Issue 67 Vol III, July 15, 2008

C O M M E N T

Comptroller and Auditor General indicts UPA Government
Special economic zones help the rich corner enormous land and avoid taxes and make profits

UNITED Progressive Alliance government’s much touted special economic zone policy is backfiring. The Left is paying its political price in West Bengal, but Congress too is losing ground. Worst there is not much economic gain coming up except that some big sharks and industrialists are cornering land at throw prices. This precious land is being acquired from the farmers at low rates all in the name of public good; industrialization.

Now India’s Comptroller and Auditor General [CAG] reported that a key objective of the SEZ policy, -- augmenting real exports -- has not only been defeated, but the policy had further resulted in revenue losses of hundreds of crores of rupees.

A review of much touted Special Economic Zone policy by the  Comptroller and Auditor General audit report confirms doubts expressed by economists that it will lead to undue favours to corporate at the cost of substantial erosion in revenue earning for State.

The CAG brought 370 SEZ units under its scanner with a limited objective to verify if they had complied with existing Customs Act, Rules and notifications. The review found systemic as well as compliance weaknesses that caused lost revenues to the tune of Rs.246.72 crores. Absence of enabling provisions has resulted in Rs.1724.67 crores of revenues irrecoverable.

One of the main objectives of setting up SEZ was fast-track augmentation of exports. These are a specifically delineated duty free enclave and are deemed foreign territory for the purpose of trade operations, duties and tariffs. Accordingly, goods and services from domestic tariff area (DTA) to SEZ are to be treated as exports and goods coming from SEZ into DTA are to be treated as imports.

The incentives and facilities offered to the SEZs include duty free import/domestic procurement of goods for development, operation and maintenance. At the same time, the SEZ law allows import/export operations on self-certification basis. The units in the zones are required to be a Net Foreign Exchange (NFE) earner, calculated cumulatively for a period of five years from commencement of production.

Additionally, as per the EXIM Policy (2002-'07) and the Foreign Trade Policy (2004-'09) an SEZ unit was required to achieve a positive NFE. For determining the same, Domestic Tariff Area (DTA) sales/supplies effected to other SEZ units, 100 percent Export Oriented Units “deemed export - were also to be considered.

It was observed  that 22 SEZ units had been achieving the prescribed "positive" NFE mainly though domestic sales and this defeats one of the sub-objectives of the scheme, which was to augment real exports. While an overall export of Rs.7, 149.23 crores was made by these 22 units, the actual export content was only Rs.1, 999.27 crores (28 per cent) and the remaining Rs.5, 149.96 crores (72 per cent) related to DTA earnings. The range of the domestic earnings as a percentage of total export earning in these units was 59 to 100. Customs duty of Rs. 1,043.29 crores was foregone on import of goods by these units.

The CAG found that duty was waived twice - first on the inputs used in manufacturing products in the SEZs, and again when the finished products from the SEZs were allowed into DTA at nil rate of duty. The duty foregone on the inputs utilized for manufacture of the finished products could not be recovered, in the absence of the provisions of paying back.

CAG's audit scrutiny explains how this system turned out to be a huge favour for Nokia the well known mobile manufacturer, while putting similar units in the DTA or even in other EOUs at distinctly disadvantageous position. The audit report clearly states, "Audit scrutiny of records of Nokia India Pvt. Ltd., a unit in Madras SEZ, revealed that the unit cleared mobile phones with a value of Rs.4,855.69 crores in 2005-06 and 2006-07 in DTA at 'nil' rate of duty. Duty of Rs.681.38 crores (Rs.86.76 crores in 2005-06 and Rs.594.62 crores in 2006-07) foregone on the inputs used in the manufacture of these mobile phones could not be recovered in the absence of enabling provisions."

Negative foreign exchange earning

CAG's scrutiny also revealed a failure in recovering duty foregone from units who had not achieved "positive" NFE. The CAG report states, "Scrutiny of records of 24 units of Falta, Cochin, Madras, Kandla and Vishakhapatnam SEZs revealed that these units failed to achieve the required positive NFE. Accordingly, a duty of Rs.106.71 crores (determined in proportion of the shortfall in achieving positive NFE) with interest of Rs.46.17 crores was recoverable from these units."

Forty one units in Falta, Chennai, Vishakhapattnam, SEEPZ, Kandla and Surat SEZs had violated conditions of their Letters of Permission (LoP). The violations included (i) carrying out trading activity though the LOP was for manufacture, (ii) manufacturing in a premises not mentioned in the LOP, (iii) excess trading than what was permitted in the LOP, (iv) operating without a valid LOP, (v) clearing all goods in DTA despite the facts that these were required to be exported to the general currency area (GCA) countries, and more. They attracted penal action as per provisions in Foreign Trade (Duties and Regulations) Act 1992 and to pay duty totaling Rs.74.90 crores.

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Karzai opposes U.S. use of Afghan soil against Iran

Afghanistan, President Hamid Karzai is the latest to emerge as an opponent to American - Israeli attack on Iran. Described by his opponents as an American puppet and mayor of Kabul, Mr. Karzai at times has shown statesmanship. In an interview to Radio Liberty on July 14, 2008, he clearly said that he opposes U.S. use of its territory for launching a possible attack against neighbouring Iran. Iran has threatened to target Israel and U.S. interests in the region in the event of an attack against the Islamic Republic which is locked in a dispute with the West over its nuclear programme.

President Karzai said his government, which came to power after U.S.-led and Afghan forces overthrew the Taliban in 2001, had always tried to "keep the balance between the powers. We are attentive to the dangers," Karzai told Radio Liberty when asked about the possible repercussions of a conflict between Iran and the United States… Afghanistan should not become the battleground of differences of any country. It does not want its soil to be used against any country and Afghanistan wants to be a friend of Iran as a neighbour who shares the same language and religion."

Karzai said his government had facilitated talks between Tehran and Washington, and had also served as a messenger between both in the past.

Washington, which has some 32,000 troops in Afghanistan and is the biggest aid donor to Kabul, has been constantly threatening Iran with an armed attack the one it launched against Iraq notwithstanding its serious military and humanitarian consequences . Over seven lakh people, majority of them women and children have perished in that war and whole civilization is under threat of extinction.

Pakistan that has opposed any attack is not that strident. It should be otherwise clear to the present leadership in these two countries that Muslim sentiments would be strong like a wave to sweep them aside. This move would strengthen the political extremists all over, particularly in these Muslim dominated neighbouring countries.

Does anyone remember Indian government leaders speaking for the poor Iraqis one, however, does remember how it has followed US dictates by delaying signing the gas pipe line agreement with Iran or how it voted against Iran and in line with the US at the International Atomic Energy Agency meeting to condemn and isolate Iran.

Yet India that normally shies away from criticizing American hegemonic policies has now expressed “grave concern over reports suggesting the imminent use of military force against Iran. It said a military strike on the Islamic nation would have ‘disastrous consequences’ for the entire region, affecting the lives and livelihood of five million Indians in the Gulf and the world economy.

An external affairs ministry spokesman on July 14 said in response to a question, “India is gravely concerned at these statements threatening the use of military force against Iran. India is against any such military attack, which constitutes unacceptable international behaviour.” The spokesman said there was no military solution to the issues that were being discussed between Iran and the international community. “India continues to support negotiations and diplomacy, rather than the threat or use of force... India calls upon all concerned Governments to exercise restraint and choose the peaceful path of persuasion and negotiations.”

Interestingly neither the minister for foreign affairs nor garrulous senior officers have spoken. It was left to a routine reaction to a question.  Grave dangers which even American military leadership has admitted, are yet to dawn on Indian political class.

In another significant comment, Karzai said foreign troops had ignored his repeated calls to coordinate operations with Afghan forces to avoid civilian casualties. Nearly 700 Afghan civilians have been killed in the first six months of 2008, the United Nations says, 255 of them by Afghan and international forces. "This in reality is a disaster ... many innocent people have been killed in the bombardment. For five years, routinely, I have been trying to prevent foreign forces from possibly harming our nation. Unfortunately, this effort has not had outcome I wanted, and as the nation expects," Karzai said.

He said Afghanistan favoured good ties with its other large neighbour, Pakistan, but said there were "elements in Pakistan's intelligence and Pakistan's army" who did not want a stable Afghanistan. This charge India too has repeated laid at the doors of Pakistan.

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