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Indian Government At Odds Over SEZs

by Mary Swire,, Hong Kong

17 March 2011

The Indian Commerce Secretary Rahul Khullar is still very concerned about the withdrawal of the income tax exemption given to the country’s special economic zones, as announced in the budget.

The Commerce and Industry Ministry has been working on a number of schemes to make India an attractive investment destination and increase India’s exports to the world. SEZs were set up six years ago with the idea that manufacturers were given tax holidays to encourage them from moving to 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 Commerce Ministry fears that imposing the minimum alternative tax (MAT) at 18.5% on SEZs could damage India’s image as a safe place to invest. The ministry warns that there is the possibility that affected firms could take the government to court over breach of contract.

“Exports have grown at a huge clip from SEZs because people have made investments, because people have received assurances that there will be tax breaks. If the MAT ends up altogether discouraging both foreign and domestic investment, what are we achieving?” said Mr Khullar at a press conference.

“The levy of MAT acts as a disincentive for those who have already invested in SEZs because it amounts to changing the rules of the game mid-stream. Somebody is going to run around and say it is not fair. I don’t rule out the possibility of somebody dragging us to court. Nobody is going to sit back and just watch somebody take the tax breaks away”, he said.

Many of the SEZs are still in the development stage or have only recently actually started producing and exporting. “The greater damage here is that it will not do wonders for our credibility,” said the Commerce Secretary.

There have been plenty of detractors of the Special Economic Zones, not only on their economic performance but also on the social costs of purchasing land in a country where many don’t have a roof over their heads. The Finance Ministry’s reason for withdrawing the tax breaks is that they have drained revenue, and that the new MAT would make the corporate tax burden fairer.

TAGS: court | tax | investment | business | India | fiscal policy | commerce | budget | corporation tax | e-commerce | tax breaks | trade | telecoms | free trade zone

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