Wednesday, July 12, 2006

IT SEZ is a real estate charade

Says S Sriniwasan in the Economic Times. He has dissected the IT SEZ charade beautifully....

In simple terms, the SEZ policy essentially exempts the developer of the SEZ from taxes. It also exempts the occupier of the property from taxes on exports. Both the developer and the occupier enjoy the tax break for over 15 years starting from 100% exemption and progressively going down in blocks of five years.

To elaborate, the developer has tax exempt-profits on development of the IT park and thereafter the rental income he receives from the occupier for 15 Years! The large slurp that you hear is the chorus from real estate developers and real estate investors!

So, every Ramu wants to set up an SEZ even on his 600 sq ft plot. (I am not sure if the land size is a factor, it was) I exaggerate, but you get the picture. Every real estate developer wants a share of this pie. Then he goes to say how the SEZ policy is biased towards the big companies.

Since large IT companies like Infosys get the SEZ status for their campus they will not be affected. Commercial interest will ensure that other SEZ developers (read real estate players) will prefer the big IT companies and MNCs as tenants.

It’s the smaller companies who will pay the price since they will be denied the present STP policy benefits and would also be on the last priority of SEZ developers to rent out space.

Theres more juice. Nasscom is trying to retain the STPI scheme so that smaller firms get to benefit.

Where is the real estate charade in this? Well, development profits of residential and other commercial space (retail, etc) are also exempt from tax in an SEZ! So in a 50-acre SEZ the “non-processing area” which is 60% of the space for other uses is also tax free!

So, even if my SEZ area is 600 sq ft, I can use 60% of the area tax free. And here salaried individuals are suffering under surcharges, cess, tough to fill firms and investigations and the like while poor real estate developers and poor IT companies and captives get to pay zero tax. I think I must float my own firm. Neelakantan Inc.

The government is now thinking of limiting the number of SEZ to about 150 odd, i.e., those who stood first in the queue! This will further skew the supply, result in profiteering by the few who get the SEZ approval and adversely affect a large number of IT companies.

Licence raj, welcome back.

My twenty five paise on the SEZ is that, SEZs need to be used for attracting fresh industry and investment and infrastructure. The policy has got it all wrong, if it is used by people to shift out of their current locations and move into new SEZ locations. This is like the erstwhile sales tax arbitrage on trucks registered in the North East. Suddenly there were a lot of Nagaland registered trucks in Mumbai - it was worth driving down all that distance and still save money. Similarly there were a lot of Dadra, Nagar Haveli registered cars in Mumbai until that loophole was plugged.

SEZ's should be used to augment infrastructure, create manufacturing or a technology capability. It is no use if we have coaching classes set up SEZ's.

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