Failed SEZ Policy Of India; Text of Supreme Court order 2007.
Friends,
While our PM was awarded another "Doctor of Law" our apex judiciary has rapped him repeatedly for poor governance.
As per an Indian proverb half knowledge is deadly but I found he has no knowledge or is just a mediocre.
Supreme Court observed in reservation case government introduced the legislation without any study and examination of the situation.
In School admission case it was High Court that introduced admission guidelines though it is legislative function.
To clean our rivers it is the Supreme Court that has to intervene.
To remove dogs, bulls and cattle from city roads, it is the Apex Courts who intervene but "Doctor of Law" citation went to world's most dubious economist cum Prime Minister.
I have already posted important message on SEZ.
Only thing I want to add is that when the matter will go to the Supreme Court, it shall observe that;
Text OF Supreme Court Judgment 2007 >>>>>
"We find government has neither carried out any serious study of failed SEZ policy in existence for 3-4 decades before introducing tax free SEZ policy. Government has not made any attempt to analyze the causes of past failures. Government has not explained how companies who failed to take advantage of huge incentives advanced to industry over decades will perform better in SEZs.
Government can't draw up plans to let Indian corporate enjoy tax free operations that all record handsome profits year after year and overload common man with burden to support non performing and entirely corrupt government machinery.
But it is absolutely scandalous to let companies operate huge SEZ projects without any security clearance and background check for criminal activities like under declaring profits, re-routing telephone calls. GOI ought to have invited objections from public in granting licenses to promoters to screen out dishonest operators.
When security clearance is required for Chinese technicians and labor undertaking projects in India why SEZ promoters are not subjected to similar security checks in view of huge size of the projects and millions of crores commercial value of properties they are acquiring."
PIL against SEZ may be filed without delay.
Ravinder Singh
October17, 2006
Failed SEZ Policy Of India
Friends,
This message again emphasizes that GOI is most incompetently led.
In this link of GOI SEZ site you will discover that India's exports from SEZ was mere $4b in 2004-05, which was increase of $1b but Noida alone contributed $0.6b approximately. The output from the other 11 or 12 SEZ was almost stagnant.
Value addition figures could be half of it.
Why the GOI is Mad about SEZ schemes?
But most worrying is the mad rush to set up 140 SEZ already.
Existing units can improve productivity, quality and technologies at nominal cost.
Worst is the idea to set up Golf Courses and Malls in the SEZ that shall further drain out resources that are needed to be deployed to improve quality and technology of the exportable goods. New plants with new work force will take time to establish and it will be very difficult to relocate most of the high skill employees who may shift jobs to avoid relocation.
The export incentives could be advanced to existing units.
Ravinder Singh March18, 2006
The significant downside of SEZs
The SEZ Act, 2005 consolidates existing specialised incentive packages and, in several respects, extends these to provide a range of benefits both in direct and indirect taxes for the promotion of exports as well as for the development of these zones in private/public/joint sectors.
Other major attractions held out by these zones are low-cost finance, a system of single-window clearances, self-declaration procedures, single notified agency for inspections, etc, to provide a unique, hassle-free environment. While the new dispensation has undoubtedly several positive features, there is a downside that has not received the attention that it calls for.
The provisions bearing on indirect taxes are meant to compensate for any domestic taxes that the exports from these zones (or, for that matter, from any other areas) may suffer, and do not constitute incentives, as such.
As far as it concerns direct taxes, it is pertinent to note that while most of the incentives for exports are either being phased out (like Sec 80HHC) or are being limited by sunset clauses (Sec 10A and 10B), the SEZ Act, 2005, is not constrained by either of these limits.
Other major attractions held out by these zones are low-cost finance, a system of single-window clearances, self-declaration procedures, single notified agency for inspections, etc, to provide a unique, hassle-free environment. While the new dispensation has undoubtedly several positive features, there is a downside that has not received the attention that it calls for.
The provisions bearing on indirect taxes are meant to compensate for any domestic taxes that the exports from these zones (or, for that matter, from any other areas) may suffer, and do not constitute incentives, as such.
As far as it concerns direct taxes, it is pertinent to note that while most of the incentives for exports are either being phased out (like Sec 80HHC) or are being limited by sunset clauses (Sec 10A and 10B), the SEZ Act, 2005, is not constrained by either of these limits.
The tax benefit includes not only tax-free treatment of profits for entrepreneurs and developers in the SEZ, but also exemption from dividend distribution tax, minimum alternate tax (MAT), and capital gains tax on transfer of assets in case of shift of an industrial undertaking from an urban area to an SEZ.
Also, overseas banking units get exemption on their profits in the SEZ. There is no withholding tax on interest payment to non-residents and not-ordinarily residents either. Even those not located in the SEZ, like investors in an infrastructure capital fund or company which has invested in the SEZ, are eligible for tax-free income from interest and dividends.
A special dispensation for exports was considered necessary when India's policy had an anti-export bias. Export processing zones were conceived as 'islands' isolated from the restrictive environment that prevailed in the economy. The reforms initiated since 1991 made a sea change in the environment for investors and exporters.
The advocates of an incentivised regime like the proposed SEZ Act draw comparisons with the Chinese experiment of SEZs. Tax incentives and relatively less stringent labour laws are presented as the two critical elements of this success story. In terms of tax incentives, there is a vital difference between the structure of the Chinese and the Indian models. The Indian SEZ Act, 2005, has made enjoyment of the tax holidays contingent on the units in the zone being net forex earners.
The effect of the export-contingent subsidy implicit in the tax concessions is, therefore, likely to be classified under the WTO's codes as one which 'displaces or impedes the imports of a like product from another country' by 'price under cutting/price depression', and therefore 'countervailable' in the country of import.
In short, incentives of these kinds can be potentially neutralised by the importing country through countervailing duties, which undermine both the gains from such an incentives regime and the revenue potential that grows with economic growth.
In contrast, the Chinese SEZs enjoy preferential rates of income -tax contingent on foreign investment and not on export criteria. Moreover, such tax preferences are available to foreign investors located outside the SEZs in China. Hence, in the early years of China's entry into WTO, the tax subsidies granted in the Chinese SEZs have not been considered 'prohibited' or 'actionable' by other member countries of the WTO.
India, however, has the dubious distinction of having the maximum number of CVD actions initiated against any member country of WTO during the period 1995-2004 — 28 out of a total of 108 actions were initiated against India's exports.
Even in the case of China, although the tax subsidy to SEZs is not contingent on exports, the fact that the SEZ model has given a differential advantage to China's exports, has led to a certain degree of rethinking by the Chinese.
In terms of labour laws, the differences are more in perceptions than in fact. As captured in The Report of the Second National Labour Commission of India, China has detailed regulations governing employment plans of foreign-invested enterprises, covering recruitment, signing of labour contracts, conditions for retrenchment, responsibility to provide basic living allowance to the retrenched and so on. The critical difference could be in the enforcement of labour standards in China, the "gains" from which might be difficult to enshrine in enactment in any other locale.
As stated by government in the monsoon session of Parliament, as of now, 11 SEZs are in operation in nine states and UTs; new approvals for setting up SEZs have been given for over 40 projects in 13 states; proposals have been received in 11 cases for establishing SEZs.
Moreover, the SEZ Act vests the SEZ board with the power to designate even an existing zone or a stand-alone unit as SEZ, if it fulfils the same export obligations.
Thus, if this is the state of play when the SEZ Act is barely a few months old, there is likely to be a deluge of applications in the immediate future, leading, probably, to virtual de-industrialisation of non-SEZ regions, with consequent repercussions to tax revenues. A proposition being advanced (Perspectives: ET, Nov 22 '05) as a counter to the revenue loss argument is that employment generation/transfer of technology/FDI inflow likely to result from the setting up of SEZ tax havens would set in motion such a virtuous cycle of higher investment-higher income-higher expenditure-higher savings and the economy would be lifted to such heights that revenue loss resulting from tax exemptions under the SEZ regime would be offset by revenues and savings in the chain effect of higher levels of economic activity.
However, the flaw in this thesis is that it ignores the legitimacy of government's need for revenue. After all, the right environment for evenly spread growth requires much more extensive and efficient infrastructure and social security, without which it will never be possible to relax our labour laws or give sufficient impetus to overall growth.
(The author is principal consultant, NIPFP, New Delhi)
Also, overseas banking units get exemption on their profits in the SEZ. There is no withholding tax on interest payment to non-residents and not-ordinarily residents either. Even those not located in the SEZ, like investors in an infrastructure capital fund or company which has invested in the SEZ, are eligible for tax-free income from interest and dividends.
A special dispensation for exports was considered necessary when India's policy had an anti-export bias. Export processing zones were conceived as 'islands' isolated from the restrictive environment that prevailed in the economy. The reforms initiated since 1991 made a sea change in the environment for investors and exporters.
The advocates of an incentivised regime like the proposed SEZ Act draw comparisons with the Chinese experiment of SEZs. Tax incentives and relatively less stringent labour laws are presented as the two critical elements of this success story. In terms of tax incentives, there is a vital difference between the structure of the Chinese and the Indian models. The Indian SEZ Act, 2005, has made enjoyment of the tax holidays contingent on the units in the zone being net forex earners.
The effect of the export-contingent subsidy implicit in the tax concessions is, therefore, likely to be classified under the WTO's codes as one which 'displaces or impedes the imports of a like product from another country' by 'price under cutting/price depression', and therefore 'countervailable' in the country of import.
In short, incentives of these kinds can be potentially neutralised by the importing country through countervailing duties, which undermine both the gains from such an incentives regime and the revenue potential that grows with economic growth.
In contrast, the Chinese SEZs enjoy preferential rates of income -tax contingent on foreign investment and not on export criteria. Moreover, such tax preferences are available to foreign investors located outside the SEZs in China. Hence, in the early years of China's entry into WTO, the tax subsidies granted in the Chinese SEZs have not been considered 'prohibited' or 'actionable' by other member countries of the WTO.
India, however, has the dubious distinction of having the maximum number of CVD actions initiated against any member country of WTO during the period 1995-2004 — 28 out of a total of 108 actions were initiated against India's exports.
Even in the case of China, although the tax subsidy to SEZs is not contingent on exports, the fact that the SEZ model has given a differential advantage to China's exports, has led to a certain degree of rethinking by the Chinese.
In terms of labour laws, the differences are more in perceptions than in fact. As captured in The Report of the Second National Labour Commission of India, China has detailed regulations governing employment plans of foreign-invested enterprises, covering recruitment, signing of labour contracts, conditions for retrenchment, responsibility to provide basic living allowance to the retrenched and so on. The critical difference could be in the enforcement of labour standards in China, the "gains" from which might be difficult to enshrine in enactment in any other locale.
As stated by government in the monsoon session of Parliament, as of now, 11 SEZs are in operation in nine states and UTs; new approvals for setting up SEZs have been given for over 40 projects in 13 states; proposals have been received in 11 cases for establishing SEZs.
Moreover, the SEZ Act vests the SEZ board with the power to designate even an existing zone or a stand-alone unit as SEZ, if it fulfils the same export obligations.
Thus, if this is the state of play when the SEZ Act is barely a few months old, there is likely to be a deluge of applications in the immediate future, leading, probably, to virtual de-industrialisation of non-SEZ regions, with consequent repercussions to tax revenues. A proposition being advanced (Perspectives: ET, Nov 22 '05) as a counter to the revenue loss argument is that employment generation/transfer of technology/FDI inflow likely to result from the setting up of SEZ tax havens would set in motion such a virtuous cycle of higher investment-higher income-higher expenditure-higher savings and the economy would be lifted to such heights that revenue loss resulting from tax exemptions under the SEZ regime would be offset by revenues and savings in the chain effect of higher levels of economic activity.
However, the flaw in this thesis is that it ignores the legitimacy of government's need for revenue. After all, the right environment for evenly spread growth requires much more extensive and efficient infrastructure and social security, without which it will never be possible to relax our labour laws or give sufficient impetus to overall growth.
(The author is principal consultant, NIPFP, New Delhi)
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