Revenue Forgone due to SEZs: That big a deal?

Revenue Forgone due to SEZs: That big a deal?
In India, revenue forgone due to Special Economic Zones (SEZs) has been a subject of much criticism since the incentives given to SEZ�s developers and units imposes a burden on the government exchequer. The recently released CAG Report criticizes the SEZs in similar light stating that �SEZs in India had availed tax concessions to the tune of Rs. 83,104.76 crore�. (CAG Report on Performance of Special Economic Zones, 2014).

In India, both SEZ units and developers enjoy direct as well as indirect tax exemptions like:

DEVELOPERS:
Under Section 80IAB of the Income tax Act, SEZ developers are entitled to 100 percent Income Tax exemptions on income derived from the business of developing SEZ for any 10 consecutive years out of 15 years from the beginning from the year SEZ has been notified.

UNITS:
SEZ units enjoy 100 percent Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for the first five years, 50 percent for the next five years thereafter and 50 percent of the ploughed back export profit for next 5 years.

In addition, the SEZ developers and units are exempted from Central Sales Tax and other levies and are also allowed duty free import and domestic procurement of goods for development, operation and maintenance of the SEZ unit.

While, it is true that these tax exemptions have posed a burden on the government finances due to the revenue forgone, it might be unfair to look solely at the revenue losses without considering the benefits created by these SEZs. There is a need to analyze the benefits along with the revenue forgone instead of viewing the revenue losses in singularity. Although benefits arising from SEZs have been economic as well as social, in this analysis we look at the economic benefits only (since they are easier to measure) vis-�-vis the costs (revenue forgone). Economic benefits of the SEZs include boost to exports, employment generation, investment promotion etc.

Export from SEZs account for about 25.9% of India�s total SEZs. For the purpose of our analysis, we look at the IT exports from SEZs (which accounts for almost 26% of exports from SEZs and has a very low import content) vis-�-vis the total revenue forgone from the SEZs (see table below).

Table: IT Exports from SEZs and Revenue forgone due to SEZs

Note: *Revenue forgone due to customs and direct taxes only and does not include revenue forgone on account of Central Excise and Service Tax in relation to SEZs.
** IT Exports from SEZs have been calculated as Total IT exports (from India�s Balance of Payments data) minus Exports from STPI since IT exports in India come majorly from STPI and IT SEZs.
Source: Revenue Forgone figures have been taken from Chapter 5 of the CAG Report on Special Economic Zones, 2014.

As the table clearly shows, in the last four years upto 2011-12, the IT exports alone from the SEZs have outdone the Total Revenue forgone. IT Exports have grown multifold in the last few years. The SEZ scheme has given impetus to the IT exports which form a crucial component of India�s foreign exchange earnings as well since India is a Net exporter of software services.

Hence, the revenue forgone due to the fiscal benefits availed by the SEZs are lower than the export earning as compared to IT exports and miniscule in proportion to the export earnings generated by total SEZ exports. Additionally, as per the NASSCOM Strategic Review 2013, there are 99 Operational IT SEZs out of which 44% are in Tier II and Tier III cities showing that they are not concentrated in the Tier I cities only. This is an indication that there is a need to look at the data in a different light and things might not be that bad for the SEZs as they are projected to be.

—-Purva Singh