MoF: SEZ sops may flout WTO rules

New Delhi, Feb 1 The finance ministry has taken a new tack in its objection to tax breaks for special economic zones (SEZs). It has said direct tax exemptions for SEZs could isolate India at the World Trade Organisation (WTO) and give scope for other countries to impose additional duties on Indian exports.

The finance ministry has insisted that it would be difficult for the government to justify these exemptions, as international conventions would treat them as export subsidies. India's trade partners could, in turn, impose countervailing duties on such exports, official sources told FE.

"Any remission, rebate or exemption of direct tax given to the export sector can be treated as an export subsidy and countervailed. But the other country has to determine if it causes harm to its domestic sector," said Anwarul Hoda, an expert on export subsidies and a member of the Planning Commission, when asked about this development.

So far, arguments over tax sops to SEZs were centred on projected revenue losses to the exchequer. But the WTO angle has given the controversy a new twist and it would be difficult for the commerce ministry to ignore the crucial objection raised by the finance ministry.

According to finance ministry estimates, the potential revenue loss due to exemptions and concessions for SEZs from 2006-07 to 2009-10 would be a whopping Rs 1,02,621 crore, of which around Rs 53,740 crore would be on direct taxes and the remaining on indirect taxes. The ministry says distortions due to this revenue loss would further make it difficult for the government to stick to its obligations under the Fiscal Responsibility & Budget Management Act, 2003.

The commerce ministry, for its part, has termed the estimated revenue loss as notional. It said the finance ministry had not taken into consideration the massive gains that would accrue from economic activity generated by SEZs. The revenue implications of the SEZ policy would now be discussed at the empowered group of ministers meeting on Monday.

The finance ministry said if other countries imposed countervailing duties on exports from Indian SEZs, it would earn them tax revenues—ironical, as the Indian government would be foregoing these tax revenues without commensurate benefits to Indian exporters.