Nath opposes tax holiday sunset clause for SEZs

NEW DELHI: Pressure is building up on finance minister P Chidambaram to withdraw the sunset clause he has proposed to introduce in the budget with regard to the tax holiday for Special Economic Zones (SEZs). The proposal is being seen as a huge setback to India''s export drive and bid to attract large FDI.
Commerce and industry minister Kamal Nath, it is learnt, has lodged a complaint with PM Manmohan Singh after a hue and cry raised by exporters'' organisations.The budget proposal, officials conceded, could deliver a body blow to India''s nascent efforts at building SEZs as magnets for foreign investment and instruments for exports and jobs.
The proposal upsets the SEZ policy framework at a time when the government is considering a comprehensive SEZ legislation with the main objective of providing a legal guarantee to investors, precisely against unpredictable policy changes.
A GoM, headed by Pranab Mukherjee, had cleared the draft SEZ legislation which seeks to extend the tax holiday period from SEZ units from the present 10 years to 20 years. The draft is before the Cabinet for a final decision.
The budget proposes to set March 31, 2009, as the deadline for an SEZ unit to start production for availing of the existing tax holiday under sub-section 1A of Section 10A of the Income-Tax Act. Under the existing provisions, an SEZ unit which begins production after March 31, 2002, is allowed a 100% deduction of export profits for a period of five years and 50% for the next two years followed by 50% deduction of export profit credited to a special reserve account for the next three years.
Through the proposed legislation — meant to guarantee policy stability without which investments in SEZs are not taking off — the government was seeking to provide 100% deduction for the first 10 years and 50% for the next 10 years without a sunset clause. India announced an ambitious SEZ policy taking a leaf out of the book of other countries especially China and the UAE which have been hugely successful in attracting large FDI to their SEZs.
SEZ policy is unique in many ways, but it has not been able to get much investments because both developers and prospective investors have been chary of sudden changes in government tax and other policies.