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Special Economic Zones And their impact on Export Promotion May 17, 2007 Vivek Mehra INDIA -Demographics “India needs to generate 200 million additional jobs over the next 20 years”. - Planning Commission 500 mn people < 25 years 333 mn in rural areas 673 mn Working age population in 2005 (15-64 yrs as % of total population) 872 mn Working age population in 2020 71 mn People entering workforce by 2010 48 mn People entering workforce in rural areas Particularly for 48 mn rural youth Where are 71 mn jobs going to come from? IT & BPO sector – 8.8 mn jobs by 2010* ( Mainly Urban Educated ) * Source : NASSCOM Balance 62 mn from Services & Manufacturing !!! Manufacturing sector has to carry the major burden of increasing employment opportunities Key concerns • Revenue Loss • Relocation • Diversion • Large number of SEZs • Value add / export obligation • Non Processing Area • Real Estate • Land Acquisition • No tax on O&M Competitive Environment The Global Manufacturers have a choice… Indian SEZs Corporate Tax rates 33.9% Chinese SEZs 15% Philippines Thailand Malaysia Vietnam EcoZones DFZs FTZs EPZs 35% 30% 28% 10% Direct Tax Incentives (70%- 100%) 100% Tax Holiday 5 years (from 1st yr) 2 years (from year of profit) 50% Tax Holiday Next 10 yrs Next 3 years 4-8 years (from year of profit) ---- 3-8 years (from year of profit) ---- 5-10 years (from year of profit) 4 years (from year of profit) ---- ---- Tax incentives for infrastructure development SCHEME Infrastructure Tax Incentives Already available For Infrastructure • Roads, bridges, rail systems, water supply projects, water treatment systems, irrigation projects, sanitation and sewerage systems or solid waste management system, Ports, airports, inland waterways or inland ports, generation and distribution of power TAX INCENTIVES • 10 years income tax holiday • Selective exemption from Custom Duty and CENVAT For Developers: Industrial Parks (u/s 80 IA of Income Tax Act) 10 years tax holiday For units in specified states like HP, Uttaranchal, Sikkim etc Tax Holiday on Domestic and Export Profits 100% First 5 year (10 years for some states) 30% Next 5 years CENVAT exemption For SEZ Developers: Is criticism justified? • 10 years tax holiday SEZs For SEZ units Tax Holiday only on “Export Profits” 100% First 5 years 50% Next 10 years SEZ TAX INCENTIVES - REVENUE LOSS OR GAIN?? MoF ESTIMATES INR Cr OUR ESTIMATE INR Cr Direct-tax loss on Export profits from SEZs 57,531 22,913 Indirect-tax loss on investments in SEZ 40,164 10,512 97,695 33,065 Based on MoF estimates Figures relate to period 2005-2010 SEZs : BASIS OF REVENUE LOSS ESTIMATES (2005-2010) INR Cr MOF Estimates Investments in SEZs Exports from SEZs Profits @ 20% 3,60,000 8,53,000 1,70,600 REVENUE LOSS AS PER MoF REVISED LOSS ESTIMATES INR Cr Tax Rate Customs 29,700 Excise 10,464 TOTAL 40,164 INDIRECT 10% 16% EOU – NIL EPCG – 5% CVD FULLY OFFSET 10,152 Income Tax 57,531 33% Upto 31.03.09 Sec 10 exemption Rs. 22,913 TOTAL TAX LOSS 97,695 SHOULD BE INR Cr (@3%) (2009-10) 33,065 Revenues gains from Additional Economic Activities (AEA) i.e. increase in GDP (2005-2010) Activity INR Cr Investments in SEZs Less : estimated Imports as per MOF 3,60,000 1,08,000 Export sales Less : Imports @ 30% of 2,55,900 Profits @ 20% of 1,95,720 8,53,000 Domestic sales Say 20% of total sales Less : Imports@ 20% Profits @ 20% 2,13,250 42,650 42,650 2,52,000 4,51,620 4,01,380 1,27,950 1,27,950 7,81,330 INR Cr Total increase in GDP Direct & Indirect-tax earnings from AEA Revenue Gains Tax to GDP Ratio : 10.8% Income-tax @ 34% on Domestic sale profits Indirect-taxes on Domestic sales (customs & CVD) Total Revenue Gains 84,383 14,500 58,857 1,57,740 Based on MoF estimates Figures relate to period 2005-2010 Estimated Revenue Loss Estimated Revenue Gains Hence minimum incremental activity necessary for SEZ incentives to be revenue neutral 33065 Crs Rs. 157740 Crs Rs. 21% Thank You Vivek Mehra Executive Director Email: Tel: Fax: Cell: [email protected] +91 (11) 41150503 +91 (11) 23210594 +91 98110 68118 © 2006 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.