Special Economic Zones And their impact on Export Promotion May 17, 2007 Vivek Mehra

INDIA -Demographics “India needs to generate 200 million additional jobs over the next 20 years”. - Planning Commission people < 25 years in rural areas Working age population in 2005 (15-64 yrs as % of total population) Working age population in 2020 People entering workforce by 2010 People entering workforce in rural areas 500 mn 333 mn 673 mn 872 mn 71 mn 48 mn

Balance 62 mn from Services & Manufacturing !!! IT & BPO sector – 8.8 mn jobs by 2010* Manufacturing sector has to carry the major burden of increasing employment opportunities Where are 71 mn jobs going to come from? Particularly for 48 mn rural youth ( Mainly Urban Educated ) * Source : NASSCOM

Key concerns Revenue Loss Relocation Diversion Large number of SEZs Value add / export obligation Non Processing Area Real Estate Land Acquisition No tax on O&M

Competitive Environment The Global Manufacturers have a choice… Indian SEZs Chinese SEZs Philippines EcoZones Thailand DFZs Malaysia FTZs Vietnam EPZs Corporate Tax rates 33.9%15%35%30%28%10% Direct Tax Incentives 100% Tax Holiday 50% Tax Holiday 5 years (from 1 st yr) Next 10 yrs 2 years (from year of profit) Next 3 years 4-8 years (from year of profit) years (from year of profit) ---- (70%- 100%) 5-10 years (from year of profit) years (from year of profit) ----

SCHEMETAX INCENTIVES Infrastructure Roads, bridges, rail systems, water supply projects, water treatment systems, irrigation projects, sanitation and sewerage systems or solid waste management system, Ports, airports, inland waterways or inland ports, generation and distribution of power 10 years income tax holiday Selective exemption from Custom Duty and CENVAT Industrial Parks For Developers:  10 years tax holiday For units in specified states like HP, Uttaranchal, Sikkim etc  Tax Holiday on Domestic and Export Profits  100% First 5 year (10 years for some states)  30%Next 5 years  CENVAT exemption SEZs For SEZ Developers: 10 years tax holiday For SEZ units  Tax Holiday only on “Export Profits”  100%First 5 years  50%Next 10 years Tax Incentives Already available For Infrastructure (u/s 80 IA of Income Tax Act) Tax incentives for infrastructure development Is criticism justified?

Direct-tax loss on Export profits from SEZs Indirect-tax loss on investments in SEZ MoF ESTIMATES INR Cr 57,531 40,164 97,695 OUR ESTIMATE INR Cr 22,913 10,512 33,065 Based on MoF estimates Figures relate to period SEZ TAX INCENTIVES - REVENUE LOSS OR GAIN??

Investments in SEZs Exports from SEZs 20% MOF Estimates SEZs : BASIS OF REVENUE LOSS ESTIMATES ( ) INR Cr 3,60,000 8,53,000 1,70,600 REVENUE LOSS AS PER MoF INR Cr 29,700 10,464 40,164 57,531 Customs Excise TOTAL INDIRECT Tax Rate 10% 16% 33% SHOULD BE EOU – NIL EPCG – 5% CVD FULLY OFFSET Upto Sec 10 exemption REVISED LOSS ESTIMATES INR Cr 10,152 Rs. 22,913 ( ) Income Tax TOTAL TAX LOSS 97,695 33,065

INR Cr Direct & Indirect-tax earnings from AEA Based on MoF estimates Figures relate to period Investments in SEZs 3,60,000 Less : estimated Imports as per MOF1,08,000 2,52,000 Export sales8,53,000 Less : 30% of 2,55,900 20% of 1,95,7204,51,620 4,01,380 Domestic sales Say 20% of total sales2,13,250 Less : 20% 42,650 20% 42,6501,27,950 1,27,950 Total increase in GDP 7,81,330 Revenue Gains Tax to GDP Ratio : 10.8% 84,383 34% on Domestic sale profits 14,500 Indirect-taxes on Domestic sales (customs & CVD) 58,857 Total Revenue Gains 1,57,740 Activity INR Cr Revenues gains from Additional Economic Activities (AEA) i.e. increase in GDP ( )

Estimated Revenue Loss Crs Rs. EstimatedRevenue Gains Crs Rs. Hence minimum incremental activity necessary for SEZ incentives to be revenue neutral 21%

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