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Ministries in a tug of war over tax on SEZs

The commerce ministry, on the other hand, wants the tax to be rolled back as it views these zones as engines of growth that have led to a quantum leap in the country's exports.

S.P.S. Pannu   New Delhi     Last Updated: March 14, 2011  | 10:26 IST

There is a battle royal raging between the finance ministry and the commerce ministry over the contribution of special economic zones (SEZs) to India's growth story.

The finance ministry sees a huge amount of revenue leaking out of the system due to the tax-free status granted to these zones and the 18.5 per cent minimum alternate tax (MAT) on the book profits of developers and units operating in SEZs proposed in 2011-12 Budget aims to plug this gap.

The commerce ministry, on the other hand, wants the tax to be rolled back as it views these zones as engines of growth that have led to a quantum leap in the country's exports and created more jobs.

Senior commerce ministry officials are of the view that the exports from SEZs have doubled over the previous year to around $50 billion and now account for one-fourth of the country's exports.

They point out that the imposition of MAT in the tax-free SEZs amounts to changing the rules of the game midway and would discourage fresh investments in these zones and choke growth.

However, finance ministry officials say there have been huge revenue diversions from domestic operations to these zones in order to dodge taxes.

A report by the Comptroller and Auditor General of India (CAG) had also pointed out that these tax-free zones sell most of their goods within the country as "deemed exports" rather than actually exporting them overseas.

A finance ministry official told MAIL TODAY that the commerce ministry figures show a doubling of exports from SEZs even during periods when overall exports have been stagnant. "These figures have to be taken with a pinch of salt," he remarked.

Finance ministry officials also point out that while SEZs were originally set to up to promote manufacturing units, this has not happened as these zones are predominantly into IT exports which were already doing well.

"Some units have also shifted to these zones merely to avail of the tax benefits and this does not augur well for the country," a finance ministry official said.

The latest figures with the finance ministry show that only 58 per cent of the corporates that filed tax returns in 2009-10 showed profits on their books and hence paid taxes to the government.

Another 35 per cent showed that they were making losses while the remaining seven per cent showed nil profit.

"The government has to expand the tax base in order to increase revenue and reduce the fiscal deficit. So, it is imperative to bring more profit-making companies into the tax net," a finance ministry official said.

Finance minister Pranab Mukherjee had stated in his Budget speech that MAT being introduced in SEZs would "ensure equal sharing of the corporate tax liability". The finance ministry is of the view that it is already foregoing huge amounts in indirect tax concessions extended as incentives to exporters in SEZs and it is unfair to exempt them from paying tax on their profits as well while other firms are taxed.

Courtesy: Mail Today

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