DESH Bill: Commerce dept may scrap concessional corporate tax provision

The Department of Commerce is likely to drop the concessional corporate tax provision under the Development of Enterprise and Service Hubs (DESH) Bill after the finance ministry expressed objections, stating there should be a uniform tax rate for all companies, said people in the know.

In July, the commerce department sought inter-ministerial comments on the DESH Bill that aims at replacing the existing special economic zone (SEZ) law.

The Bill had proposed freezing the concessional corporate tax rate of 15 per cent until 2032 for all greenfield/brownfield units (subject to certain conditions) in these hubs under Section 115BAB of the Income-Tax Act.

However, the finance ministry’s revenue department was not in favour of offering any tax concessions to companies setting up units in these development hubs, fearing it could kick-start a debate about extending the incentive for companies outside SEZs or new development hubs.

“The commerce department has decided to remove the concessional corporate tax rate provision. Moreover, some provisions of the Bill are being reworked since the revenue department (in written comments) said it is against some of the other fiscal framework/incentives being offered under the Bill,” said one of the persons quoted earlier.

Apart from a concessional corporate tax, the revenue department had also objected to the clauses on allowing greater integration of these hubs with the rest of the country, as well as deferment of Customs duty on raw material.

The commerce department is now working on the changes and will present them to the finance ministry. Thereafter, the Union Cabinet’s approval will be sought before tabling the Bill in the Budget session of Parliament, the person said.

According to the finance ministry’s internal calculation, if the Bill is passed in its current form, units in the new SEZs or development hubs will have an 8-9 per cent tax advantage, compared to units set up in the rest of the country, also known as the domestic tariff area (DTA). The commerce department officials believe that the calculation is ‘theoretical’ and may not capture the reality.

With the revenue department’s objection to the Bill being overly flexible in integrating the development hubs with the domestic market, without any major export obligation, the commerce department is now working on fresh provisions that may encourage companies to give greater thrust to exports rather than selling their products in the domestic market.

“In the absence of the (controversial) net foreign exchange (NFE) earnings as a criterion for evaluation of SEZ units, there will be no push for such units to focus on export. One of the key ideas for setting up SEZs was to enhance exports,” said the person.

The situation is tricky since the NFE clause was being dropped as the government wanted to make the new law for SEZs compliant with World Trade Organization norms.

According to the Bill, units operating in these hubs will be allowed to make sales in the domestic market with duties to be paid only on imported raw materials and inputs instead of final products. Customs duty on capital goods, such as machinery, computer equipment, and raw material, will also be deferred.

This could result in DTA units wanting these benefits and relocating to these hubs due to the working capital advantage they would get from the deferment of taxes under the DESH Bill. In that case, goods could then be sold primarily to the domestic market rather than being exported, fears the revenue department.

TRYING TO REACH MIDDLE GROUND

• Commerce department had sought inter-ministerial comments on DESH Bill in July
• Finance ministry had raised objections regarding the Bill’s fiscal framework
• Commerce department working on reaching middle ground with finance ministry on some DESH Bill provisions
• Concessional corporate tax provision may be removed from DESH Bill
• Other changes may include encouraging units to give greater push to export rather than selling their products in the domestic market
• Centre aims to table DESH Bill in the Budget session

Cause for concern

• Revenue department feared tax sops for setting up units in SEZs could kick-start a debate about extending the incentive for companies outside new development hubs
• According to the finance ministry’s internal calculation, if the Bill was passed in its current form, units in the new SEZs or development hubs would have an 8-9 per cent tax advantage, compared to units set up in the rest of the country
• Revenue department had also objected to the clauses on allowing greater integration of these hubs with the rest of the country, as well as deferment of Customs duty on raw material