India-ASEAN to sign trade pact on Dec 18: Ramesh

NEW DELHI: India and the 10-nation ASEAN will sign around December 18 this year the Free Trade Agreement in goods, negotiations for which have been wrapped up, Minister of State for Commerce Jairam Ramesh said today.

"We will formally be signing the FTA with ASEAN around December 18," Ramesh said at a seminar on ASEAN-India FTA organised by think-tank RIS and the Asian Development Bank.

The deal will be inked at the India-ASEAN Summit in Bangkok, to be attended by Prime Minister Manmohan Singh.

Ramesh said India has shown "remarkable flexibility" in terms of the Rules of Origin and approach to tariff heading, while negotiating the trade pact with the Association of South East Asian Nations despite having a trade deficit with the bloc.

In 2007-08, India's exports to ASEAN were USD 16 billion while imports were USD 24 billion. After the signing the pact in goods, the two sides would begin negotiations for an agreement in services and investment.

India concluded talks for a FTA with the 10-nation bloc last month. While it would eliminate or substantially reduce duties on almost 96 per cent of the items it trades with ASEAN, India is protecting its sensitive agriculture sector by keeping over 300 items out of the trade agreement.

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The global crisis and its impact on India

Globalisation has ensured that the Indian economy and financial markets cannot stay insulated from the present financial crisis in the developed economies.

The debate, therefore, can only be on the extent of impact and how resilient India is to withstand the storm with minimal damage! In the light of the fact that the Indian economy is linked to global markets through a full float in current account (trade and services) and partial float in capital account (debt and equity), we need to analyse the impact based on three critical factors: Availability of global liquidity; demand for India investment and cost thereof and decreased consumer demand affecting Indian exports.

The concerted intervention by central banks of developed countries in injecting liquidity is expected to reduce the unwinding of India investments held by foreign entities, but fresh investment flows into India are in doubt.

The impact of this will be three-fold: The element of GDP growth driven by off-shore flows (along with skills and technology) will be diluted; correction in the asset prices which were hitherto pushed by foreign investors and demand for domestic liquidity putting pressure on interest rates.

While the global financial system takes time to “nurse its wounds” leading to low demand for investments in emerging markets, the impact will be on the cost and related risk premium. The impact will be felt both in the trade and capital account.

Indian companies which had access to cheap foreign currency funds for financing their import and export will be the worst hit. Also, foreign funds (through debt and equity) will be available at huge premium and would be limited to blue-chip companies.

The impact of which, again, will be three-fold: Reduced capacity expansion leading to supply side pressure; increased interest expenses to affect corporate profitability and increased demand for domestic liquidity putting pressure on the interest rates.

Consumer demand in developed economies is certain to be hurt by the present crisis, leading to lower demand for Indian goods and services, thus affecting the Indian exports.

The impact of which, once again, will be three-fold: Export-oriented units will be the worst hit impacting employment; reduced exports will further widen the trade gap to put pressure on rupee exchange rate and intervention leading to sucking out liquidity and pressure on interest rates.

The impact on the financial markets will be the following: Equity market will continue to remain in bearish mood with reduced off-shore flows, limited domestic appetite due to liquidity pressure and pressure on corporate earnings; while the inflation would stay under control, increased demand for domestic liquidity will push interest rates higher and we are likely to witness gradual rupee depreciation and depleted currency reserves. Overall, while RBI would inject liquidity through CRR/SLR cuts, maintaining growth beyond 7% will be a struggle.

The banking sector will have the least impact as high interest rates, increased demand for rupee loans and reduced statutory reserves will lead to improved NIM while, on the other hand, other income from cross-border business flows and distribution of investment products will take a hit.

Banks with capabilities to generate low cost CASA and zero cost float funds will gain the most as revenues from financial intermediation will drive the banks’ profitability.

Given the dependence on foreign funds and off-shore consumer demand for the India growth story, India cannot wish away from the negative impact of the present global financial crisis but should quickly focus on alternative remedial measures to limit damage and look in-wards to sustain growth!

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Farmers take part in referendum on Reliance Group SEZ

In the first exercise of its kind in the country, landowners and farmers in 22 villages in Raigad district, about 80km from here, on Sunday expressed their opinions in a referendum on whether they supported or opposed the Reliance Group's proposed Special Economic Zone.

Thousands of farmers and landowners of villages located in Pen tehsil submitted their opinions to the state government in a form containing "yes or no" answer.

Preliminary reports said about 5,869 out of an approximately 30,000 landowners expressed their opinions.

Farmers, who had already given permission for land acquisition for the SEZ and those had possession of their property, could submit their opinions which will be compiled into a report and submitted to the state government, a senior official said.

The district authorities will take up the result of the referendum tomorrow and give a report to the government.

"Approximately 2,307 hectares of land which is under the Hetwane dam irrigation scheme is located in the 22 villages. The land is also eligible for acquisition for the SEZ," Sameer Kurtkoti, Deputy Collector (Land Acquisition Department), said.

Farmers of the 22 villages had opposed the project stating their properties came under arable land due to the irrigation project and was ineligible for the SEZ.

Amidst tight security, landowners began submitting their opinions at primary schools in their villages and the process continued from 0900 hours to 1700 hours. Video cameras were used to document the proceedings.

Over 170 government officials and hundreds of police personnel, including State Reserve Policemen, were deployed to ensure security in the region.

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CBEC wants SEZ units to be surveyed for service tax compliance

New Delhi, Sept. 19 SEZ units providing taxable services to recipients outside the special economic zones (SEZ) are under Government scanner, with revenue department officials being directed to submit by October 31 a report on whether such units were discharging their service tax obligations or not. The report is to be submitted to the Director-General of Service Tax.

The Central Board of Excise & Customs (CBEC) directive to survey the SEZ units follows a recent report of the Comptroller and Auditor General (CAG) which highlighted that certain SEZ units in Chennai and Kochi were providing taxable services such as manpower supply services, technical testing and analysis service to units / persons outside the zone without payment of service tax.

Taxable services received by SEZ units and SEZ developers for consumption within the SEZ are exempt from service tax. However, service tax is applicable on taxable services provided by SEZ units, except in situations where specifically exempted.

In a communiqué to its field formations, the CBEC has said they should ensure that SEZ units, providing taxable services to any person for consumption in domestic tariff area (or providing any taxable service which is otherwise not exempt), should register with the jurisdictional service tax authorities and discharge their service tax liability.

Meanwhile, CBEC has also clarified that SEZ units claiming refund of service tax should register with the jurisdictional service tax authorities (i e. service tax commissionerates in Delhi, Mumbai, Bangalore, Ahmedabad, Kolkata and Chennai and the jurisdictional central excise commissioners elsewhere).

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Denial of export benefit to US co not discriminatory

MUMBAI: In a verdict crucial to foreign companies operating in India, the Pune Income-Tax Appellate bench has held that the denial of export benefits under Section 80 HHE of the Income-Tax Act to an American company operating in India could not be construed as discrimination between Indian and foreign companies.

This decision is critical in view of the increasing complaints from foreign companies alleging discrimination in tax treatment between them and Indian companies. The company, which approached ITAT claiming that the denial of Section 80 HHE benefit is discrimination under Article 26 of the Indo-American tax treaty, is a US company — Automated Securities Clearance.

The division bench of Pramod Kumar and Mukul Shrawat said differential treatment does not always amount to discrimination. Only when the difference in treatment is proved to be unreasonable — arbitrary and irrelevant — can it be construed as discriminatory. ITAT also pointed to the provisions in the US tax laws for permanent establishment tax levied on foreign companies, higher withholding tax requirements for foreign companies, higher penalties for foreign companies. Therefore, differences in treatment between domestic and foreign companies are institutionalised in the Indo-US DTAA, the tribunal held.

The tribunal further held that difference in treatment was based on the residential status of the company and not on the basis of the location of incorporation.

In this case, the difference in treatment on the issue of tax incentive for export is also in tune with the objectives of the legislation of such laws. The objective of such legislation was to enhance the foreign exchange reserve of the country. Therefore, the difference in treatment in this case is based on a certain rationale. There can be difference in tax treatment between the companies in India and the permanent establishment of other countries in India, but as long as the differential treatment is justified on the basis of dissimilarities in their situation, such treatment cannot be accounted as discriminatory, the tribunal concluded.

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Rupee posts biggest fall in a decade

MUMBAI: The rupee posted its biggest fall in a decade on Tuesday, hit by risk aversion and banks arbitraging a weaker offshore rate, although suspected central bank intervention stopped the slide just short of 47 per dollar.

The partially convertible rupee ended at 46.89/90 per dollar, off a trough of 46.99 which was its lowest since July 24, 2006.

The rupee fell 1.8 percent from its close of 46.05/06 on Monday, its biggest fall since May 14, 1998, according to Reuters daya, when the currency fell 2 percent after sanctions were imposed on India for its nuclear testing. One-month offshore non-deliverable forward contracts were quoting at 47.15/25, weaker than the onshore rate, indicating a bearish near-term outlook for the rupee.

That also created an arbitrage opportunity, where the dollar is bought against the rupee in the onshore market and sold in the offshore NDF market to exploit the price differential. "There are no (dollar) sellers in the market apart from the central bank. There is lot of oil, equity and NDF-related dollar demand, and even importers are covering near-term imports," said Madhusudan Somani, associate director of financial markets at Yes Bank.

"The rupee may test 47.20-25 levels in the near term," he added. Dealers said the central bank was seen selling dollars to halt the rupee's sharp decline, but sales were offset by demand for the US currency. At its low on Tuesday, the rupee was down 6.5 percent in September and more than 16 percent in 2008. Dealers estimated the central bank had sold $1.5-$2 billion to put a floor under the rupee on Tuesday.

Indian shares pulled out from a nosedive to end almost level on Tuesday after they had opened down 3.5 percent. Capital outflows from the local shares so far in 2008 total a net $8.4 billion, including $1 billion in September, a sharp turnaround from a record net inflows of $17.4 billion in 2007.

Traders said broad strength in the dollar versus other currencies overseas was also hurting sentiment on the rupee. The dollar steadied near 4-month lows versus the yen on Tuesday, but held gains against high yielders as investors took refuge in safe-haven assets following the collapse of Lehman Brothers.

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Interview with Commerce Secretary on SEZs and land acquisition

The controversy over the threatened withdrawal of Tata Motors from Singur in West Bengal has come not a day too soon. The Singur plant is not located in any designated Special Economic Zone (SEZ).

The acquisition of land from farmers by the company and the support extended, and still being extended, by the West Bengal Government to Mr Ratan Tata in the interest of attracting investments into the State in the face of the Opposition onslaught, piloted mainly by the Trinamool Congress leader, Ms Mamata Banerjee, is something incredible.

There was trouble in Goa too where the SEZ developers are facing the wrath of the State government despite a few SEZs having been notified by the Centre. Justice demands that the developers be compensated for their sunk cost in the case of SEZs . This is needed to ensure that the promises of assured support to industrialists for investing their capital and labour to generate income, employment and manufacturing activity that would do proud to the State, are redeemed.

In both the cases, the moot point is, how far the Central and State governments would renege on their commitments to industry, particularly when faced with political choices for survival. In this case, the domestic investors who could ill-afford to squander their precious capital in endless litigation or prolonged spell of uncertainty over the future of their proposed activities.

To get an idea of what the Centre thinks about this issue here is the extracts of an interview with Commerce Secretary, Mr Gopal K Pillai.

Always courteous and candid and not to mince words in the usual officialese, Mr Pillai gave his views on SEZ, land acquisition for industrial projects and on how the Commerce Ministry hopes to transform the country’s manufacturing activity and employment generation through the vehicle of SEZs in the foreseeable future.

Excerpts from the interview:

On SEZs: Since the Special Economic Zones Act, 2005 along with SEZ Rules 2006 came into effect on February 10, 2006, over 253 new SEZs have been notified, which have established 343 units and got over a lakh of employment to people. Then, there are also 332 units in other Central Government SEZs and there are SEZs set up by States numbering 285 units.

Before 2005, there were 927 units under the extant SEZ and, post-SEZ Act and Rules, 970 units have come in two years.

SEZs get notified and it takes 12-18 months for initial infrastructure like laying roads, giving electricity and water connections and to put other amenities in place before the first unit comes up. Of 235 notified SEZs, a little less than 100 are functional, while others are in the process of building basic infrastructure; the units will be set up subsequently.

Multi-product SEZs, where the area spreads to 1,000 hectares or above, take at least five years to come up.

On SEZ land ceilings: The empowered Group of Ministers (eGoM) has fixed an upper limit of 5000 ha for the time being for the SEZ. As it is, nobody today has more than 2,000 ha in the SEZs. Let somebody set up an SEZ with 5,000 ha before the existing ceiling is raised.

The only SEZ that is coming near the ceiling figure now is the Adani Group-promoted Mundra SEZ with Mundra Port SEZ of 2,700 ha and another multi-product SEZ in adjacent site with the same acreage or so. At the moment, it is two separate companies.

Administratively, it would be convenient if the two SEZs are run as one, but the question as to whether the existing ceiling should be eased or not, will go to the eGoM.

On parallel row in Singur and Goa SEZ: In the Goa case, government acquired the land for industrial purposes in 2002, but the issue today is that the State government does not want the SEZ and has told the developers to give up the SEZ status and run the factory normally But the fact remains that neither industrialists nor SEZs can function without the approval of the State.

So if the developer gets compensation for all the investments he has made, he would go away as he is responsible to the shareholders.

In the case of the Singur, the West Bengal government has handled the situation badly. When you had a problem with the acquisition, the parties should have been compensated. There are SEZs coming up in West Bengal and there is no problem.

Bharat Forge is acquiring 4,000 ha in Pune, Maharashtra. Social activists, including Ms Medha Patkar, visited the place and were told by the agriculturists there that the company was formulating a rehabilitation package, with plans for training and social infrastructure. Sri City SEZ in Nellore, spread over 5000 acres, purchased the entire land from the farmers without any agitation or protests. The eGom is meeting this month to resolve some issues plaguing SEZs, following its meeting last month when it took three important steps.

One, for handicrafts SEZ, it decided to bring down the area to 10 ha from 100 ha.

Second, for SEZ’s authorised activities outside the SEZ, it gets refund of service tax provided the earnings is in foreign currency.

But the SEZ developers buy equipment, steel or cement for infrastructure works and do not earn foreign exchange to qualify for exemption from service tax.

But the drawback duty had the stipulation that the payment must be in foreign exchange for purchase of domestic materials to get refund. The Finance Ministry has agreed that, in such cases, even if the payment is in Indian rupees, you can pay him drawback or DEPB reimbursement.

On ‘vacant’ land issue: The Finance Ministry has taken a stance that the SEZ units in an abandoned building, even if it has a shed or foundation or a small building, would not qualify for tax breaks. But the Board of Approval (BoA) for the SEZ has taken a view that if it is a shed, the SEZ developer/unit can demolish it. Where there is a building inside the vacant land inherited by the developer that can be used as part of the non-processing area, why ask for it to be demolished?

Because, first, the developer is not claiming tax benefits and if he is asked to demolish the building, he would re-construct it and then seek reimbursement for building activities. This may look like a non-issue but the matter has been referred to the Law Ministry.

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Centre shelves plan to impose export obligation on SEZ units

NEW DELHI: Here is some good news for units located in special economic zones (SEZs). The government has dropped a proposal for imposing a minimum 51 per cent mandatory export obligation on such units. There would be no changes in the present SEZ rules, which lay down that SEZ units need to be only net foreign exchange earners.

The decision taken at a recent meeting of the empowered group of ministers (eGoM) on SEZs would come as a huge relief to investors in SEZ units, both foreign and domestic, as they would not be forced to start exporting from the first year of operations.

“There are a number of cases, like the Nokia unit in Sriperumbudur, where investors did not export much in the first year. However, they started exporting a huge chunk of their total production subsequently. A minimum export obligation would take away this flexibility which units enjoy at the moment,” an official of the commerce department said.

It was the finance ministry which had proposed that the net foreign exchange earner criteria for SEZ units — which means that each unit’s exports should be more than its imports — was not enough to ensure that substantial exports take place from the units.

It said that some units could also escape by not exporting anything if their import content was low. The commerce department, however, argued that since units in SEZs get tax benefits only on the products they export, they would, on their own, want to export as much as possible. In fact, at present, more than 80 per cent of goods produced in SEZ units are exported, the official pointed out.

The proposal was debated at a number of eGoMs but no decision could be taken earlier. However, with the chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, stating earlier this year that export obligation on SEZ units was not necessary, the commerce department’s case got strengthened.

“In the recent eGoM meet earlier in August, everybody agreed that it was not necessary to impose an export obligation on SEZ units and the idea should be given up,” the official said. Exports from SEZs were estimated at Rs 66,638 crore in 2007-08. This was 92 per cent higher than exports of Rs 34,615 crore from the zones in 2006-07.

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Goa to take back SEZ land from three promoters

MUMBAI: After scrapping three notified SEZs, Goa government is now planning to take land back from three promoters — Cipla, K Raheja and Peninsula Land.

For many, the government’s decision to revert the land looks an attempt to show allegiance with local villagers who have been accusing the state of being soft on SEZ promoters, even blaming it of allowing ‘backdoor entry to developers’. Goa chief minister Digambar Kamat, it seems, now wants to prove this wrong. He wants to snatch the land back from these projects.

Confiscating land, according to senior bureaucrats, is an attempt by the state to win over agitating villagers, thereby paving way for future projects. Even as industrialists point to the state’s negative growth and want Goa to rewrite its industrial policy, Mr Kamat is firm on his stand on scrapping three SEZs.

“If people don’t want (SEZs), then we will not go ahead,” Mr Kamat said. He had a ready answer to question on the impact this decision will have on the state’s investment scenario. “There are other ways for economic development, like bringing in non-polluting industries,” he said.

The tourist state is locked in a bitter battle over land with SEZ developers. The state’s decision to scrap three projects, after they were given all clearances, has landed in the court. The Centre too, is working out its response to the state’s move. Initially, though it thought of over-ruling the state’s decision, political pressure forced the Manmohan Singh government to steer clear of the issue. With the state government going a step further in taking the land back from promoters, the Centre’s reaction remains to be seen.

The development, however, has come as a big jolt to SEZ promoters. “This will force us to challenge one more decision in the court,” said a senior official of K Raheja Corp.

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