India Introduces Tax Breaks In Export Drive

by Mary Swire, Tax-News.com, Hong Kong

02 April 2003

New Delhi confirmed at the start of the week that it will be extending tax breaks in special economic areas in addition to lifting restraints on exporters in a bid to boost the country's total export output.

The incentives in the economic zones will include tax breaks to industries such as power generators and road builders. It is the mission of the Commerce and Industry Minister, Arun Jaitley to boost foreign direct investment in these zones in an attempt to increase their export potential. "Our endeavor is to bless our special economic zones with facilities comparable to those elsewhere in the world," the Minister explained.

In concentrating resources in the special economic zones, the Indian government is hoping to replicate the success that the Chinese government has had with similar policies.

China's first export zone, Shenzhen, created 22 years ago, has exported goods totalling $54.23 billion in the first months of 2003 alone. This dwarfs India's total output in terms of exports. The Chinese economy grew at twice the rate of India's last year, and received twelve times the amount of foreign investment.

The Indian government plans to lift export restrictions on five products including silk cocoons, and remove import restrictions on 69 items, including spices. It will give tax breaks to firms who maintain the country's infrastructure in addition to providing incentives to banks who offer finance at "international rates".

However, the policy of focusing on the special economic zones has attracted criticism from an economist at the Institute of Foreign Trade. Biswajit Dhar said it was "not the way forward", and the system had worked in China due to its distinctive political system, which differs markedly from India's.

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