Finmin worries about SEZs 'exaggerated'
The study, which was commissioned by the finance ministry, found the claims of revenue loss exaggerated and maintained that tax incentives will have a positive impact on investment, productivity and growth.
By TNN |
NEW DELHI: In A development that strengthens the hands of the pro-SEZ quarter at the Centre, particularly the commerce ministry, a government-sponsored study has rejected the alarms raised by the finance ministry on the issue.
The study, which was commissioned by the finance ministry, found the claims of revenue loss exaggerated and maintained that tax incentives will have a positive impact on investment, productivity and growth.
The study was commissioned following policy wrangling between finance and commerce ministries. The rift in the government on the issue was also encouraging sceptics, particularly those in the Left, to demand a revision of the policy.
The findings of the study have emphatically countered reservations raised by the finance ministry. Countering the stand that SEZs would cause a huge loss in revenue, the report said that policy makers have to be concerned with the overall benefits to the economy. In other words, if the overall gains far outweigh potential revenue loss, SEZs should be an acceptable policy choice.
According to the study, new SEZs are expected to yield a net benefit of Rs 1,13,000 crore to over Rs 1,54,000 crore, in the next three years. The report, which contested the finance ministry’s estimates of over Rs 1 lakh crore of revenue loss, said the loss would be between Rs 19,000 crore to Rs 23,000 crore.
“Therefore, the net direct benefits to the economy far outweigh possible revenue losses,” the report said, and maintained that even these losses would disappear when the indirect and induced benefits/incomes generated by the SEZs are taken into account.
“Induced effects arise when wage incomes are generated. Because of its linkage effects, this is expected to create additional economic activity in the domestic mainland that generates additional tax revenues. While evaluating the overall dynamic benefits from SEZs, we find that the government will have net revenue generation instead of loss,” said the report.
The study said since all new SEZs will be developed by private players, investment in infrastructure should be seen as additional net savings for the government. “Even in the two alternative scenarios when 60% IT sector production represents diversion from the domestic area or when 75% total investment is expected to be diverted from domestic areas to SEZs, the average net benefits remain positive over three years,” the report argued.
The study has argued that there would be direct employment generation for almost 8 to 12 lakh people. It said induced and indirect employment could be more than 14 lakh. In addition, building new infrastructure could generate up to 7.5 lakh employment. The finance ministry’s contention that SEZ could divert investment was also found to be without merit.
“Large IT units may indeed be the free-riders in the system. But evidence suggests that if there is potential for agglomeration economies, then tax benefits to lure or regain businesses can be welfare improving and a positive sum game. Agglomerations generate external economies and have growth enhancing effect,” the report said.
On transfer-pricing (TP), too, the report contests the finance ministry’s viewpoint. “Evidence suggests that transfer-pricing practised by MNCs may have serious implications for tax revenue. But discouraging FDI because of fears of TP will be counter-productive. Instead, as in other countries, administrative measures should be taken to plug loopholes that permit TP,” it suggested.
The report has made three major suggestions. One, capacity-building by government to ensure effective implementation of SEZ policy. This, the report said, will prevent transfers, maximise additionality and minimise transfer-pricing.
Second, approval of IT SEZs should be discouraged, but fiscal incentives to Export Oriented Units (EOUs) and Software Technology Parks of India (STPIs) should be restored. And third, dissemination of information about the performance of new SEZs that are in operation.
The study, which was commissioned by the finance ministry, found the claims of revenue loss exaggerated and maintained that tax incentives will have a positive impact on investment, productivity and growth.
The study was commissioned following policy wrangling between finance and commerce ministries. The rift in the government on the issue was also encouraging sceptics, particularly those in the Left, to demand a revision of the policy.
The findings of the study have emphatically countered reservations raised by the finance ministry. Countering the stand that SEZs would cause a huge loss in revenue, the report said that policy makers have to be concerned with the overall benefits to the economy. In other words, if the overall gains far outweigh potential revenue loss, SEZs should be an acceptable policy choice.
According to the study, new SEZs are expected to yield a net benefit of Rs 1,13,000 crore to over Rs 1,54,000 crore, in the next three years. The report, which contested the finance ministry’s estimates of over Rs 1 lakh crore of revenue loss, said the loss would be between Rs 19,000 crore to Rs 23,000 crore.
“Therefore, the net direct benefits to the economy far outweigh possible revenue losses,” the report said, and maintained that even these losses would disappear when the indirect and induced benefits/incomes generated by the SEZs are taken into account.
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“Induced effects arise when wage incomes are generated. Because of its linkage effects, this is expected to create additional economic activity in the domestic mainland that generates additional tax revenues. While evaluating the overall dynamic benefits from SEZs, we find that the government will have net revenue generation instead of loss,” said the report.
The study said since all new SEZs will be developed by private players, investment in infrastructure should be seen as additional net savings for the government. “Even in the two alternative scenarios when 60% IT sector production represents diversion from the domestic area or when 75% total investment is expected to be diverted from domestic areas to SEZs, the average net benefits remain positive over three years,” the report argued.
The study has argued that there would be direct employment generation for almost 8 to 12 lakh people. It said induced and indirect employment could be more than 14 lakh. In addition, building new infrastructure could generate up to 7.5 lakh employment. The finance ministry’s contention that SEZ could divert investment was also found to be without merit.
“Large IT units may indeed be the free-riders in the system. But evidence suggests that if there is potential for agglomeration economies, then tax benefits to lure or regain businesses can be welfare improving and a positive sum game. Agglomerations generate external economies and have growth enhancing effect,” the report said.
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On transfer-pricing (TP), too, the report contests the finance ministry’s viewpoint. “Evidence suggests that transfer-pricing practised by MNCs may have serious implications for tax revenue. But discouraging FDI because of fears of TP will be counter-productive. Instead, as in other countries, administrative measures should be taken to plug loopholes that permit TP,” it suggested.
The report has made three major suggestions. One, capacity-building by government to ensure effective implementation of SEZ policy. This, the report said, will prevent transfers, maximise additionality and minimise transfer-pricing.
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Second, approval of IT SEZs should be discouraged, but fiscal incentives to Export Oriented Units (EOUs) and Software Technology Parks of India (STPIs) should be restored. And third, dissemination of information about the performance of new SEZs that are in operation.
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