The government is likely to forego revenue to the tune of Rs 500-2,500 crore by way of incentives given under Merchandise Exports From India Scheme (MEIS) and Services Exports From India scheme (SEIS) to units located inside special economic zones (SEZs) under the new Foreign Trade Policy (FTP) 2015-2020.

The Foreign Trade Policy 2015-2020, unveiled on April 1, gave a breather to ailing SEZ units by bringing them under the newly introduced MEIS and SEIS incentive programmes. However, according to experts, this will mean an additional revenue impact on the government, which is already reeling under resource constraints, over and above the existing quantum of revenue foregone.

Currently, there are 199 operational SEZs having 3,937 units located in them. The total exports achieved by these units stood at Rs 3,48,584 crore during April-December 2014-2015, according to latest data from the Ministry of Commerce and Industry.

Revenue forgone



Under the two new schemes – MEIS and SEIS – exporters will be allowed rewards for export of goods given as a percentage of realised free-on-board (FOB) value. The rate of these rewards, given in the form of duty scrips, will be 2-5 per cent.

Similarly, under the Served From India Scheme (SFIS), the rate of rewards will be 3-5 per cent. These sops or duty scrips were not given to SEZ units earlier.

“As a result of benefits given under both the schemes (MEIS and SEIS), the revenue forgone will be in the range of Rs 500-2,500 crore in a financial year,” said an official on condition of anonymity.

The actual revenue forgone by the government on account of tax incentives for export profits of SEZ units in the financial year 2013-2014 stood at Rs 17,036 crore, higher than the projected revenue impact of Rs 14,992 crore.

In financial year 2014-2015, it is estimated that total revenue foregone on account of sops given to SEZ units would reach Rs 18,393.70 crore. According to the finance ministry, the actual impact is going to be “even higher”, said the statement on revenue forgone.

According to Amit Kumar Sarkar, partner, Grant Thornton India LLP, the revenue foregone might exceed Rs 2,000 crore to Rs 2,500 crore if subsidies are calculated based on 5 per cent of duty scrips.

“The tax burden is going to be substantial. It is going to be more for goods exports compared to services,” said P C Nambiar, chairman, Export Promotion Council for EOUs and SEZs (EPCES).

However, the industry feels that the increase in subsidy outgo will not be much of a concern for the present government.

“Increase in the subsidy bill should not be a major concern as Indian exporters are at a disadvantage on many fronts vis-à-vis their competitors from other countries. These incentives are to offset infrastructural inefficiencies and other cost disadvantages,” said Ajay Shriram, president, Confederation of Indian Industry (CII).

MAT & DDT problems to persist



Minister of state (independent charge) for commerce and industry Nirmala Sitharaman has said the proposal to remove minimum alternate tax (MAT) and dividend distribution tax (DDT) on SEZ developers and units is still lying with the finance ministry.

“It is suggested that the rate of MAT should be reduced to its original rate of 7.5 per cent, which can be done through a notification, so that the government gets revenue in time and the SEZs are able to set off the advance tax MAT paid within the stipulated period. Reduction or removal of MAT will help in growth of SEZs. For reduction of tax rate, no approval of Parliament is required,” Nambiar said.

According to Sarkar, the incentives given to SEZ units under the new FTP are not lucrative enough for investors to stay invested in SEZs despite the fact that SEZs are entitled to duty-free imports and income tax benefits.

Confusion over SEIS rewards



Although the government has maintained that both MEIS and SEIS benefits will be given to SEZ units, the policy fine print states that these are eligible for SEIS incentives, according to the ineligible categories under section 3.09 II (e).

Hence, if only the MEIS incentives are taken into account then the total export subsidy burden of the government is expected to be benign.

“The MEIS burden will not be much as the petroleum sector, which contributes to sizeable exports of SEZs, besides IT and ITeS, will be outside the purview of MEIS. By a rough estimate, the burden on the exchequer on account of MEIS benefits to SEZs is expected to be between Rs 500 crore and Rs 600 crore,” said Ajay Sahai, CEO and director general, Federation of Indian Export Organisations.

SEZs contribute almost 25 per cent of the country’s total exports. Total exports from SEZs stood at Rs 3,48,584 crore during April-December 2014-15, declining 7.61 per cent from the corresponding period in 2013-14. In 2013-14, exports from SEZs stood at Rs 4,94,077 crore. After cancelling almost 67 SEZs, the SEZs that have received formal approvals so far are 436, of which 347 are notified and will be operational soon.

THE FTP MATHS