SEZ OR REAL ESTATE ENCLAVES?
SEZ OR REAL ESTATE ENCLAVES?
Under the Special Economic Zones Rules, ‘procedure of establishment of SEZ sec.5’, developers will get exemption from electricity duty or taxes on sale of self generated area of SEZ. In the list of facilities to be provided to developers listed by the ministry of commerce, the developer will have full authority to provide services like water, electricity, security, restaurants, recreational centers etc. on ‘commercial lines’. Clearly, developers belong to that highly privileged set which is required to pay no taxes but fully authorized to charge on commercial lines.
Madhu Bhaduri
The objective of creating Special Economic Zones (SEZ), as stated in the SEZ Act 2005, is to provide an “internationally competitive environment” for the export industry in India. The reasons advanced for the need to create SEZ is to make available tax free goods and services with single window mechanisms for expeditious approvals along with incentives to attract foreign and domestic investments for the purpose of promoting export led growth. In short, a SEZ is intended to be “a designated duty free enclave to be treated as foreign territory for trade operations and duties and tariffs.” This is how the Ministry of Commerce describes it.
However, a close look at the Special Economic Zone Act 2005 reveals that the Act digresses from the stated objective of creating SEZ for export purposes. What its many legal provisions, notified rules and small print cater to is the creation of large Real Estate Enclaves which give tariff and trade concessions to Real Estate developers along with tax benefits and much more. Let us see how that is done.
1. The first step is to identify a suitable area, which can be chosen by the developer or the state where the zone is to be located. The size can vary beyond 1000 acres. The Act in sec. 31 (2) states that the SEZ authority, which is constituted by the central government through a notification will have the power to “acquire, hold and dispose property both movable and immovable”. This means that the developer does not acquire land from the owners. The state government does this with the might of state machinery and power. This is the beginning of the benefits, that developer/builder is provided by law to receive from the government. So extensive and immense are the benefits that the SEZ Act looks less and less as an export promotion exercise and increasingly like a real estate scam. Here is what the Act provides:
2. After being handed over land by the sate government, the developer (under SEZ rule 2006, 5) would be provided by the state government “water and electricity and such other services as may be required by the developer”. This provision could well be the reason why areas identified by developers and states for locating SEZ s have plenty of water and availability of electricity. It is another matter that the land is also good arable land on which supports the livelihood of a very large number of people.
3. Under sec.26 of the Act, the developer is entitled to the same drawbacks and concessions as the entrepreneur, including the customs and excise duties on goods bought from abroad and the domestic tariff area as well. Although the entrepreneur earns foreign exchange and is involved in production of exportable goods and the developer is not, the concessions are identical!
4. Under the same sec 26, the developer like the entrepreneur is entitled to exemption from service tax, securities transaction tax and exemption from the levy of taxes on the sale or purchase of goods other than newspapers if the goods are meant to carry on the authorized operations of the developer. As we will see shortly, the ‘authorized operations’ of the developer include the running of recreational centers, shopping malls health clubs etc. Why should these activities entitle the developer to tax concessions?
5. Some SEZs are envisaged exclusively for trade and warehousing. These would be run by developers and not have any export producing units.
6. Rules permit that only 25% of SEZ area need be utilized for export units. In the remaining 75% the developer is free to develop residential, recreational, sports and other activities on a commercial basis.
7. Under the Income Tax Act read with Appendix 14-11-N of procedure, the developer will get exemption for a block of 10 years in 15 at the option of developer from paying Income Tax.
8. Under the Special Economic Zones Rules, procedure of establishment of SEZ sec.5 developers will get exemption from electricity duty or taxes on sale of self generated area of SEZ. In the list of facilities to be provided to developers listed by the ministry of commerce, the developer will have full authority to provide services like water, electricity, security, restaurants, recreational centers etc. on ‘commercial lines’. Clearly, developers belong to that highly privileged set which is required to pay no taxes but fully authorized to charge on commercial lines.
(In a Model State Policy on SEZ it is also proposed that SEZ s would be free to procure from NTPC or any other generating company and SEZ would be treated as an extension of State Electricity Board for fixation of tariff.)
9. To the direct benefit of developers, investors in SEZ s will be entitled to income tax exemption under section 10 (23) G of Income Tax Act.
10. Investors in SEZ companies will also be eligible for exemption under sec 88 of IT Act.
11. Under Sec. 80-1-A exemptions will be legible for development and transfer of infrastructure facility.
12. Most important, since the SEZ areas are to be treated as foreign territory, labour laws of the Republic of India will not apply to them.
The above list is a clear proof that the stated objective of the policy to create SEZ exclusively for export promotion is a cover for governments (both central and states) to assist developers to acquire cheap land with state power and to run high class real estate enclaves with complete freedom from conforming to labour related laws, payment of taxes as required in the rest of the country and to have this freedom while enjoying the authority to charge commercial rates. The developer has no compulsion to export goods but has the freedom to import without paying taxes.
The SEZ Act has in addition to the above, also bestowed on the developer an unprecedented power by making place for the developer in the Approval Committee of the Zone which will among other things approve the applications of entrepreneurs to put up export units in SEZ. The developer is given a position in decision-making by the Act.
Through this Act, Government has bound itself to acquiring large areas of land from poor farmers, depriving them from their livelihood without imposing any condition on the beneficiaries i.e. the developers and entrepreneurs to provide jobs and livelihood to the dispossessed evacuees, much less to make them stakeholders in the zones. The wisdom of giving unprecedented Tax benefits to the developers and entrepreneurs is questionable. More than anything else what emerges from this scheme is that the Government has changed its role from one of being a regulator to that of being a prominent agent-facilitator of developers. Is this what the country needs most?
