Sandeep Banerjee
Last week, while announcing the annual supplement to the Foreign Trade Policy, India’s commerce minister, Kamal Nath, declared that Indian exporters would be exempt from paying service tax. This declaration will undoubtedly make Indian goods and services a little more competitive in the global arena. It would also help push the country’s exports a notch closer to the government’s articulated target — 1.5 percent of global merchandise trade by 2009. But the significance of the announcement lay elsewhere; it once again underlined the government’s reliance on tax incentives to promote economic activity in the country.
Tax breaks have been around in India for quite a while. Nowadays, however, politicians and policymakers of all hues are debating the pros and cons of tax incentives given to industry. This, ever since Special Economic Zones (SEZs) became operational in the country. And there’s good reason for such debate: the SEZ Act of 2005 conceives of these industrial enclaves as specifically delineated duty-free zones, deemed to be foreign territories for trade operations as well as duties and tariffs.
So, these enclaves get a slew of direct tax breaks that are staggered over a fifteen-year period. SEZ units pay no tax on export profits for the first five years; fifty percent of their export profits are eligible for tax exemption for another five years and there are no taxes for a further five years on fifty percent of their reinvested profits. There are benefits on the indirect tax front too — SEZ units can procure, duty-free, all their requirements of capital goods, raw materials, consumables, spares, packing materials and office equipment from domestic sources. Of course, these exemptions are applicable only if the manufactured product is exported; all relevant duties — customs and excise — are levied if the product is sold in the domestic tariff area.
The direct tax breaks granted to the SEZs are now being criticised by various non-governmental organisations (NGOs). They say the central government is indulging in doublespeak — invoking the mantra of fiscal prudence to prune the food subsidy bill while simultaneously doling out tax incentives to industry. They also contend that while the government is ready to lose tax revenue for the SEZs, it is not serious about addressing the questions of displacement and loss of livelihood that are almost always necessary corollaries to industrialisation.
In political circles, similar concerns are being raised by India’s Left parties whose support is crucial for the Congress-led United Progressive Alliance (UPA) to hold on to power in New Delhi. In its many missives to the commerce ministry, the Left has repeatedly asked for a paring — if not a complete scrapping — of direct tax incentives given to units in the SEZs. They also object to the government extending tax benefits to developers who build the physical infrastructure in these enclaves. Their contention: instead of foregoing revenue, the government should collect the taxes and spend them on social-sector schemes for rural India. Interestingly, in their quest for an equitable taxation order in India, the Left has the most unlikely of allies — the country’s finance ministry.
India’s finance minister, P Chidambaram — a man who loves to wear his reformist credentials on his sleeve – and the Left rarely see eye to eye. But the SEZ issue is perhaps that exception which proves the rule. Almost echoing the Left’s stand against tax rebates to SEZs, the finance ministry has repeatedly voiced its concern about loss of tax revenue. In fact, the ministry projects revenue loss of Rs1.76 billion in direct and indirect taxes between 2005 and 2010. The Left has often cited these figures to Commerce Minister Kamal Nath and his ministry officials to bolster their argument.
But the commerce ministry has its own counter-logic. It contends that the finance ministry’s revenue loss figures are notional; the exchequer would eventually earn far more from direct and indirect taxes owing to increased economic activity than the estimated tax loss. As regards concession to developers, the commerce ministry argues such incentives already exist for the infrastructure sector. They also maintain that without sops, no developer would come forward to invest amounts in the range of Rs 20 billion to set up SEZs.
Despite the Left’s opposition and the finance ministry’s tentativeness, the commerce ministry’s line has prevailed in the cabinet. The government sees SEZs as a fast-track to industrialisation. They are crucial to India’s strategy of export-led development that seeks to accelerate economic growth and generate jobs. Within this context, tax incentives are central to the success of SEZs in the country.
But there’s more to tax concessions than meets the eye. They can be extremely effective instruments for promoting equity if used judiciously and with ingenuity. As India industrialises further, the government of the day will be required to tap into this aspect of tax sops to evenly spread the dividends of economic reforms.
Currently, India has opted to industrialise in clusters. These clusters are, more often than not, located near large urban agglomerations. While industries situated near urban clusters have certain locational advantages, the government must also encourage corporates to set up factories and SEZs in less developed areas. Since companies are motivated by little else besides making profit, tax breaks could be an effective way of promoting corporate social responsibility as well as spreading the good cheer of industrialisation. This would ensure that no part of the country falls completely out of the development map in the days ahead.
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This is the second part of a three-part series published in Daily Times, Lahore on April 27, 2007. The original article can be found here.
Showing posts with label Commerce. Show all posts
Showing posts with label Commerce. Show all posts
Apr 27, 2007
Nov 16, 2006
GIVE TRADE A CHANCE
Sandeep Banerjee
A couple of years ago, the Iran-Pakistan-India (IPI) pipeline was the policy issue in India and provided a subject for endless editorials as well as relentless debate in political and diplomatic circles. Pakistan had cleared the proposal but the United States had made clear it was not too keen on this tripartite arrangement. So when Indian journalists met the visiting Pakistani commerce minister in New Delhi, they were curious to know if the US wanted Pakistan to opt out. Pat came the reply from Humayun Akhtar Khan: “Jab mian bibi razi, to kya karey ga kazi.”
This was an unusual articulation of South Asian unity. It didn’t mean India-Pakistan relations had reached a state of conjugal ecstasy but simply that the pipeline made good business sense for both Pakistan and India and they were responding to a sound business proposal. But even though they seem to agree more when they use their economic faculties, India and Pakistan seldom talk business. The political crowding out the economic, Indo-Pak talks almost always end in political rhetoric. And political rhetoric — used to negotiating the semantics of ‘boundary’ and ‘self-determination’ — is incapable of addressing issues like duty structures or non-tariff barriers. The net result is dismal trade figures: Indo-Pak direct trade stood at a little over US$600 million in 2004–05. Compare that to Sino-Indian trade of over US$17 billion in 2005–06.
But to be fair, official India-Pakistan trade data doesn’t paint the complete picture. There is a huge volume of illicit trade as well as trade in goods which originate in either country but are imported through a third country. The most conservative of estimates puts unofficial trade at three to four times that of trade through formal channels. Supplementing official figures with this data would show that despite unfavourable conditions, there exists substantial (though unofficial) trade between India and Pakistan. Indian and Pakistani establishments acknowledge this fact; they now need to code this reality into their actions.
In the past, opportunities to uncouple economics from politics haven’t succeeded in negotiating the rough terrain of India-Pakistan relations. Take, for instance, the South Asian Free Trade Agreement (SAFTA) that proposes a free trade area in South Asia. As Pakistan notified the agreement, it issued a positive list for trade with India, citing the old faithful — security concerns. This meant that the goods that could be traded were spelt out. The international norm is to trade on the basis of a negative list (trade is allowed in all goods except those listed). In response, the Indian Commerce Minister Kamal Nath has written to the SAARC (South Asian Association for Regional Cooperation) secretariat claiming Pakistan is sabotaging the SAFTA, a claim that is not without merit.
Some say it is difficult to love thy neighbour, especially if you have fought three wars with each other and have a territorial dispute that goes back six decades. But then, India-Pakistan relations would do well to follow the Sino-Indian paradigm. Like Pakistan, China too has a boundary dispute with India; China and India claim portions of each other’s territories as their own. They also fought a war in 1962.
But they still manage to trade. And even speak of Free Trade Agreements.
In fact, Indian commerce ministry projections show China could be India’s largest trading partner (surpassing USA, and a figure of US$20 billion) by 2008. The contentious issues — of boundary and territory — haven’t been forgotten. It’s just that they don’t impinge on business.
Today, as we speak of globalisation, the global economy and the global village, we say capital has no nationality or race. This world-view is constantly undermining the older ethic of nation and of political boundaries. That is the nature of the world we live in and political establishments the world over are only gradually grasping this new radicalism. China and India — by de-linking politics from economics — perhaps show they have not just imbibed the message of globalisation, but have also internalised it.
Chinese and Indian embrace of globalisation isn’t a matter of simple ideological predilection. These countries are home to a huge chunk of the world’s poor. The performance of these two economies — dubbed the Asian powerhouses — are gradually lifting their populations out of poverty and giving them a better life. This is not just a function of welfare. There is a deeper political import. Economic prosperity essentially leads to durable regimes and consequently, stable countries. And in that, there is perhaps a message for Pakistan.
With the dialogue process once again chugging, there is need to reassess the old salients. Progress on Kashmir need not be linked to movement on commerce; cross-border terrorism cannot be the reason for a lull in cross-border trade. Pakistan needs to bring enlightened moderation to the table. India, with the balance of trade hopelessly in its favour, simply needs to be more gracious about trade concessions.
Pakistan and India are home to over 1.4 billion people. The governments of these countries owe it to their citizens to help them lead better lives. And there really is no substitute for economic activity to generate more jobs and fight poverty. India and Pakistan have been trying, for long, to give peace a chance. It is time to change tack and give trade a chance. The rest will follow.
_____
This article was published in Daily Times, Lahore on November 16, 2006. The original article can be found here.
A couple of years ago, the Iran-Pakistan-India (IPI) pipeline was the policy issue in India and provided a subject for endless editorials as well as relentless debate in political and diplomatic circles. Pakistan had cleared the proposal but the United States had made clear it was not too keen on this tripartite arrangement. So when Indian journalists met the visiting Pakistani commerce minister in New Delhi, they were curious to know if the US wanted Pakistan to opt out. Pat came the reply from Humayun Akhtar Khan: “Jab mian bibi razi, to kya karey ga kazi.”
This was an unusual articulation of South Asian unity. It didn’t mean India-Pakistan relations had reached a state of conjugal ecstasy but simply that the pipeline made good business sense for both Pakistan and India and they were responding to a sound business proposal. But even though they seem to agree more when they use their economic faculties, India and Pakistan seldom talk business. The political crowding out the economic, Indo-Pak talks almost always end in political rhetoric. And political rhetoric — used to negotiating the semantics of ‘boundary’ and ‘self-determination’ — is incapable of addressing issues like duty structures or non-tariff barriers. The net result is dismal trade figures: Indo-Pak direct trade stood at a little over US$600 million in 2004–05. Compare that to Sino-Indian trade of over US$17 billion in 2005–06.
But to be fair, official India-Pakistan trade data doesn’t paint the complete picture. There is a huge volume of illicit trade as well as trade in goods which originate in either country but are imported through a third country. The most conservative of estimates puts unofficial trade at three to four times that of trade through formal channels. Supplementing official figures with this data would show that despite unfavourable conditions, there exists substantial (though unofficial) trade between India and Pakistan. Indian and Pakistani establishments acknowledge this fact; they now need to code this reality into their actions.
In the past, opportunities to uncouple economics from politics haven’t succeeded in negotiating the rough terrain of India-Pakistan relations. Take, for instance, the South Asian Free Trade Agreement (SAFTA) that proposes a free trade area in South Asia. As Pakistan notified the agreement, it issued a positive list for trade with India, citing the old faithful — security concerns. This meant that the goods that could be traded were spelt out. The international norm is to trade on the basis of a negative list (trade is allowed in all goods except those listed). In response, the Indian Commerce Minister Kamal Nath has written to the SAARC (South Asian Association for Regional Cooperation) secretariat claiming Pakistan is sabotaging the SAFTA, a claim that is not without merit.
Some say it is difficult to love thy neighbour, especially if you have fought three wars with each other and have a territorial dispute that goes back six decades. But then, India-Pakistan relations would do well to follow the Sino-Indian paradigm. Like Pakistan, China too has a boundary dispute with India; China and India claim portions of each other’s territories as their own. They also fought a war in 1962.
But they still manage to trade. And even speak of Free Trade Agreements.
In fact, Indian commerce ministry projections show China could be India’s largest trading partner (surpassing USA, and a figure of US$20 billion) by 2008. The contentious issues — of boundary and territory — haven’t been forgotten. It’s just that they don’t impinge on business.
Today, as we speak of globalisation, the global economy and the global village, we say capital has no nationality or race. This world-view is constantly undermining the older ethic of nation and of political boundaries. That is the nature of the world we live in and political establishments the world over are only gradually grasping this new radicalism. China and India — by de-linking politics from economics — perhaps show they have not just imbibed the message of globalisation, but have also internalised it.
Chinese and Indian embrace of globalisation isn’t a matter of simple ideological predilection. These countries are home to a huge chunk of the world’s poor. The performance of these two economies — dubbed the Asian powerhouses — are gradually lifting their populations out of poverty and giving them a better life. This is not just a function of welfare. There is a deeper political import. Economic prosperity essentially leads to durable regimes and consequently, stable countries. And in that, there is perhaps a message for Pakistan.
With the dialogue process once again chugging, there is need to reassess the old salients. Progress on Kashmir need not be linked to movement on commerce; cross-border terrorism cannot be the reason for a lull in cross-border trade. Pakistan needs to bring enlightened moderation to the table. India, with the balance of trade hopelessly in its favour, simply needs to be more gracious about trade concessions.
Pakistan and India are home to over 1.4 billion people. The governments of these countries owe it to their citizens to help them lead better lives. And there really is no substitute for economic activity to generate more jobs and fight poverty. India and Pakistan have been trying, for long, to give peace a chance. It is time to change tack and give trade a chance. The rest will follow.
_____
This article was published in Daily Times, Lahore on November 16, 2006. The original article can be found here.
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