Five Years After SEZs: Chronicle Of Revenues Foregone

SEZs, touted as the silver bullet for India’s economic ambitions, appear to have lost their sheen as the Direct Tax Code threatens to withdraw the exemptions offered them. We have only just begun to realise how many thousands of crores of revenue have been foregone due to tax holidays granted to SEZs, says Manshi Asher, who secured some revealing statistics on this subject after invoking the RTI law.

It’s been five years since the SEZ Act 2005 came into being. Over 580 SEZ approvals, much real estate speculation, half-a-dozen farmers’ protests, and an economic slowdown later, it is time for the Ministry of Commerce to admit that the policy has been a damp squib on the economic front. Developers who were falling over each other to get their SEZ plans approved seem to be looking for greener pastures, as they now line up to get their SEZs denotified or withdrawn. Many others continue to seek extensions to their in-principle approvals, even as they experience problems accessing land or coming up with the requisite finances. In October 2010, the Board of Approvals at the ministry, which was clearing more than 40 projects an hour a few years ago, did not receive a single proposal!

The Direct Tax Code Bill 2010, tabled by the Ministry of Finance in the last session of Parliament, would appear to be the latest spanner in the works. The future of tax exemptions — the most attractive feature of the SEZ policy for new units in SEZs — looks bleak as the DTC threatens to withdraw location-specific exemptions from the dividend distribution tax or minimum alternative tax for SEZs in the country. Further, the DTC has proposed a substitution of the profit-based incentives prevalent under the existing provisions of the Act with investment-based deductions for SEZs notified on or after April 1, 2012. Though the Bill tabled in Parliament this August is a watered down version of the original draft, it does put the focus back on the concerns of the Ministry of Finance in relation to revenue losses involved in SEZ development in India.

The finance ministry expressed its apprehensions over tax sops to SEZs when the Central SEZ Act was passed in 2005. According to the Parliamentary Standing Committee’s 83rd report, presented in the Rajya Sabha in June 2007, the Ministry of Finance estimated a revenue loss of Rs 175,487 crore from tax holidays granted to SEZs, for the period 2004-05 to 2009-10. The finance ministry, which collated the tax filings of 410,451 companies (including SEZs) in 2009, found that there was a sharp increase in revenue foregone by the government on account of certain exemptions — including accelerated depreciation, which shot up from Rs 7,396 crore in 2006-07 to Rs 12,946 crore in 2007-08, and further to Rs 14,344 crore in 2008-09.

The concerns of the finance ministry were corroborated by the Comptroller & Auditor General’s performance audit report tabled in Parliament in 2008. The CAG review brought out systemic as well as compliance weaknesses in relation to SEZs that caused revenue losses to the tune of Rs 246.72 crore. Furthermore, the CAG threw light on the absence of enabling provisions, resulting in Rs 1,724.67 crore of revenue foregone, or irrecoverable.

More recently, in January 2010, the Central Board of Excise and Customs (CBEC) recommended an overhaul of the Special Economic Zone (SEZ) Act 2005, saying it had detected gross violations of duty and tax concessions causing it to suffer a revenue loss of Rs 175,000 crore to date.

The figures put out by various departments have often been termed “notional” or exaggerated by the Ministry of Commerce and economic analysts. But a simple probe, vide a series of RTI applications with the Gujarat government, revealed that the revenue loss figures in a handful of SEZs ran into  lakhs and crores of rupees (the RTI applications were filed with the following departments in August and September 2009 — Director General of Audit, Central Revenues, Sr/Deputy Accountant General, Office of Accountant General and Gujarat Industries Commissionerate, by Manshi Asher).

Here are some of the figures: Rs 5,066.89 crore has been foregone as duty on import procurement between 2006-07 and 2008-09 in the case of the Reliance Jamnagar SEZ. Between 2007-08 and 2008-09, the SEZ also availed of Rs 7.99 lakh in exemption of stamp duty, Rs 39,760 in fee exemptions. Between 2007-08 and 2008-09, the Dahej SEZ has foregone Rs 14.06 crore as central excise duty on DTAs (Domestic Tariff Areas, or areas outside an SEZ). Between 2006-07 and 2008-09, the SEZ has also foregone customs duty worth Rs 116.10 crore. The Mundra Port and SEZ and Adani Power SEZ combined have led to Rs 937.46 crore foregone as duty exemptions between 2006-07 and 2008-09. The twin SEZs have also together got exemptions worth Rs 10.2 crore in stamp duty and registration fees combined, in 2008-09 alone. Between 2005-06 and 2008-09, Rs 805.65 crore was foregone as exemptions on customs duties in the Kandla SEZ.

And yet the Ministry of Commerce has chosen to brush aside such findings and pitch the ‘success’ of SEZs on investment and export figures.

There are fundamental flaws in relying merely on statistics while ignoring the trajectory, trends and nature of exports and investments, which is precisely what the commerce ministry has done.

Let’s take exports. While the astounding figure of Rs 2 lakh crore exports from SEZs till March 2010 is used to highlight the performance of SEZs in general, it is important to examine this figure. Nearly 50% of these exports came from the same handful of functional zones in the state of Gujarat mentioned above. Also, it may be noted that Gujarat’s functional SEZs, including Kandla, Mundra, Jamnagar, Surat and Dahej, which contribute to the exports, existed or were projects that were planned and under construction before the central and state SEZ Acts were put in place; hence their success can hardly be attributed to the SEZ policy of 2005. Further, a single SEZ (Reliance Jamnagar) contributed Rs 75,000 crore to the all-India figure, and this level of performance cannot be expected of all SEZs.

Another important dimension pointed out by analysts in several leading business dailies is diversion of exports from DTAs to SEZs. In other words, the rapid increase in exports from SEZs has been accompanied by a drop in exports from non-SEZ areas, indicating a possible shift of units from outside SEZs into SEZs — a trend that merits serious investigation.

The issue of positive NFE (Net Foreign Exchange) and physical exports is also controversial, as Rule 53 of the SEZ Act, which considers sale to DTAs from SEZs, is deemed exports. In fact, it was the CAG report of 2008 that observed that “22 SEZ units had been achieving the prescribed ‘positive’ NFE mainly though domestic sales and this defeats one of the sub-objectives of the scheme which was to augment real exports. While an overall export of Rs 7,149.23 crore was made by these 22 units, the actual export content was only Rs 1,999.27 crore (28%); the remaining Rs 5,149.96 crore (72%) related to DTA earnings”. An illustration is the Nokia SEZ in Tamil Nadu, which the commerce ministry cites as a successful SEZ. However, an independent study published by Madhumita Dutta, an activist and researcher based in Chennai, corroborated the finding that “domestic sales of Nokia’s mobile phones from the SEZ count towards exports” thanks to loopholes in the legislation. Also, apart from absolute figures, the MoC has no disaggregated data on exports from SEZs. In fact, in response to an RTI application filed last year, seeking the Net Foreign Exchange (NFE) earned from SEZs, the ministry clearly said that “no such data is maintained in the department”.

The extent of benefits drawn by developers (mostly real estate and infrastructure companies) in the name of export augmentation, and the tax exemptions taken together, in itself seem outrageous. Common sense suggests that this, coupled with other advantages like the measly prices at which government and agricultural land has been diverted to developers, and the social and environmental costs of these projects, results in cumulative losses to the public exchequer that far outweigh the benefits.

It remains to be seen whether Parliament debates the Direct Tax Code Bill 2010, and if so, confronts the SEZ issue head-on. Given the fact that five years ago the SEZ Bill was passed in both houses of Parliament in a single day, with no real discussion, the chances of a debate now on the purpose and performance of the policy remain slim. The socio-political ramifications of SEZs are already being questioned; the time has come to review the policy for its economic sense. After all, the people of India deserve to know the real cost of such development. And who is paying it.


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