The Indian government's plans to enlarge the Special Economic Zone regime with additional tax breaks took a new turn last week when Trade and Commerce Minister Kamal Nath said he was planning to allow the country's 29 states to make individual decisions on whether strict labour laws could be suspended within the SEZs.
The passage of new legislation to liberalize SEZs has been dogged by in-fighting between Nath's ministry and the hawkish Finance Ministry which is determined to rein in tax incentives. When legislation was published two weeks ago, it contained a 'sunset' clause which stipulates that no deduction of export profits would be allowed to any undertaking which began manufacturing articles or computer software after March 31, 2009. Mr Nath protested to Prime Minister Manmohan Singh that this would eviscerate the legislation; the outcome of this particular spat is still unclear.
Under current legislation, SEZ undertakings are allowed a 100% tax holiday for the first 10 years; in the original draft Special Economic Zones Bill, this exemption was proposed to be extended to 20 years, beginning from the date the unit starts production. Mr Nath says that since SEZs require world class infrastruture and the additional costs could be very high, infusion of investment on a massive scale including FDI was required to make the scheme a success. "A.substantial increase in foreign investment involving funding over a period of 15-25 years would be required, especially in infrastructure," he said.
The policy blueprint that Congress negotiated with its allies after coming to power last May excluded both privatisation and labour reform. Under Mr Nath's new proposals, legislation would allow state governments decide what labour regulations to apply to their own planned SEZs. “It will be for every state to decide,” said Mr Nath. “I am confident this will be enacted by May.”
36 SEZs have so far been approved for establishment, many in the IT sector.
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