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CEZs may get tax holiday in next Budget

Business Standard:  November 07, 2016

New Delhi:  India’s first coastal economic zones (CEZs) could finally take some concrete shape, with the likely announcement in the Union Budget for 2017-18 to give units in these areas a 10-year holiday from corporation tax. However, there could be a rider these units must generate a specific threshold of direct jobs. 

The provision in the Budget could come up despite the finance ministry looking at phasing out exemptions given on corporation tax and reducing levy to 25%, from the current 30% in the next two years. 

Officials said the first two CEZs are expected to come up in Gujarat and Andhra Pradesh, and land is being sought for them. 

According to a preliminary proposal, CEZs would have to be around 450-km long areas from the sea, where big manufacturing and export-oriented units would come up to set up labour-intensive industries such as clothing, footwear, electronics as well as electrical and light manufacturing to tap overseas markets. The proposed CEZs would be of a much bigger size than the special economic zones (SEZs). 

The Budget for 2017-18 is likely to provide a 10-year corporation tax exemption to all the manufacturing units located in the CEZs. The Centre might announce other relaxations as well and impressive infrastructure. The CEZs would have liberal land and labour laws; something which cannot be done on a mass scale and could be modelled along the lines of China’s Shenzhen and Guangzhou areas. 

The government’s main think tank, NITI Aayog, is actively pursuing the proposal. 

Last month, NITI Aayog Vice-Chairman Arvind Panagariya, in a meeting with his Chinese counterpart Xu Shaoshi of National Development and Reform Commission, had sought China’s cooperation in setting up of such CEZs. 

Panagariya, in a blog in February this year, had also spelt out his idea of CEZs. 

These zones, according to Panagariya, would have to be set up near deep-draft ports, which are capable of accommodating very large and heavily loaded ships. 

“They must provide a business-friendly ecosystem, including ease of doing business, especially ease of exporting and importing, flexible labour laws, swift decisions on applications for environmental clearances and speedy water and electricity connections. Apart from conventional infrastructure, the zones should create urban spaces to house local resident workforce,” Panagariya had said. 

It is still being debated whether CEZs would come up through an Act along the lines of SEZs or will these 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 options are being considered, officials said. 

The finance ministry had announced a plan to phase out tax exemptions, so that it could cut corporation tax rate to 25% by 2018-19, from 30% at present. It had said profit-linked, investment-linked and area-based deductions will be phased out for both corporate and non-corporate taxpayers. 

In this year’s Budget, Finance Minister Arun Jaitley had said the new manufacturing companies, which were incorporated on March 1, 2016, onwards, would be given an option to be taxed at 25%, provided these do not claim profit-linked or investment-linked deductions, and do not avail of investment allowance and accelerated depreciation. 

The Chinese experience with these zones such as Shenzhen and Guangzhou is being told to sell the idea of these zones. 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 such as footwear, clothing, electronics and light manufacturing, which generate jobs and, hence, face absence of economies of scale.

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. Also, home market in electronic goods is $65 billion, of which $26 billion is 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, officials said. 

An important advantage of locating the zones near the coast is that these would attract large firms interested in serving the export markets. These firms would bring with them technology, capital, good management and links to world markets. These would help create an ecosystem around them in which productive small and medium firms would emerge and flourish. 

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