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Business Urges India To Reverse SEZ Policy

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

19 July 2011


As the Indian government puts the final touches to a new national manufacturing policy, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has called for the ironing out of issues troubling special economic zones (SEZs) and suggested that the zones could be used as a springboard to boost India exports.

SEZs were set up six years ago with the idea that manufacturers were given tax holidays to encourage to move to India from other Asian countries, and they in return would provide jobs and exports. The Indian government had hoped to attract substantial new investment and create millions of new jobs.

The announcement in this year's budget speech that SEZ firms would have to pay India's minimum alternative tax (MAT) at a rate of 18.5% came as a huge surprise to most people, including even the Indian Commerce Secretary, who said at the time that the tax could damage India’s image as a safe place to invest. He also warned that there was the possibility that firms could take the government to court over breach of contract.

The Finance Ministry’s reason for withdrawing the tax break was that SEZs had drained revenue, and that the new MAT would make the corporate tax burden fairer.

ASSOCHAM Secretary General D.S. Rawat argues that the government should concentrate on boosting exports from SEZs, rather than remove tax breaks, in order to make up for the shortfall in revenue.

“As goods and services become cheaper in other countries, there are valid and reasonable grounds for the government to continue benefits spelt out in the earlier SEZ policy,” he said.

“Increasing exports amid high crude oil prices and rising import bill can also lower trade deficit and reduce risk on account of foreign exchange volatility,” he said.

ASSOCHAM warns that if tax benefits are not maintained, SEZ developers and units will consider pulling out of new and existing projects, putting many billions of dollars worth of investment at risk.

There are already signs that Mukherjee’s proposal may be putting in jeopardy both planned and present investment projects and that investors and state-level governments are worried about the impact that this will have on the economy locally and nationally. In Gujarat, which accounts for about half of all SEZ exports from India, it is said that 24 business units have postponed their plans to move into the state’s SEZs, while doubt has been cast on the future of 50 SEZ developments which are at various stages of implementation.

TAGS: tax | business | India | tax incentives | law | corporation tax | manufacturing | tax breaks

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