Sops to revive SEZs on the anvil

R. SURYAMURTHY

Aid on way New Delhi, March 30: The government plans to come out with fresh guidelines to revive special economic zones (SEZs) as uncertainty over tax exemptions has led to declining interest in these tax-free enclaves. A reduction in the minimum area required to set up an SEZ, extension of benefits of export schemes to units in these zones and lower minimum alternate tax for manufacturing SEZs are some of the measures the government may consider. According to officials in the commerce ministry, the new guidelines will be announced along with the annual foreign trade policy next month as SEZs contribute about 30 per cent of the country's overall exports. Officials said the finance ministry could agree to lower the minimum alternate tax on manufacturing SEZs to boost exports, enhance job creation and narrow the widening current account deficit. However, the benefit may not be extended to IT and the other service sectors. While the SEZ act promised 100 per cent tax exemption for five years and 50 per cent exemption for the next five years, the government had imposed an 18.5 per cent minimum alternative tax (MAT) on SEZs in Budget 2010-11. This led to a large number of developers withdrawing their proposals and very few coming up with new proposals to set up tax-free zones. The Export Promotion Council for EoUs (export oriented units) and SEZs want the MAT to be lowered to 7.5 per cent. Officials said the commerce ministry could agree to a MAT rate of 15 per cent initially, but would continue discussions on a further cut on a later date. The ministry is also trying to convince the finance ministry to extend DTC provisions only on units that come up after March 2015. The Direct Taxes Code (DTC) proposes to do away with the income tax exemption given to SEZs and instead link tax sops to investments made in them. Profit-linked benefits were the main attraction of the SEZ scheme. According to the DTC, which will replace the Income Tax Act of 1961, tax exemptions for SEZs will be confined to already existing units. The proposals have led to a visible slowdown in new tax free zones in the country. The government is planning incentives for developers who want to set up SEZs in remote and under-developed areas. It is also considering extending the benefits of export schemes to SEZ units that are already available to entities outside the zone. Another change being considered by the ministry is extension of benefits of export schemes to SEZ units. Export benefits announced in the foreign trade policy and extended to some other sectors included a 2 per cent interest discount or subvention scheme for a number of sectors such as toys, sports goods, processed agricultural products and ready-made garments, apart from SMEs (small and medium enterprises) and the handloom sector.