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Finance ministry rejects 15% benign corporate tax in DESH Bill

New Delhi, October 5, 2022

Although the commerce ministry is making efforts to finalise the DESH Bill and introduce it in the parliament during the winter session, the finance ministry's stance may delay it

The Ministry of Finance has continued to oppose the key provisions of the Development Of Enterprise And Services Hub (DESH) bill which will be replacing the Special Economic Zones (SEZ) Act, reported the Financial Express. This includes the benign corporate tax rate of 15 per cent until 2032 for units in these planned hubs.

Official sources claim that the ministry has, in its formal comments on the Bill, emphasised its reluctance to integrate the hubs with the domestic market in contrast to SEZs, which have explicit export obligations.

Although the commerce ministry is making every effort to finish the draft and introduce the DESH Bill in the Parliament during the winter session, which is typically held in November or December, the finance ministry's position may delay it.

In the past, the finance ministry has voiced similar reservations about providing tax benefits to SEZs during internal discussions, in line with its efforts to stop fiscal eroding and its goal of ushering in an exemption-free and straightforward tax system. Additionally, it has opposed the idea of allowing SEZ businesses to sell items on the domestic market for no or little tax, as opposed to the customs duty that is usually charged.

However, given that it had already reduced such a tax to 15 per cent for new manufacturing units that start operations by March 2024, it was anticipated that its opposition, particularly on the issue of freezing the concessional tax for greenfield and some brownfield DESH units in the manufacturing and services sectors for a decade, would soften.

To encourage investors to establish businesses in these specifically designated zones, the commerce ministry added these measures to the draft Bill. SEZs have been rapidly losing their attraction as a result of the removal of numerous incentives.

However, the commerce ministry will probably speak with the finance ministry and others who have questions about the draft Bill or concerns about certain elements in a week or two to try to find a solution.

The government established a sunset date for SEZ units to begin operations (June 30, 2020) in order to be eligible for a 15-year phased income-tax holiday, which made the need for the new Bill to woo investors necessary.

Furthermore, India lost a case at the World Trade Organization filed by the US in which it alleged that New Delhi was providing illegal export subsidies through these SEZs.

The basic criteria for a SEZ unit to have positive net foreign exchange (NFE) for five years has thus been suggested to be eliminated by the draft Bill; instead, the unit's success will be assessed on the basis of "net positive growth" (NPG) under the proposed Bill. A unit's NPG will be determined by a number of factors, including economic activity and employment creation.

According to a source, the finance ministry's recent reservations about the units' lack of an export focus arise from a worry that it would lead to demands for similar incentives for businesses outside of these zones.

[The Business Standard]

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