Brave new world of tax exemptions

Published : Jul 14, 2006 00:00 IST

The Sultanpur bird sanctuary is close to the site of the proposed Special Economic Zone. There are fears that proximity to an industrial enclave will affect the ecology of the sanctuary. - V.V. KRISHNAN

The Sultanpur bird sanctuary is close to the site of the proposed Special Economic Zone. There are fears that proximity to an industrial enclave will affect the ecology of the sanctuary. - V.V. KRISHNAN

The Reliance-HSIIDC proposal to set up a massive Special Economic Zone raises more questions than answers.

ONE of the first laws passed by the Congress-led Bhupinder Singh Hooda government soon after assuming power last year was the Haryana Special Economic Zones Act, patterned on the lines of The Special Economic Zones Act, 2005, a Central law that received presidential assent on June 23, 2005. The SEZ was in tune with the State's new industrial policy that placed a premium on public-private partnership in projects to build infrastructure and industrial townships.

Within a year of the Central Act and less than six months of the enactment of the State legislation, Haryana seemed poised to set up the country's largest multi-product SEZ. The government has not yet specified the exact location, but there is talk of the SEZ stretching over 25,000 acres between Gurgaon and Jhajjar off the Delhi-Jaipur highway. It is being set up jointly by Reliance Ventures, a wholly owned subsidiary of Reliance Industries Limited and the Haryana State Industrial and Infrastructure Development Corporation (HSIIDC). RIL alone will invest Rs.25,000 crores, while Rs.15,000 crores will be put in by companies interested in investing in the SEZ.

But, in the first week of June, a fortnight before the agreement was clinched, murmurs of protest rose in the ranks of the State Congress. Pradesh Congress president Bhajan Lal's son Kuldeep Bishnoi, who also represents Bhiwani in the Lok Sabha, criticised the State government for clearing the project, alleging that rules had been relaxed to favour RIL.

The main Opposition party, the Indian National Lok Dal, made similar charges and said that the process of land acquisition for the project was not transparent. The Haryana unit of the Communist Party of India (Marxist) demanded a White Paper on the government's land acquisition policy. An independent legislator from Ateli in Mahendargarh district, Naresh Yadav, who heads the Haryana Yuva Kisan Sangharsh Samiti, declared his opposition to the SEZ project, claiming that the government had long ignored the district's problems.

Earlier, apprehensive that labour laws would be diluted within SEZs, the Centre of Indian Trade Unions (CITU) had reminded the United Progressive Alliance government of the National Common Minimum Programme commitment to protect labour rights in the manufacturing investment regions.

Reliance Industries chairman Mukesh D. Ambani said at a press conference in Chandigarh on June 19 that the SEZ would be built on a scale and standard equivalent to the international SEZs in Shanghai and Dubai. The project has provisions for a cargo airport and a 2,000 megawatt power plant, all subject to approvals. The deal was inked in the presence of the Chief Minister, the managing director of HSIIDC, and Mukesh Ambani. At the same press conference, the Chief Minister jubilantly announced that the SEZ would generate 500,000 jobs and that the State government would earn revenues up to Rs.10,000 crores. Reliance is the major stakeholder with 90 per cent stake in the joint venture company while the remaining 10 per cent rests with HSIIDC.

According to the RIL chairman, the SEZ would come up near National Highway No. 8 in Gurgaon and extend up to Jhajjar district, adjacent to the proposed Kondli-Manesar-Palwal Express highway. The government had previously acquired 1,395 acres of land near Garhi-Harsaru in Gurgaon district and the June 19 agreement had cleared the way for the transfer of this land to the joint venture company. The process of acquisition began in the previous regime and the Hooda government completed it.

The Chief Minister is enthusiastic because HSIIDC is expected to earn an initial Rs.60 crores by way of interest on the total cost of acquisition and administrative costs after transferring the land to Reliance. But there is a caveat in the financial memorandum of the Haryana SEZ Act, 2005, that states: "The Haryana Special Economic Zone Bill, 2005, shall exempt from payment of any tax, duty, fees, cess or any other levies under any existing State law to the Developer and exporting units set up under Special Economic Zones in the State of Haryana. It is, however, not possible to assess the losses likely to accrue to the state exchequer at this stage." Informed sources told Frontline there had been hardly any debate on the Bill in the Haryana Assembly.

The exemptions granted are not time-bound; they appear to be in perpetuity. In fact, they may be in consonance with the Central legislation itself. The Statement of Objects and Reasons of the Haryana SEZ Bill, 2005, is self-explanatory. It states: "Haryana Special Economic Zone Bill, 2005 is being introduced to provide world class infrastructure, competitive duty free enclave and hassle free environment to the exporters of Haryana for promotion of exports, promotion of investment from domestic and foreign sources, creation of new employment opportunities. As per the provisions under Section 50 of the Special Economic Zone Act, 2005 of Govt. of India, State Government have to formulate an Act/Policy for granting exemptions from State taxes, levies and duties to the Developer/Entrepreneurs of Special Economic Zone and delegation of powers to the Development Commissioner of Special Economic Zone. Hence the Bill."

The State SEZ Act appears to exempt units in the SEZ from State duties, taxes, fees, cess and levies in perpetuity. In Chapter Five, Section 11 of the Act exempts from all these charges goods exported out of, or imported into, the SEZ; inter-unit transaction of goods within the Special Economic Zone; goods from the SEZ sent for value addition to the domestic tariff area and returned to the SEZ thereafter and services that provide value addition to a product within the Special Economic Zone. Sub-section 2 stipulates that all transactions and transfers of immovable property or related documents within the SEZ shall be exempted from stamp duty. As no time period has been suggested, it may be surmised that these exemptions are for perpetuity.

Similarly, Chapter 1V, Section 10 (5), stipulates that no electricity duty or cess shall be levied on the businesses of generation, transmission and distribution of electricity and on consumption of electricity within the SEZ. In addition, Rule 12 on the import and procurement of goods by the developer allows the developer to import or procure goods from the Domestic Tariff Area without payment of duty, taxes and cess for the authorised operations.

Exact plans for the SEZ, including its location, are not out yet, presumably because of the controversies that have arisen. Ram Kumar, an agriculture scientist and former faculty member of Hisar Agricultural University, argues that it is not possible to have one SEZ in Gurgaon and Jhajjar.

According to the SEZ Rules, 2006, a multi-product SEZ should have a contiguous area of 1,000 hectares or more and the identified area should be contiguous and vacant and it should have no public thoroughfare cutting through it.

Now, the stretch where the SEZ is expected to come up, between Garhi Harsaru in Gurgaon and Jhajjar, cuts through the Gurgaon-Rewari State highway, the Gurgaon-Rewari railway line and the Gurgaon-Jhajjar State highway. The planned Kondli-Manesar Palwal highway would be adjacent to the area. Moreover, the SEZ would be located around the well-known Sultanpur bird sanctuary.

Ram Kumar and others ask why the State government is so focussed on developing an area close to Delhi when the backward regions of Haryana are in a state of neglect. Besides, the area under consideration is populated. Ram Kumar says it is not possible to relocate villages. "Look at the Narmada oustees. Their rehabilitation is yet to be complete and here the government talks as if rehabilitation is an easy job," he said.

It is not that much of the land between Gurgaon and Jhajjar is not suitable for agriculture. The State government could acquire the land only because high input costs had made agriculture an unviable option for the farmers. The government has completely ignored the issue of the landless, who comprise at least 50 per cent of the village population and depend on agriculture.It is they who will take the hardest blow and it is doubtful that the SEZ would absorb them.

Ram Kumar says that instead of locating the SEZ on prime agricultural land, the government could have concentrated on Jhajjar and other districts in southern Haryana where about 10 villages have no irrigation possibilities. Instead, the government seems keen to locate the SEZ near the National Highway as well as Gurgaon and Delhi, areas that already have fairly good infrastructure.

There is one clause in the SEZ Rules, 2006 that perhaps bolsters Ram Kumar's apprehensions. Rule No.10 states that the developer may allot the land in the non-processing area for business and social purposes to set up educational institutions, hospitals, hotels, recreation and entertainment facilities, residential and business complexes, provided that the infrastructure is eligible for exemptions and concessions.

Mukesh Ambani said at the June 19 press conference that 5 per cent of the area was being earmarked for leisure and recreation and that there were plans for a tie-up with Disney, Time Warner or Universal and a golf course as per the standards prescribed by the Professional Golfers' Association. This is the kind of activity likely to be exempted from taxes by the Board of Approval in the Ministry of Commerce and Industry. Ram Kumar says such "social" activities would be of little use in backward regions like Jhajjar.

There is need for more clarity on the revenues that the State will earn from the venture and on the extent to which the people of Haryana will benefit. It is not clear how much revenue the government will earn with so many exemptions in place and with the State not even a major stakeholder in profit sharing. At the press conference it was promised that at least one member of each family that gives up its land for the project will be given employment. The question is what kind of employment that would be.

The Central SEZ Rules 2006 also allow liberal exemptions. In fact, Rule 5 states: "Even before recommending any proposal for setting up of a Special Economic Zone, the State government shall endeavour that the following are made available in the State to the proposed SEZ units and Developer." The "following" includes exemption from the State and local taxes, levies and duties, including stamp duty and taxes levied by local bodies on goods required for authorised operations by a unit or developer and the goods sold by a unit in the Domestic Tariff Area except the goods procured from domestic tariff area and sold as it is. There is also exemption from electricity duty or taxes on sale, of self-generated or purchased electric power for use in the processing area of a SEZ. The State is required to allow generation, transmission and distribution of power within a SEZ, provide water, electricity and such other services as may be required by the developer and delegation of power to the Development Commissioner under the Industrial Disputes Act, 1947, and other related Acts.

Reliance sources say that at least 200,000 people are expected to get jobs in the RIL-HSIIDC project. The Chief Minister promised 500,000 jobs. According to information given on the government web site on SEZs, till March 31, 2005, the 11 SEZs in the country had managed to employ only 100,650 people, including 32,185 women. These zones also include what were formerly called the Export Processing Zones. As for revenue generation, the 1998 Comptroller and Auditor-General Report on EPZs, stated that "customs duty amounting to Rs.7,500 crores was forgone for achieving net foreign exchange earnings of Rs. 4,700 crores and the government does not seem to have made any cost benefit analysis."

The Haryana government takes pride in stating that it is the first in the country to have a labour policy. It is another matter that labour unions have had little to do with the framing of this policy. The SEZs have been declared a public utility service under the Industrial Disputes Act and are very much outside the purview of normal labour laws. This means that strikes and lockouts cannot be declared without prior notice.

The Development Commissioner, appointed by the Central government to supervise, oversee and coordinate the activities of agencies in the development of the SEZ, has the powers to grant approvals/sanctions to the entrepreneur. This amounts to a single window clearance system in the SEZ relating to several features, including the powers of the Labour Commissioner and Chief Inspector of Factories in respect of labour laws.

As far as the HSIIDC is concerned, people can go to court if they are dissatisfied with the compensation received. What have not been taken into account are the social consequences of a community traditionally dependent on land for a living.

Says Sukhbir, a Class IV employee and a resident of Harsaru: "This land is gold. It is not barren. Instead of wheat, there will be a marble floor. But what option do we have if the government decides it wants our land, gives us money and tells us to do wage labour? The farmer is in a trap and he thinks the government is helping him out by buying his land. Today, people want to own cars and the youth like to walk around with 500 rupee notes in their pockets. But when that gets over, then what?"

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