quantum of income tax deduction with respect to the profits of an SEZ unit under section 10AA of the Income-tax Act, 1961.
The deduction from the profits of the SEZ unit is available to the extent of the amount which is in proportion of the export turnover of the SEZ unit to the total turnover of the business of the assessee.
In the absence of a definition of the phrase “total turnover of business carried on by the assessee”, there is ambiguity in identifying as to what is the correct formula for computing the income tax.
The ambiguity in section 10AA(7) of the Income-tax Act deprives SEZ units from the actual benefit which has been envisaged by the Union government while forming the SEZ Scheme. Therefore, the section needs to be amended to provide the intended benefits to SEZ units.
A similar issue relating to computation of quantum of deduction for exports under section 10A has been modified by the Union government by the Finance Act, 2001. Section 10AA(7) needs to, therefore, incorporate “total turnover of the business carried on by the assessee from the undertaking” instead of the “total turnover of the business carried on by the assessee”.
Krupa Venkatesh and Prashant Deshpande are senior directors at Deloitte Touche Tohmatsu India Pvt. Ltd.
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First Published: Fri, Jun 26 2009. 09 27 PM IST