Customs duty on sunflower oil may be cut

Levy likely to be slashed to 10% as prices rule at Rs 77,500/t
Duties on sunflower oil are levied on the actual landed price but in the case of soya oil and palm group of oils, these are computed on the ‘tariff value’.
Effective duty on sunflower oil above 45% compared with less than 20% for palm and soya oils.

reduction in the import on sunflower oil is quite likely in the coming Union Budget, according to industry sources.

Currently, the import duty on crude sun oil is 41.2 per cent (40 per cent basic customs duty plus three per cent education cess), while being 51.5 per cent (50 plus 3X50/100) for refined sun oil.

Tariff values

On the face of it, these are quite comparable to the 40 per cent levied on both crude (de-gummed) as well as refined soyabean oil, 46.35 per cent (45 plus 3X50/100) on crude palm oil (CPO) and 54.075 per cent (52.5 plus 3X52.5/100) on refined, bleached, de-odourised (RBD) palmolein.

But the catch here is that while the duties on sunflower oil are levied on the actual landed price, in the case of de-gummed soya oil, CPO and RBD palmolein, these are computed on the ‘tariff value’ or base price fixed by the Finance Ministry.

On Friday, imported CPO was being quoted at $1,200 a tonne (cost & freight, Mumbai), while corresponding ruling at $1,267 for RBD palmolein, $1,450 for de-gummed soy and $1,723 for crude sunflower oil. On the other hand, the tariff values are much lower: $447 a tonne for CPO, $484 a tonne for RBD palmolein and $580 a tonne for de-gummed soya oil.
Effective duty

The effective duty incidence on importers (relative to the actual current landed costs), therefore, works out to just 17.3 per cent on CPO, 20.7 per cent on RBD palmolein and a mere 13.5 per cent on de-gummed soyabean oil.

This is as against the corresponding notified rates of 46.35 per cent, 54.075 per cent and 40 per cent, respectively.

Repeat performance?

“The contrast is particularly sharp when we compare the 13.5 per cent effective duty on de-gummed soya vis-À-vis the 41.2 per cent on crude sun oil. And both these cater to similar market segments, being low in saturated fats,” the sources added. The contrast has widened, especially as the tariff values on palm and soybean oils have been frozen since August 2006, even as the duty on sun oil continues to be levied on the actual landed cost.

In the 2007-08 Union Budget, the Finance Minister, Mr P. Chidambaram, had reduced the basic customs duty on crude sun oil from 65 to 50 per cent and that on refined sun oil from 75 to 60 per cent, while leaving those for other oils unchanged. The duties on crude and refined sun oils were further reduced to 40 per cent and 50 per cent, respectively on July 25.

“There might be a repeat again in this year’s Budget. But with domestic sun oil now at around Rs 77,500 a tonne, the duties will have to be slashed to at least 10 per cent for any meaningful impact on prices. Whether such as sharp reduction will happen is a moot point,” the sources pointed out.

Crude sunflower oil imports totalled 195,245 tonnes during the 2006-07 oil year from November to October. In the current 2007-08 oil year (between November and January), not a single tonne has been imported, according to the Mumbai-based Solvent Extractors Association of India (SEA).

Dipping soya oil import

Skyrocketing international prices have also led to a decline in crude soya oil imports, from 1,44,990 tonnes in November-January 2006-07 to 91,250 tonnes during the same period of the current oil year. However, imports of CPO – which are more competitive following the cut in import duty from 88.8 per cent till August 2006 to 46.35 per cent now -– have shot up from 700,265 tonnes to 934,887 tonnes.

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Govt approves Rs 500-cr relief package for exporters

NEW DELHI: Government on Thursday approved a fresh package of Rs 500 crore in the form of interest subvention for exporters to compensate for the reduction in their profits due to rupee appreciation against the US dollar.

The government has already announced Rs 300 crore under the interest subvention scheme for exporters.

"The measures will ensure mitigation of the effect of rupee appreciation across the export sectors, make them internationally competitive and will also enable them achieve export targets," the official spokesperson told reporters after the meeting of the Cabinet Committee on Economic Affairs (CCEA) here.

Under the scheme, exporters are given two per cent relief in pre-shipment and post-shipment credit in sectors such as leather and leather products, marine products, handicrafts, textiles and carpets.

The interest subvention is subject to the condition that rates will not fall below seven per cent, the rate applicable to the agriculture sector under priority sector lending scheme, the spokesperson added.

The scheme, she said, "will provide relief to exporters.. and mitigate (their) hardships on account of unanticipated and steep rupee appreciation."

The export of traditional items especially handicraft, textile and carpets have suffered on account of 15 per cent appreciation in the value of rupee against the dollar in the last 16 months.

The government has earlier announced various packages totalling Rs 5,200 crore to help the exporters.

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Rupee-hit textile industry in need of incentives to exports

The Indian textile industries are currently in spotlight. The focus, the action and the consequential issues - commercial, regulatory and taxes are certainly more tilted, both quantitatively and qualitatively towards the global markets. This was echoed by the Prime Minister in his speech rendered in the Tex Summit 2007 when he called the players in the industry catering only to domestic market as short sighted.

Indian textile industry has certain inherited unique features such as a fragmented set up, absence of economies of scales, several layers of stakeholders, outdated technology, and geographically dispersed set up. These features result in not only cost inefficiencies, but also in tax inefficiencies at several levels due to cascading taxes in the form of Central Sales tax and local taxes.

Since 2005, after the dismantling of multi fibre Agreement, the Indian textile industry is undergoing a complete reorientation. The textile industry is pitted against players from China and other countries both on quality and cost. Year 2007 exposed the textile industry to the vagaries of forex losses - appreciating rupee against the US dollar. If media reports are to be believed, the hardening rupee pulled down the industry’s exports by 15 per cent last year.

Though the Government has been working out several measures such as putting in place modified Textile Upgradation Fund and concessional pre-shipment and post-shipment credits, on the tax side, the minimum the industry wants is a mechanism to ensure that there are no embedded indirect taxes on its exports. Of course, being one of the few industries, with least imports (a net foreign exchange gainer for the country), the industry would also want incentives for the exports.

One of the demands of the industry for this Budget is a scheme to recoup some of the local taxes such as Octroi and Central sales tax, for which understandably currently there are no mechanism. In terms of rate, the demand is pegged to be equivalent to 6 per cent of f.o.b. value of exports.
EOU scheme

Companies operating under EoU scheme are realising that globalisation has made the scheme irrelevant, especially, with no imports and differential excise duty implication for domestic clearances. An exit route from EoU without duty implication on the de-bonded assets would provide the much needed relief.

Specifically, the demand of the industry is for reduction of import duty relating to man made staple fibres and filaments, cotton, furnace oil and machinery is well founded. Similarly on the excise duty on the input side, they would want cut in duty rates for machinery, man made fibre, furnace oil, etc.

Few key areas that would require special attention of the Finance Minister is relating to past accumulated Cenvat credit and mechanism to eliminate the cost of Special Additional duty of 4 per cent arising out of ineligibility of these units to avail credit, since majority of them opt for zero duty regime.
comprehensive scheme

A well thought out comprehensive scheme in the lines of special economic zone (SEZ) scheme for textile exporters with mechanism to procure inputs, capital goods without duty and input services without service tax and without any geographical restriction on location for its entire gamut of operations should help. In the alternative, there should be well laid out export incentive plan with long term focus and robust structure to frequently update for new levies and taxes should be put in place.

Service tax, for one, like on immovable properties, job work charges and commission paid to agents would certainly add to the cost of products of this industry, unless fully factored in the scheme of incentives or is exempted for exports. Currently, only about ten services are exempted for exports.

Though favourable tax proposals alone would not be sufficient to propel this industry fully into the international orbit, however, this would at least put the industry in the right direction towards success.

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India, China to work on FTA recommendations

NEW DELH: Trade ministers of India and China will meet in the first week of April to consider the recommendations of the Joint Task Force on the India-China Free Trade Agreement.

"The two trade ministers would meet in the beginning of April in Beijing to look into the recommendations of the Joint Task Force on the India-China FTA," Commerce Ministry Joint Secretary Dinesh Sharma told reporters here on Wednesday.

The ministers would discuss in what way the recommendations of the Task Force have to be worked upon and how to take the process forward, he said, while speaking on the sidelines of a seminar on 'A Road To Chinese Market'.

The 103rd session of the Canton Trade Fair would be organised in April in the Guangzhou in China. To increase imports in China from other countries, an international pavilion has been added in the fair.

About the Indo-China trade, Chairman of the Council of the China Foreign Trade Centre Zhang Zhi Gang said, "The current bilateral trade is $38.6 billion. India is the tenth largest trade partner of China, while China is the second largest trade partner of India."

He expressed hope that trade between the two countries could reach a balanced level.

Every year, about 5,000 Indian professional buyers, which represents around 2.5 per cent of the total number of foreign purchasers, participate in the fair.

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Goods & services cannot be treated on par under Foreign Trade act, feels MoF

NEW DELHI: The trade in services is set to acquire a new meaning with the government planning to define the term services. The new definition is expected to be in tune with the taxation laws. Services would be defined by amending the Foreign Trade (Development & Regulation) Act, 1992, an official source said. The aim is to bring clarity in the trade of services, it added.

The proposal, mooted by the commerce ministry, has been vetted by the finance ministry. The finance ministry is, however, not in complete agreement with the commerce ministry’s proposal and has suggested to keep the new definition in line with the provisions laid down in the tax laws as all services are not taxed in the country, sources said.

The Foreign Trade (Development & Regulation) Act covers trade in goods but does not have a provision for trade in services. The commerce ministry has proposed to extend coverage of the Act to facilitate trade in services, sources said. It has proposed to replace ‘trade in goods’ with ‘trade in goods and services’ in the Act.

The finance ministry, in its comments on the proposed move, has made it clear goods and services cannot be treated on par under the Act. This is especially because all cross-border services are not treated as imports or exports like goods. The practice is also followed internationally. Considering the complexities involved in determining the place of supply of service provision and its evolving nature, like classification of goods for Customs purposes, classification and determination of place of supply of services for international trade in services would have to done as per the provisions laid down by revenue department.

Moreover, there are also no uniform practices in deciding whether a cross-border transaction of service is import or export. This is especially in the case of services like telecom, broadcasting and electronic commerce, the ministry has pointed out. Sources said the proposed changes will have to be carried out keeping in mind that the provisions do no have an implication on taxation of services and service tax collections.

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Tax refund to exporters of 3 more services allowed

Couriers, goods transport agencies, container transportation by rail..The three services are not in the nature of `input services’ but could be linked to export goods and hence the decision to allow refund of service tax.

New Delhi, Feb. 19 The Finance Ministry on Tuesday extended the service tax refund scheme for exporters to three more taxable services, taking the overall number of such services to 13.

The three services qualifying for service tax refund are courier services, goods transport agency services availed for transport of export goods from the ‘place of removal’ (mainly factory gate) to actual place of export i.e inland container depot (ICD)/airport/port and transportation services in containers by rail from the ‘place of removal’ to ICD/airport/port.

These three services are not in the nature of `input services’ but could be linked to export goods and hence the decision to allow refund of service tax.

Service tax paid by exporters on input services used for export goods is neutralised under various existing schemes like drawback scheme.

“This is a welcome move. Initially they (Finance Ministry) had given service tax refund on movement of goods on both rail and road from ICD to port of export. Now they have completed the chain and given it from factory gate to port of export on both rail and road. This would particularly benefit exporters in the hinterland who were paying huge service tax for movement from factory gate to ICD”, said the Director General of Federation of Indian Export Organisations (FIEO).

He, however, rued that the Finance Ministry was not looking to refund service tax on important services like commission paid by exporters to foreign agents, overseas travel for export promotion, fees to clearing house agents and fees paid to chartered accountants for export documentation. “Service tax on these services should also be rebated”, he said.

So far, the Finance Ministry has specified about ten taxable services, which are not in the nature of input service but could be attributable to exports, as services that would qualify for service tax refund.

These include port services provided for export, transport services on road and rail for movement of goods from ICD to port of export, general insurance services, technical testing and analysis agency services, storage and warehousing services and business exhibition services.

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FIEO suggests setting up exchange neutralisation fund

KOLKATA: Taking cognisance of the adverse impact of rupee appreciation among a vast section of exporters, the Federation of Indian Export Organisations (FIEO) has pleaded with the government to set up an exchange neutralisation fund and fix the value of the dollar vis-a-vis the rupee on a quarterly basis solely for the purpose of exports. FIEO, while placing a charter before the finance and commerce ministries, has also pitched for allowing small and medium exporters to avail of cheaper export credit in foreign currencies.

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BUDGET VIEW - Pharma seeks export incentives, R&D tax sops

The pharmaceutical industry wants the forthcoming federal budget to grant incentives to boost exports and extend the scope of tax breaks given for research and development work.

Last year's budget extended tax breaks of up to 150 percent of a firm's research expense by five years to 2012. Currently, only companies doing in-house research are eligible for this.

These sops should be extended by another five years to 2017, said a note from the Organisation of Pharmaceutical Producers of India, largely a group of research-led multinational firms.

Tax breaks should also be given to drug firms involved solely in R&D and should cover all expenses incidental to basic research, including clinical trials, done in India or abroad, said a note from the Federation of Indian Chambers of Commerce and Industry.

"This will catalyse the R&D industry, the innovation-based industry, which is completely lacking in India," said Swati Piramal, director of Strategic Alliances and Communications at Nicholas Piramal India Ltd.

"Pharma spends 10 times as much as the IT or auto industry and the research takes 10-12 years," she said. "So five years is not enough in an industry where 10-12 years is the gestation period."

Most of the top Indian drug firms, including Ranbaxy, Dr. Reddy's, Sun Pharmaceutical, Nicholas Piramal and Wockhardt, have either spun off or are planning to spin off their R&D wings into separate entities.

The domestic pharmaceutical industry, being a net exporter, has also taken a beating due to the rupee's rise, which gained more than 12 percent against the dollar in 2007.

The industry is hoping for some exemptions for export activities as tax breaks for export-oriented units, which were set up to encourage exports, are set to expire in 2009.

The industry is also seeking reduction of excise duties on drugs to 8 percent from 16 percent now.

The union budget will be presented at the end of February.

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Cestat rules service tax relief for exporters

New Delhi, Feb 19 The Customs, Excise Service Tax Appellate Tribunal (Cestat) on Tuesday ruled that service tax on commission paid by exporters to agents situated abroad could be levied only prospectively from the date when the relevant Section 66 (A) was introduced in Budget 2006.

The case relates to the revenue department’s appeal for a service tax claim of Rs 8.32 lakh on Bhandari Hosiery Exporters Ltd for the period from July 2004-February 2006. The company is a hosiery goods exporter and pays commission to such agents for getting orders from abroad.

The department contended that as per Rule 2 (1)(d)(iv) of Service Tax Rules 1994, the assessee is laible to pay tax. The Rule was made in 2002, but the Section regarding service tax on commission to foreign agents was introduced only in Budget 2006.

Rejecting the department’s appeal, Cestat held that service tax cannot be levied with retrospective effect on services rendered outside India before April 18, 2006, when Section 66A was introduced in the Finance Act. The department is expected to appeal before the high court shortly.

The company’s counsel J K Mittal said, “This landmark decision has major consequences as many similar cases are pending in other courts. More exporters can get similar relief now. Also, the revenue department will not be able to impose service tax just by bringing in Rules before a relevant Section is introduced in the Budget and passed by Parliament.”

Exporters in sectors like pharmaceuticals, textiles and leather pay a substantial commission to agents based abroad. The commission ranges from 5-25% of the freight on board (FoB) value of exports in pharma sector, and 5-10% in textiles & leather sectors. The commission is paid on around $6 billion worth exports of the total $20 billion worth annual exports from the three sectors. Back of the envelope calculations show that of this amount about $ 5.4 million is paid annually as service tax on commissions to foreign agents.

“This commission is the most effective marketing tool of exporters to promote their new products. The tax would harm their businesses, since exporters find it difficult to get major foreign buyers without the help of such agents,” Ajay Sahai, director general, Federation of Indian Export Organisations said.

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‘Continue I-T sops for export-oriented units’ - Kamal Nath for removal of sunset clause

In the run-up to the Union Budget 2008-09, the Commerce and Industry Minister, Mr Kamal Nath, has sought continuation of the income tax benefits bestowed on 100 per cent export-oriented units (EOUs), which are set to be removed after March 31, 2009.

Sources in the Government told Business Line here that in an identical communication to the Prime Minister’s Office and the Finance Ministry, Mr Nath pointed out that the accent of the UPA Government was always on encouraging manufacturing activities and augmenting employment, and on which the 100 per cent EOU scheme precisely scores well ever since it was introduced in the early 1980s.

Encouraging Manufacturing

He said that the EOU scheme was meant only for carrying out manufacturing activities within the custom-bonded area, and no trading activity was allowed under the scheme. The Minister said the scheme facilitated creation of dedicated manufacturing capability for exports, which amounted to Rs 68.782 crore with exports during the last five years from EOUs clocking more than 31 per cent growth.

The net foreign exchange earning by the EOUs is over 60 per cent. In the current fiscal, exports from EOUs would cross the one-lakh crore mark.

When contacted, the Council for 100 per cent EOUs and SEZs, the Director General, Mr L.B. Singhal, said that among the plethora of issues currently plaguing the units under the scheme, the most important one affecting them is the sunset clause under Section 10B of the Income Tax Act, under which no income tax exemption would be available for the exports effected by the 100 per cent EOUs after March-end, 2009.

Urgent need

Hence there is an urgent need for removal of the sunset clause in the forthcoming Union Budget, as otherwise no fresh investment would flow under the scheme.

“If no income tax exemption is provided from March 2009 onwards, there is no reason why any industrialist will set up a unit under this scheme and accept vigorous custom bonding regulations, procedure of obtaining procurement certificate for every import consignment or CT3 procedure for every domestic procurement and other procedural hassles like repeated registration with customs.

“No industrialist would like to pay unnecessary cost recovery charges for the Central Excise Inspectors posted for these units even for discharge of their sovereign functions,” Mr Singhal said.

Tax exemption

Even as there is an unstated principle that exporters should be exempted from indirect taxes, EOUs have to bear the burden of a host of indirect levies from the State Governments and local bodies such as purchase tax, entry tax, electricity duty, property tax, works tax, mining royalty, water cess, education cess, mandi tax, commercial tax and local area development tax.

Underlining the importance of income tax benefits to the EOUs, the Council said the EOUs could also be asked to re-invest the portion of profits to make them comparable with SEZ units, so that their basic remit of enhancing manufacturing activity and employment would continue.

As the Finance Ministry and the Ministry of Information Technology are reportedly toying with the extension of income tax benefits to Software Technology Park of India (STPI) Scheme, the Council said that EOU/STPI/Electronic Hardware Technology Park Schemes are all part of the same chapter of the Foreign Trade Policy and are governed by the same customs/central excise notification. Hence the sunset clause needs to be removed for 100 per cent EOU scheme as well, along with the STPI Scheme, the Council argued.

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India, Malaysia free-trade deal set for March 2009

KUALA LUMPUR (AFP) — Malaysia and India have agreed to try to finalise a free-trade agreement by March 2009, Indian officials said Wednesday after the first round of talks.

The two-day negotiations in the Malaysian capital established a roadmap for the deal which is aimed at "forging a long-term, comprehensive and dynamic economic partnership between the two countries", they said.

"Both sides will endeavour to complete the negotiations by March 2009," the Indian High Commission (embassy) said in a statement.

Malaysia has said that a bilateral pact -- which will cover trade in goods and services, investment and economic cooperation -- could boost its exports to India by 1.3 times, or 12 billion dollars, by 2012.

In 2006, India was Malaysia's ninth largest trading partner, ninth largest export destination and 17th largest import source.

The next round of talks will be held in New Delhi on April 10-12.

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Panel to discuss removal of tax sops for SEZs

New Delhi, Feb. 3 The Empowered Group of Ministers (eGoM), under the Chairmanship of the Union External Affairs Minister, Mr Pranab Mukherjee, is meeting here on February 4 to examine the merit of the Finance Ministry’s plea for removing a slew of tax exemptions provided to the Special Economic Zone (SEZ) and their developers.

Sources in the Government told Business Line here that the Finance Ministry has drawn the attention of the eGoM on the revenue loss on account of tax exemptions to units in SEZs which has been estimated to be Rs 1,02,621 crore for the period 2006-07 to 2009-10.

Out of this, the revenue loss due to direct taxes is reckoned to be Rs 53,740 crore and on account of indirect taxes Rs 48,881 crore.

In fact the Finance Ministry included in last year’s Budget document, for the first time, the aggregate revenue loss estimates arising out of such tax breaks to highlight the need for removing such exemptions.

The sources said that the SEZ Act came into operation only in February 10, 2006, duly underpinned by the SEZ Rules, and it was about to complete two years of its advent.

The policy has the express remit to generate additional economic activity, promote exports of goods and services and investment from domestic and foreign sources, create employment opportunities, and develop dedicated infrastructure within the zone.
Exemptions

Accordingly, SEZs were conferred certain tax exemptions including in the import/domestic procurement of goods for development, operation and maintenance of SEZ units.

They were given 100 per cent income tax exemption on export income under Section 10AA of the I-T Act for the first five years, 50 per cent for the next five years thereafter, and 50 per cent of the ploughed back export profit for the next five years.

For the developers too, income tax exemption for a block of 10 years in a block of 15 years in a consecutive order, and exemption from dividend distribution tax were provided. For both the developers and units, tax exemption was extended from minimum alternate tax, central sales tax, and service tax.

The sources said that the Finance Ministry’s target on tax exemptions granted to SEZ units and developers, particularly income tax exemptions on a graded phase spanning over 15 years particularly when they have not even completed the first five-year 100 per cent exemptions, is bound to upset the existing units or the new entrants.

They said that even before the Act completes its second year, any such scuttling of incentives embedded in the Act would create unwarranted panic among investors and potential investors, both domestic and foreign, besides injecting policy instability.

The Director General of the Council for SEZ and 100 per cent export-oriented units, Mr L.B. Singhal, said that just prior to 2000, when the SEZ policy was announced, exports from the then free trade zones were only Rs 8,000 crore, which shot up to Rs 34,789 crore in 2006-07 and are likely to be Rs 67,300 crore this fiscal.

He said the benefits derived from functioning SEZs were self-evident from the investment, employment, exports and infrastructural developments additionally generated.

The sources said the benefits derived from multiplier effect of the investments and additional economic activity in the SEZs and the employment created thus would far counterbalance the putative loss arising out of tax exemptions.

Hence, they say that the Department of Commerce would put up a stout defence in the eGoM to ensure that the hard-won incentives which had resulted in tangible gains to the economy through the SEZs-generated efficiency and income should not be nullified by any hasty withdrawal of benefits statutorily provided to investors.

EGoM meeting on SEZs deferred

NEW DELHI: (5 Feb) The meeting of the empowered group of ministers on special economic zones (SEZs), which was scheduled for Monday to look at important issues like the removal of land ceiling for Reliance’s Jhajjar project and DLF’s Gurgaon project, has been postponed.

The meeting was also scheduled to take a call on the alleged flouting of norms in Essar’s steel SEZ in Hazira.

Without giving a reason for the postponement of the meeting, commerce & industry minister Kamal Nath said a fresh date for the meeting would be decided by the EGoM chairman and external affairs minister, Pranab Mukherjee.

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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.

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SEZ developers may lose tax benefits

NEW DELHI: The SEZ boat may be rocked once again. The finance ministry has said that as a principle, complete income-tax exemption for SEZ developers and co-developers should be withdrawn.

North Block had earlier hinted at a minimum alternate tax (MAT) on SEZ units, emphasising that this will bring some parity with non-SEZ exporters most of whom are small exporters hit hard by appreciation of the rupee. However, such a move will require an amendment to the SEZ Act, which could be a long-winded process.

The finance ministry’s latest missive will be a major cause of concern for the SEZ programme as scores of developers have committed huge investments on the strength of tax breaks.

Highly-placed government sources said the finance ministry has sent a letter to the empowered group of ministers (EGoM) on SEZs, seeking withdrawal of direct tax sops due to revenue constraints. It has been argued that notional revenue foregone on account of SEZ tax sops would be Rs 1 lakh crore in 2008-09, and half of it would be on account of direct tax exemption. Loss of revenue could affect allocation of funds for social programmes, ministry officials feel.

The EGoM, headed by external affairs minister Pranab Mukherjee, will debate the issue next week. The plea for extension of tax holiday to STPI units, scheduled to be phased out by 2010, is also likely to be discussed by the ministerial panel.

Despite the finance ministry’s insistence, it would not be easy to withdraw the sops as the exemptions are part of the SEZ Act passed by Parliament. Imposition of tax on SEZs would require amendment to the law for which a Bill has to be piloted by the commerce & industry ministry which is opposed to withdrawal of tax concessions meant for exporters.

Speaking to ET, government sources said the finance ministry, while targeting developers and co-developers, had decided to spare units operating within SEZs from total withdrawal of direct tax exemption. This would disturb stability in the tax regime and discourage investments, a commerce department official said.

At a time when exports face a major challenge due to appreciation of the rupee, the department has been highlighting job creation by SEZs as a major achievement of the programme. It seems the finance ministry is targeting direct tax exemption on two grounds: while buoyancy in direct tax collection is strong, indirect taxes are not growing as fast, with service tax being the lone exception.

It is estimated that more than half of the Rs 6 lakh crore revenue collected during the year would be on account of direct taxes. The SEZ law grants full tax exemption for five years to the units, 50% tax exemption for the next five and tax exemption on ploughed-back profits for another five years.

Developers get tax exemption on development of the processing area where export goods are produced. They get 100% income-tax exemption for 10 years within a block of 15 years. The commerce department is likely to oppose the proposal on the ground that the SEZ Act had attracted investments from players on the basis of the sops promised in the Act. To go back on the provisions of the Act would be a breach of promise.

Although it would be difficult for the government to decide on withdrawing sops provided under an Act, the debate being generated by the finance ministry’s demand could put a shadow on the future of SEZ policy which is expected to attract a lot of foreign direct investment.

“There has to be continuity in policy if we want to attract investments. The debate is not healthy for the economy,” a source said. While the finance ministry has been expressing concern about revenue loss from the beginning, a study commissioned by the ministry was recently in spotlight as it explained that incremental economic activity and job creation justified the tax concessions.

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