Graveyard Humour

http://timesofindia.indiatimes.com/cartoonpics/5172299.cms

Fiscal and Export Implications of SEZs

The Comptroller and Auditor General's recent report on taxation highlights, among other things, the adverse revenue implications of SEZs. The issue of whether incentive schemes are revenue-neutral or not has been around at least as long as India has been operating export processing zone-type schemes. The debate has become more heated since the SEZ Act came into force in 2005-06. The CAG Report claims that roughly Rs 2000 crore (USD 400 million) has been lost to the exchequer because the SEZ rules do not require firms to pay sales taxes and import duties on production inputs, even if the final product is sold in the Domestic Tariff Area (DTA), and not exported, as long as the product category does not attract excise duty. This is an anomaly that is harming the competitiveness of non-SEZ firms.

An intriguing political economy question thus arises: dos the existence of such opportunities create incentives for 'domestic' producers to lobby for curbs on the ability of firms operating within SEZs to avail of such incentives? It may be that the barriers to collective action among those adversely affected by this state of affairs is too great to allow them to gain much traction. On the other hand, it may incentivize firms producing within the DTA to relocate to SEZs in order to level the playing field.