New Delhi: The commerce ministry has toned down its resistance to provisions in the draft direct tax code, which proposes to do away with tax holidays for special economic zones (SEZs).
The ministry has limited itself to ensuring that tax incentives are preserved for existing SEZ developers and units, commerce secretary Rahul Khullar said.
Photo by Hemant Padalkar/HT; graphic by Yogesh Kumar/Mint
“What can we do? If it is a considered view of the government that in future SEZs should live with this tax regime, fine,” he said. “You ask my preference, I will prefer things to go as they are. But the sovereign right of the government to change the rules exists.”
SEZs were launched to boost investment, generate jobs and raise economic growth, along the lines of similar enclaves in China.
The commerce ministry had been insisting on tax incentives to SEZs continuing under the proposed tax code.
“As the commerce minister, I do not agree with the provisions of the direct tax code,” commerce minister Anand Sharma had said in December. “The tax concessions should continue.”
Taxing firms operating in these enclaves could make them unattractive for investment.
Khullar said there will be two types of SEZs—the ones set up before the code and the ones that will be set up once it comes into force.
“Two different rules will apply to them. We are requesting the finance ministry to make a statement like that,” Khullar said. “(For) those guys who are already in business, the rules of engagement will be different from those that would apply prospectively under the DTC (direct tax code).”
He wants the government to retain tax holidays for zones that are already operational.
“What I am saying is as a spokesperson of the industry. I would argue, grandfather those that are already in place, do not change rules retroactively for them,” he said. “And if you want to change the rules for others, take a considered decision.”
The draft direct tax code, released by the finance ministry in August for public debate, proposed to do away with all profit-linked tax benefits given to SEZs, replacing them with an investment-related expenditure scheme. Under the existing rules, the units in these zones are given 100% tax exemption on income for the first five years and 50% for the next five. Another 50% exemption is given on reinvested profit for the next five years.
Under the draft code, all capital and revenue expenditure except that on land can be recovered, after which income tax will be levied on profit.
Industry lobby group Associated Chambers of Commerce and Industry of India told finance minister Pranab Mukherjee that the draft code would hit the zones where it hurt. “Such provisions will be a major roadblock in the development and growth of SEZs in India,” it said in a representation to him.
The global downturn has forced some SEZ owners to denotify their tax-free zones. During the first three quarters of the current fiscal year, total exports of Rs1.52 trillion have been made from SEZs.