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Does death of SEZ policy mean biggest real estate scam // Govt may scrap SEZ policy

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  • Vinay Baindur
    http://www.business-standard.com/article/economy-policy/govt-may-scrap-sez-policy-113062400100_1.html * Nayanima Basu | New Delhi * *June 24, 2013*
    Message 1 of 1 , Jun 24, 2013

             Nayanima Basu  |  New Delhi  June 24, 2013 Last Updated at 00:55 IST

      Govt may scrap SEZ policy

      Existing units stay operational; those approved may not be notified, land could be used for other purposes

      Plagued by a series of controversies and scams, it seems, the government is finally planning to do away with the Special Economic Zone (SEZ) programme it had launched in 2006 with much fanfare.

      While the existing SEZs will continue to remain operational, those approved might not be notified and developers be allowed to utilise the land for other purposes.

      The commerce ministry has asked the Export Promotion Council for EoUs and SEZs (EPCES) to commission a study to Icrier to find if SEZs have met the economic objectives for which the programme was rolled out. It has been given six months for the study.

      Ministry officials told Business Standard this had been done to end the turf war between the commerce and finance ministries, as the latter believed some numbers given out by the former on exports, investments and jobs in SEZs were exaggerated.

      "There has always been some tension between the two ministries over the success of SEZs. So, we are doing a study by a neutral organisation on whether it has been able to measure up to its objectives. Else, we see no point in continuing with this scheme and giving them tax subsidies," said a senior commerce department official.

      The objective of the study was to find if the economic goals had been met, said P C Nambiar, director of the Pune-based Serum Biopharma Park (the country's first biotech SEZ), and the chairman of EPCES. "The finance ministry feels those have not been met," he said.

      It seemed the commerce ministry was also keen to do away with the policy so that it could promote the National Manufacturing and Investment Zones (NMIZ), under the National Manufacturing Policy, officials indicated.

      It was the Minimum Alternate Tax, imposed on both developers and units from 2011-12 onwards, that took away the interest of companies in SEZs. Additionally, a dividend distribution tax (DDT) was imposed on developers.

      However, existing SEZs were reported to be doing quite well. This raised the finance ministry's apprehensions. According to the latest data, exports from SEZs rose almost 30 per cent to $88 billion in 2012-13, from $68 billion the previous year. These were up 17 per cent in 2011-12, compared with $58 billion a year before. These are quite impressive numbers, given that the country's total exports fell 1.76 per cent to $300.6 billion in 2012-13. It means exports from SEZs accounted for 29 per cent of total exports in 2012-13.

      Total investments in SEZs rose to $44 billion in 2012-13, compared with $43 billion the previous year. As of March 31, SEZs had generated 1,074,904 jobs.

      The government has so far formally approved 577 SEZs, of which 389 are notified. At present, 170 operate across India.

      The Parliamentary standing committees on both commerce and finance have been opposing the policy. It has often been said that SEZs have led to large-scale realty scams, offering developers the opportunity to make quick money while enjoying tax exemption.

      • Tax breaks: Under Section 10AA of the I-T Act, SEZ units enjoy 100% I-T exemption on export income for first five years, 50% for next five years, and 50% of ploughed-back export profit for the next five years
      • Hit to exchequer: Rs 4,560 crore because of concession to SEZs in 2011-12; pegged at Rs 3,742 crore for 2012-13
      • Minimum Alternate Tax: SEZs had got a setback as MAT was imposed on both developers and units from 2011-12. It is currently charged at 20.96%
      • Dividend Distribution Tax: Additionally, DDT was imposed on developers; current rate: 17%
      • Denotification bid: Reliance, DLF, Essar, L&T, Jindal Stainless Ltd and Unitech, among others, have gone for denotifying their projects
      • Exit route: Supplement to the foreign trade policy, unveiled recently, makes it easier for the SEZ units to exit from the ventures

      Read more on:    SEZs | NMIZ | commerce ministry | Export Promotion Council


      Does death of SEZ policy mean biggest real estate scam 

      The government has lost interest in the Special Economic Zone policy, which it had devised in 2005 in order to boost economic activity in the country.

      According to a report in the Business Standard today, the government may discontinue its SEZ policy as it is tired of the controversies and protests that the policy has given rise to.

      The Icrier (Indian Council for Research on International Economic Relations) will study whether the policy has indeed delivered on the objectives it was devised for. If it has not, there is no reason to continue with the policy, a commerce ministry official has been quoted as saying in the report.


      It is significant that the comment is coming from an official of the department of commerce, which has always favoured the policy. Had this been from an official with the finance ministry, it would not have been a surprise, as this ministry has always been against the policy.

      The commerce and finance ministries have always been at loggerheads as far as the effectiveness of the policy is concerned.

      At the outset, the finance ministry was of the opinion that the promotion of SEZs, by giving huge tax breaks to the developers, result in a loss of over Rs 1,60,000 crores to the public exchequer in the first four years.

      The commerce ministry was not ready to buy this argument. On the contrary, it expected a net revenue gain of Rs 44,000 crores in the first two years and creation of 500,000 jobs. It also expected the SEZs to attract Rs 100,000 crores worth investments in this short span.

      The differences of opinion never ebbed. According to the BS report, the finance ministry never believed the numbers given out by the commerce ministry about the exports from and jobs created by these zones.

      So what were the objectives of the policy? As envisioned by the SEZ Act of 2005, they are generation of additional economic activity; promotion of exports of goods and services; promotion of investment from domestic and foreign sources; creation of employment opportunities; and development of infrastructure facilities.

      As per the BS report, the SEZs that are now operational are doing well. In 2012-13, exports from SEZs rose 30 percent to $88 billion, which forms 29 percent of the total exports. In 2011-12, the increase was 17 percent. At $44 billion in 2012-13, investments in SEZs are also significant. The fairing on the jobs front is also good. As of March 31, SEZs have generated 1,074,904 jobs.

      If these figures are to be believed, the policy’s stated objectives have been by and large met. Then why is the government veering towards such a drastic decision?

      The answer can only be the controversies related to land use and acquisition. There have been peasant protests against takeover of agricultural land, some of them, like that of Nandigram in West Bengal, even took a bloody turn.

      “The current promotion of SEZs is unjust and would act as a trigger for massive social unrest, which may even take the form of armed struggle,” former Prime Minister VP Singh had once warned.

      So at the heart is the question whether agricultural land should be used to set up industries? How can the government effectively bring about a rehabilitation and resettlement policy for the farmers who are displaced from their land?

      According to the BS report, the commerce ministry wants to do away with the SEZ policy so that it can go full steam ahead with the National Investment Policy, which envisages setting up of the National Manufacturing and Investment Zones.

      According to a report by Corporate Catalyst India, NMIZ are a “combination of production units, public utilities, logistics, environmental protection mechanisms residential areas and administrative services”. These will be set up over 5,000 hectares. The objectives are a) increasing the sectoral share of manufacturing in GDP to 25 percent by 2022; b) doubling the current employment level in the sector; c) enhancing global competitiveness of the sector.

      So, the government should have ideally devised the new policy by taking into account the flaws in the SEZ policy. But has that really happened? Media reports suggest it has not.

      According to a report in the Economic Times, as many as five states have written to the department of industrial policy and promotion, saying they are finding it difficult to acquire such huge tracts of land as they will have to acquire agricultural land. They want the Centre to revise the minimum land requirement.

      So, here is a new policy, which will have to grapple with the old problems on implementation. This gives rise to doubts as to why is the commerce ministry trying to discontinue the SEZ policy.

      The BS report says once the SEZ policy is discontinued, the government will allow the developers who have got the approval for SEZs to use the land acquired for other purposes.

      As per the report, the government has given formal approval for 577 SEZs. Of this, 389 have been notified. Notifying is the last step in setting up the SEZ. So there are 188 SEZs that have got the formal approval and possesses the land. If these developers hold on to their land until the government scraps the policy, they can use this land for other purposes.

      Scrapping of the SEZ policy definitely has the potential to turn into the biggest real estate scam in India.
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