Provisions in India' new Direct Tax Code could serious affect SEZs. It would drastically reduce the value of the concessions that currently help attract investments into SEZs. Tax breaks would henceforth be based on investment rather than profit levels. Existing SEZs are to be grandfathered, as will (apparently) units operating within SEZs before April 2010.
A couple aspects of how this state of affairs has come about are striking. The first is the ability of the Finance Ministry to exercise authority in ways that significantly undercut initiatives in other policy domains. The FM has always exercised outsized influence, but in the context of a fiscal crisis, and with a stalwart minister at the helm, it is doing so more vigorously and with less regard for the interministerial consequences.
V Balakrishnan, CFO, Infosys was quoted as saying that the lack of clarity in the relationship between the tax code and the SEZ policy 'creates uncertainty for any investments to come into SEZ. But he also saw a larger pattern of incoherence at work: "When the SEZ act came into force in 2005, the government proudly proclaimed that the three pillars of fiscal incentives, regulatory freedom and a supportive infrastructure would make the new policy a success. Today—the very same government has proposed a tax policy that takes the fiscal incentive pillar away. Without which, there will be nothing special about Special Economic Zones.
A change to the applicable tax regime also raises the question of what will happen to SEZs still in the process of acquiring land -- will these too be grandfathered? Or will only some of them, based on a discretionary waiver system, for which state-level approval would also be required? If some form of the latter arises, this will fuel further speculation about favouritism and rent-seeking -- a, perhaps, unintended consequence of thepolicy shift
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The Direct Tax Code is, as yet, a draft code. So, SEZ developers declaring that it takes away what is special about SEZs may simply be position taking as the bargaining over the draft code gets underway.
Until now in the battle between the fin min and the commerce ministry over SEZs the commerce ministry appeared to have the upper hand. It will be interesting to see how this battle shapes up through the Direct Tax Code.
As the gentleman from Infosys says tax breaks are only one of the attractive features of SEZs. Presumably the single window mechanism, the simplified administrative and customs procedures, the easier environmental norms "(regulatory freedom"?) are also part of the attraction of SEZs?
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