Reality Check India

SEZ online chat

Posted in Uncategorized by realitycheck on November 8, 2006

The SEZ fever is upon us. Dont expect Shenzhen  / Pudong / Hainan / Sharjah / Jebel Ali style cities in these SEZs ? They will be mostly small units enjoying unprecedented tax benefits (estimated direct tax loss to government is 90,000 crores) walled off from the surrounding unfortunate non-SEZ areas. Is this economic aparthied ?  You decide.

Chat with SEZ officials

In the meantime, the government has an online chat where you can ask questions to SEZ officials at http://www.sezindia.nic.in/ and http://commerce.nic.in/ If you cant access these sites try : http://dippserver1.nic.in/commerce_chat/welcome.html

I went online and left a few questions for them. I will post replies when someone answers them.

Consider this tax scheme for Chinese SEZs (details).

  • No tax in startup years (when you dont make a profit).
  • The year you make a profit is “year one”. Your tax clock starts now.
  • Year one and two after your tax clock starts – you pay NO TAX
  • Year three and four after – you pay 50% TAX
  • Year five onwards – you pay FULL TAX

This my friends is China. Contrast with Indian SEZ (more details).

  • Note: Most SEZ units (esp IT Services) are hugely profitable from day one
  • 100% TAX FREE for the first 5 YEARS (even for already hugely profitable units just emerging from the STPI tax holiday scheme – eg, Infosys, Wipro, TCS, etc)
  • 50% TAX FREE for the next 5 YEARS
  • Open ended tax rebates thereon subject to ploughback of profits
  • Excise duty and Import duty exempted

Side note: Does anyone know of any country in the world that has private SEZs ? All of Chinas SEZs are huge (eg, Pudong, entire province of Hainan, etc) and setup by the government.

Think about this : SEZs are allowed to build golf courses, hotels, shopping, schools, and educational institutions inside their “walled hectares”. I wonder if those unfortunate enough not to be employed by an SEZ unit (read 90% of India) can access these facilities freely.

Unfortunately, I dont have too much time at the moment to write more.  I had written another post about this earlier.

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18 Responses

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  1. Barbarindian said, on November 8, 2006 at 12:15 pm

    The wikipedia article answers your questions.

    http://en.wikipedia.org/wiki/Special_Economic_Zone

    The Philippines appears to allow private SEZs. Not sure though. Note that SEZs are required only by Commie or Dysfunctional states.

    Some recent news:
    1) India’s corporate taxes are highest in the world
    2) Government wants reservation in Private sectors

    Now, if you combine these, you will understand why despite apparent hue and cry by farmers and leftist partners the UPA Government is so overzealously going ahead with SEZs. They kill three birds in one stone.

    1) They can give corporations the benefit and appease those who want high taxes simultaneously.
    2) SEZs will become a captive (and vulnerable) audience to force any future legislations, e.g. reservations etc. down their throats – huge political gain
    3) The privileged happy too, at least those that enjoy working in the swanky SEZs.

    In case you are wondering, technically the rest of India can not play golf in an SEZ. I guess they should be allowed to foreigners and NRI. But what do you think is gonna happen? We will see our politicians and their cronies and the ultra rich playing golf in those facilities. As a matter of fact, I believe going forward SEZ licenses will go to the “well connected”, apart from the big houses who are already making beelines.

    SEZs are nothing but socialism in a test tube. Defined as manna from heaven for the masses, open to only a privileged few, exploited to the hilt and hotbeds of corruption.

  2. realitycheck said, on November 8, 2006 at 12:45 pm

    Barb,

    Spot on.

    Quotas are a way to narrow the interests of the Indian public. This way no protest of any magnitude will build up against the SEZs. Yes, I dont think private players care too much about quotas or what not, as long as they get such goodies from the government. The biggest goodie they can get is tax breaks and a way to suppress competition.

    An interesting issue is the municipality of SEZs. The SEZ act allows the private players to control issues like maintenance, security, infrastructure and so forth. So there is absolutely no local self governance in these areas. This means inside an SEZ, there is no democracy. This is outrageous and will be challenged in court, I hear lawyer Prashant Bhushan has already filed a petition against the act.

    I know Jamshedpur also has no local government either, that is a exception due to the historic nature of that facility. You cant make that the rule, besides it is not an SEZ.

  3. Barbarindian said, on November 8, 2006 at 4:06 pm

    Let’s take a look at the tax structures in India vs. China. This is quite revealing. I guess the fact that you don’t pay taxes when you don’t have a profit, is kind of redundant. But the clock starting on year of profit has huge implications. In other words, if the industry does not turn up profit in the first few years, it has less incentive to set up shop in India. On the other hand, the industries that are already turning up big profits will have a huge incentive to run for SEZs.

    This is exactly what is happening in India. The big corps are grabbing them. No hope for the small guy who wants to try out a new business model.

    About the legal issue, there are several. Who decides who gets a license for a particular line of business? Let’s say the SEZ model makes transformer business particularly attractive. Will I be allowed to set up shop too? If not, it would be potently unethical.

  4. realitycheck said, on November 8, 2006 at 4:10 pm

    >> I guess the fact that you don’t pay taxes when you don’t have a profit, is kind of redundant. >>

    There are indirect taxes – example excise and customs.

  5. Barbarindian said, on November 8, 2006 at 5:04 pm

    Don’t want to split hairs here, but the tax section really refers to corporate tax. SEZs are exempt from excise and customs at all times, regardless of profit situation.

  6. realitycheck said, on November 8, 2006 at 6:07 pm

    Barb,

    You are correct, SEZ units in India are exempt from excise, sales, service, and customs for all time it seems. I think the SEZs in china are not totally exempt from indirect taxes for all time. Let me check with someone who visits there every month. In any case, this is a minor detail compared to the income tax exemption.

    Re your question about getting a license to start a line of business. Apparently there is going to be a unit approval committee that decides on your application depending on various critiria. I dont complain about these nitty gritty details.

    The real issue is that the SEZs are too small and too many. The SEZs are developed and maintained by private players. The tax breaks are too large and given to already cash rich profitable IT companies.

  7. Apollo said, on November 9, 2006 at 4:18 am

    This SEZ thing looks more and more like a walled garden to keep the unwashed masses out rather than to act as a incubator for smaller businesses which is what it professes to be. Excellent analysis RC.

  8. […] read previous posts : SEZ Chat, PIO University in an SEZ ? , IT SEZ – Everyone wants a holiday, Minimum Alternate Tax issue, […]

  9. girish jain said, on January 16, 2008 at 9:32 am

    is all sezi rebate are equally??

  10. girish jain said, on January 16, 2008 at 9:33 am

    is all sez rebate are equall??

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  15. punit said, on January 16, 2010 at 7:32 am

    i wanna know a answer
    somebody tell me “what are the special components of SEZ (Special Economic Zone)

  16. punit said, on January 16, 2010 at 7:33 am

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