SEZ and revenue loss : Isn't it a myth?

THERE is hardly a day when the SEZ Scheme is not there on the front page of most newspapers. Apart from various sticky aspects, revenue loss theory continues to carry a lot of weight even after many Studies being reported by the media.

The indirect tax benefits to SEZ's flow from the concept of zero-rating for all exports. Many economic analysts continue to have certain erroneous belief with respect to the indirect tax aspect of SEZ's. SEZs should be judged the same way one may like to assess other export promotion schemes such as EoU/EHTP/STP, Drawback, Duty Entitlement Pass Book and Export Promotion Capital Goods. All these schemes have a common feature: all envisage a zero-rating of the goods exported. This means not only that the final product exported is exempted from customs duty, excise duty, service tax, and so on. Even the inputs are not taxable.

How does it make a difference if the products exported are being made in SEZs or in other schemes that are outside the SEZ. The reason why SEZs have become such a burning issue now is because they entail land acquisition which often is forcible. That is not an indirect tax matter at all.

The first misconception is the notion that revenue forgone in the course of export is actually a loss of revenue due to export (that is, cost of export). Economic analysts variously refer to revenue foregone as 'cost to revenue' or 'loss of revenue' or 'cost of export'.

Actually, the revenue foregone is not a loss of revenue at all, neither is it a cost of export. The accepted principle all over the world is to export the goods and not the taxes. Foregoing of duty is necessary to make export possible. If exemptions and remissions of duty were not given, hardly any exports would be possible. All countries resort to zero-rating, which the WTO permits. (It would be significant to remember here that in India the un-refined version of SEZ concept was first introduced in 1965 with Kandhla Free Trade Zone (FTZ) and later extended to seven more Export Processing Zones (EPZ), but the scheme could not get the expected success.)

If India does not do it, Indian goods will simply be priced out. So there will be no production for export, and only goods meant for the domestic market will be produced. But if these goods were not going to be produced, there would be no duty collection either. In which case, where is the loss? One more example may clarify this point.

Let us say, Honda manufactures 120 cars in India. They sell 100 in the Indian market and export 20. If there is no zero-rating for these 20 cars, they will be priced out in the world market, and there will be no export of these motorcycles. So Honda will only manufacture 100 and not that extra 20. For these 20 which are not manufactured, there will obviously be no customs duty paid for any parts or paints that would not be imported. Also there will be no central excise duty paid as there will be no manufacture. So the question of duty foregone will not arise.

There would be no collection of duty if these 20 are not exported. If these 20 are exported and zero-rated, no duties will be collected either. Both situations are the same. So one cannot say that the duty foregone due to exports is a loss of tax.

The second misconception is that the indirect tax concessions to SEZ's are enormous. I have seen several writings and attended seminars on SEZ's where speakers, economists and generalists alike eloquently condemn SEZ's on the ground that thousands of crores of indirect taxes such as customs and excise are being lost in the concessions given to SEZ's. And they talk nothing about other export promotion schemes at all though the revenue foregone is much more in various other schemes. However, when the SEZ's increase in number, the revenue foregone will be more. But the point remains that there is revenue foregone is for all the schemes and not for SEZ's alone. The only difference is that in SEZ's even infrastructure gets indirect tax benefit for materials used, namely steel, cement, paints and so on. This extra benefit for developers cannot be properly calculated.

The third point is about what the cost of export really is. It consists of the elements of misuse of all the schemes mentioned above and in SEZ's. On the basis of available data, some rough estimates can be made of the actual cost in the past for the other schemes but not for SEZ's as no reliable data are available. The misuse mainly arises in cases where exports do not take place but the concessions are availed of.

In the case of SEZ's, some misuses have been detected of goods being smuggled out into the domestic tariff area without payment of duty or without being exported. But no firm data are available. There is also a subsidy element in the DEPB scheme. The rates of refund of duty in DEPB as compared to Drawback scheme for corresponding goods are far more. This shows the element of subsidy.

However, studies show that such cost of export due to misuse and subsidy are very little compared to the total duty collected as indirect tax. In the case of SEZ's, this question of cost of export due to subsidy does not arise, as there is no availment of DEPB or any other schemes within the SEZ.

Conclusion

•  It is wrong to say that there is a huge concession of indirect taxes in SEZ's. The revenue foregone is the same in SEZ's as well as in all other schemes outside SEZ's;

•  The only extra revenue foregone in SEZ's is the one in relation to developers;

•  It is wrong to say that the revenue forgone is the cost of export;

•  The cost of export consists of the misuse of the schemes and the subsidy elements; and

•  SEZ's can possibly be faulted for many other reasons such as forcible land acquisition, creating a landlord class, diversion of industries and investment from other places to SEZ's, but not for the reason that there is an enormous loss of revenue from indirect taxes and inordinately large cost of export from SEZ's.

(The author works with a leading Consulting firm)