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NITI for 10-year tax holiday for coastal economic zones

Business Standard:  September 26, 2016

New Delhi: NITI Aayog, a policy think-tank of the government, is pushing for a 10-year corporation tax holiday for proposed coastal economic zones (CEZs) provided these generate a threshold of employment. An informal proposal to this effect came at a time when the finance ministry is looking at phasing out exemptions given on corporation tax and reducing the levy to 25 per cent from the current 30 per cent at present.

“Aayog has proposed a 10-year holiday from corporation tax for CEZs,” an official source said.

It is still being debated whether CEZs would come up through an Act such as special economic zones (SEZs) had come or will these would be built through an executive order. While the legislative backing would be a preferable route, the government does not have a majority in the Rajya Sabha. As such, both the options are being mulled, sources said.

Basically, the proposed CEZs, which would be of much bigger size than SEZs, are being planned on coastal lines of India to set up labour-intensive industries such as clothing, electronics as well as electrical manufacturing, light manufacturing to tap export markets. The Chinese experience with these zones such as Shenzhen is being told to sell the idea of these zones. When asked why should CEZs be given corporation tax holidays when the finance ministry is phasing out these exemptions, sources said this could be an area of tension, which would be resolved.

The finance ministry had announced a plan to phase out tax exemptions so that it could cut corporation tax rate to 25 per cent in four years starting this year from 30 per cent at present. It had said profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate tax payers.

In this year's Budget, finance minister Arun Jaitley had said the new manufacturing companies which are incorporated on March 1, 2016 onwards would be given an option to be taxed at 25 per cent provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.

The argument in favour of these zones are that India has not been able to generate employment in manufacturing since large players are missing in those areas which generate jobs and hence face absence of economies of scale.

“Unfortunately, large firms are missing in India in precisely the sectors in which they are needed the most: employment-intensive sectors such as apparel, footwear, electronic and electrical products and host of other light manufactures,” writes Aayog vice-chairman Arvind Panagariya in his blog.

In the blog, titled Jobs, Growth and Coastal Economic Zones, he says these are products in which China has done well thereby generating a large volume of good jobs for its workers.

In 2014, China exported $56 billion worth of footwear compared with $3 billion by India and $782 billion worth of electrical and electronic goods compared with $9 billion by India, he rolls out statistics in the blog to buttress his arguments. An important advantage of locating the zones near the coast is that they would attract large firms interested in serving the export markets. These firms would bring with them technology, capital, good management and links to the world markets. They would help create an ecosystem around them in which productive small and medium firms would emerge and flourish, says Panagariya.

It may make sense to initially limit the number of zones to a few, perhaps two or three. This would help ensure that many sector-specific zones and clusters emerge within each CEZ to fully exploit economies of scale and agglomeration. Simultaneous creation of too many zones would spread the available public resources thinly while also diffusing economic activities with potential synergies. The Aayog vice-chairman says the domestic market still remains small and fragmented so that it will not give rise to genuinely large firms. For example, home market in electronic goods is $65 billion of which $26 billion is already supplied by domestic firms. In comparison, the world market in electronic goods is $2 trillion. Domestic market can serve as an attractive complement; it cannot substitute for the large world market, he says.

WORKFORCE SHARE OF MANUFACTURING

  • Manufacturing firms with less than 20 workers each employed 73% of manufacturing workforce but produced only 12% of manufacturing output in 2010-11, a study says
  • Only 10.5% of manufacturing workforce in India was employed in firms larger than 200 workers compared to China's 51.8% in 2005, says ADB
  • 84% of India's manufacturing workforce was in firms with less than 50 workers compared to China's 24.8% in 2005, says ADB
  • These differences translate into substantially lower average labour productivity and wages in India than China

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.