1. Special Economic Zones (SEZ) (Concept of Economic Development) Suggestions for Healthy, Transparent & Effective Implementation Dr. Kirit Somaiya, B Com,FCA,Phd Ex-Member of Parliament

2. SEZ – EVOLUTION & EVALUATION  Concept:Thrust on Export, FDI, New Township/Infrastructure, Manufacturing  Concessions: exemptions/relaxations in tax, labour,other laws- deemed foreign territory, land acquisition Execution of 6 years resulting into public debate > Dilution, deviation, diversion, manipulation, loophole to be checked > Healthy implementation of SEZ concept need of the hour. These are suggestions for improvement. Dr. Kirit Somaiya,B Com,FCA,Phd Ex-Member of Parliament kirit@vsnl.in 4 th December 2006

3. Major Issues  Commitments for Export, FDI, Manufacturing diluted/removed  Impact on agricultural land  Compensation & Rehabilitation of PAP/Farmers  Tax Heavens – Revenue losses of State & Center  Abuse of large scale business/services to DTA  Level playing field for other industries in DTA

4. Major Issues (contd.)  Impact on democratic system-monopoly be avoided  Small SEZ additional burden on present infrastructure  Abuse-Real Estate Business-75% Non-Processing Zone  Abuse:Housing, Hotel, Mall, Profit motive Health & Education business-illogical Tax Benefits  Transparent decision making process- Better coordination & screening required  500 approvals/applications till now. Need to study need- demand to avoid abuse & default

5. Commitments for Export, FDI, Manufacturing diluted/removed  Export clause diluted to ‘Economic Activity’  No need/commitment for foreign exchange- Positive inflow- 1 dollar enough in 5 years  Developers/unit holders planning/executing business for DTA Suggestions  50 to 60 % Production Mandatory for Export  All benefits enjoyed should be surrendered with penalty for all DTA transactions  Disincentive to small-metro city sez

6. Impact on Agricultural Land Issue concern with Mega Sez only IT, single sector developer/applicants have own land Disproportionate controversy Of 400 SEZ applications, few will require fertile land Mega SEZ will require crop/fertile land Suggestions: Screening of Mega Sez applications & land requirements State Govt. be asked to be careful about fertile land Size of SEZ be restricted to 1000-2500 hectares to minimize the above problem.

7. Compensation and Rehabilitation of Farmers/PAP An important issue Differences between State and Centre Different approaches in various States Transparency required in compensation policy Bad experience in Maharashtra CIDCO project Commitments not fulfilled after 25 years

8. Compensation and Rehabilitation of Farmers/PAP (contd.) Suggestions Government help for acquisitions needed Farmers as stake holders with 15-20% stake in developed land Developers to provide houses to every affected family Employment to one member of the family Time bound implementation with monitoring system Security/bank guarantee be provided for the fulfillment of the commitment

9. Tax Heavens – Revenue Losses Dilution, diversion, migration and manipulation going to cause actual revenue losses Centre and State have not thoroughly studied the implication of tax exemptions Abuse of provision by developer-cum-unit holder for business activity in non-Processing Zone Abuse of tax benefits for DTA business. Tax arbitrage

10. Tax Heavens – Revenue Losses (contd.) Suggestions All indirect taxes, stamp duty availed by developer/unit holder for export business will have to be surrendered in proportion to DTA business Benefit of indirect taxes on erection/installation/ capital investment should be disallowed for DTA business (proportionately – e.g. Power Plant) Non-processing Zone business activity taxes at par with DTA – Presently Employee in SEZ liable for Income Tax CBDT, CBEC be asked to study and come out with corrective measures Provision of “Enabling Clause”

11. Impact on Domestic Industries Developer/unit holder in SEZ inclined for DTA business e.g. Nokia Sez Getting benefit of indirect taxes for installation, erection Domestic unit will be at disadvantage Domestic/DTA units will demand similar benefits to compete Several IT/ITES SEZs in and around metro cities Existing IT/ITES EOUs sufferers

12. Impact on Domestic Industries (contd.) Suggestions Penalty for DTA business of developer/unit holder Disincentive for SEZ in and around metro cities Either all benefits given to SEZ unit/developer for Non Export business be extended to domestic unit Reconsideration of EOU Sunset Clause Level playing field for Domestic Industry

13. Impact on Democratic System  Several mega SEZs by couple of private individuals-concentrating of economic power  So much power in the hands of developer/Development Commissioner  400 approved/applied for SEZs will swell to 800  Instrument to become zamindars/state within state?  No country including China such private foreign territory created Suggestions  Monopoly-Concentration of Economic Power developers be avoided  Size of SEZ be restricted if land acquisition is through Government process  More Sez of 1000-2500 Hectares be developed  Proper codification and regulatory system

14. Transparent Decision Making Process  Piece-meal, non-scientific, ad-hoc decision making system  Conflict, contradiction within Commerce, Finance Ministries, RBI, etc.  No proper coordination between State and Centre  Ambiguity-Size of Processing Zone from 25% to 35% with power to relax to 25%  Provision regarding export commitment and tax relaxation. Suggestions  Ambiguity be removed  Ad-hoc powers not required  System of coordination and fresh controversy be avoided  Ad-hoc decision-making system like non-Processing Zone of 75% be avoided.

15. Real Estate - Non-Processing Zone Business  75% non-Processing Zone-No scientific provision  Such provision not in other Countries  Private developer getting land through compulsory acquisition  Abuse of housing, medical, education, mall, entertainment business  Mega SEZs in and around Mumbai and Delhi. Suggestions  50 to 65% Processing Zone  Codification of Work in Non Processing Zone in Social Infrastructure  Social infrastructure in proportion to employees working and residing in SEZ  No tax benefit for additional business/profit-making so-called social infrastructure  Direct/indirect tax benefit only for revenue earned in foreign exchange  No direct/indirect tax benefit for business/profit making so-called social infrastructure including housing, hospital, education business, etc  All activities in Non Processing Zone shall be at par with DTA incl taxes.

16. Revenue-Tax Relaxation for Non- Processing Zone  Abuse of tax deviation for profit-making hospital, medical, educational business  Tax arbitrary for various services, etc.  Developer, unit holder same. Suggestions  All business activities, where Service Tax is applicable, sold to DTA should be taxable  Housing construction be allowed only for employees working and residing in the Processing Zone activities  Development of non-Processing Zone be allowed in proportion to the export activities.

17. Infrastructure  Concept to have New Township away from developed area  Additional world class infrastructure  Execution says-Devt in & around Metro Cities Mumbai-Delhi  SEZ within Metro adding burden on existing infrastructure Suggestions  Insistence for additional-new infrastructure  Applications in-around Metro be discourage  Housing etc for employees be insisted  Devt for all region

18. Global Experience  Comparison with China illogical  Nowhere in the world 75% non-Processing Zone  Concept of private developer and real estate business only in India  In China, Government develops cities and private entrepreneurs asked to set up EOU Units  Some country no tax benefits for DTA to SEZ  Export only-Disincentives for sale to DTA

19. Global Experience (contd.) Suggestions  Incentive, benefits for export units  Commerce Ministry should be asked to study concept and experience of SEZ in 10 countries  Developed-Developing Countries  Tax relaxation, Real estate business etc  Role & relaxation to Private Enterprenuers

20. SEZ Policy & Issues & Suggestions (At a Glance) S. No. Issues Action Needed 1 Export FocusThe units in SEZs should have export focus. Strong fiscal disincentive for SEZs to sell in domestic market. 2 Non-Processing Zone Non-processing area in SEZs should have focus alinged with the objective Only foreign exchange receipt by the units in non-processing area should be given tax incentives. Any sales to domestic market should be taxed appropriately. 3 Financing of SEZs Who will finance SEZ projects and units in SEZs. Ministry of Finance in consulatation with RBI and SEBI should announce a clearly laid down policy for financing of SEZ projects. Support for Processing Zone.

21. 4 LocationLocation of SEZs is imporatnt for infrastructure development and regional disparity We should not allow SEZs in metro cities as instead of creating infrastructure they will be a burden on the metros' infrastructure 5 Domestic UnitsLevel Playing Field and to stop abuse from SEZ to DTA non SEZ units and they should not be competitively disadvantages. Tax abuse be stopped, e.g. Power Plant 6 Role of state governments Views of state government are important before giving any approval The Centre should ask for state's views/recommendations before granting any approval. SEZ Policy & Issues & Suggestions (At a Glance)

22. SEZ Policy & Issues & Suggestions (At a Glance) (contd.) 7 Limit on number of SEZs Any limit on number of SEZs will create market distortions There should not be any upper limit on number of SEZs 8 TransparencyTransparency in approval process is key to success of the SEZ concept A transparent policy framework should be created to discourage corruption and ensure proper growth of SEZs. 9 Promoters' Credibilty We need to have promoters with proven credibility for developing SEZs. Good quality of promoters can really make this concept a grand success. Government needs to conduct due dilligence before giving approval thwarting any attempt of fly by night operators. 10 Non- transferibility Government should allow only serious promoters with long-term perspective to develop SEZs. We should not allow trasfers of undeveloped SEZs. Promoters should not be able to sell any part of SEZ without developing it.