Finance ministry raises concerns on proposed tax sops under DESH Bill

Says such concessions may stir debate of extending incentive for all firms

The finance ministry’s revenue department has raised concerns over the proposed revamped law for Special Economic Zones (SEZs) that offers some direct tax concessions to companies setting up units in the hubs, people aware of the matter said.

The commerce department’s new draft Development (Enterprise and Services) Hub (DESH) Bill, 2022, proposes to freeze the concessional corporate tax rate of 15 per cent for all greenfield units in these hubs under the section 115BAB of the Income Tax Act. The concessional tax rate will also be available to brownfield units, subject to certain conditions.

“The ministry is not in favour of offering any tax concessions to companies setting up units in these development hubs over a fear of revenue loss,” one of the persons quoted above said. Offering such concessions just for development hubs may lead to a situation where other departments may also seek such breathers for schemes that they may devise and can also stir a debate of extending the incentive for all companies.

Emailed query sent to the finance ministry remained unanswered. 

The concessional tax rate proposed by the commerce ministry is not a new incentive that is being devised by the Centre. The idea solely is to give a leg-up to domestic manufacturing.

Announced by Finance Minister Nirmala Sitharaman three years ago, any new domestic company making fresh investment in manufacturing will have an option to pay a tax of 15 per cent under section 115BAB of the Income Tax.

Act. However, they will not be then allowed to avail of any other incentives. Such companies will have to start production on or before March 2024. The commerce department wants this to be extended for some more years— till 2032 — under the DESH Bill.

Lack of consensus between the commerce and revenue departments on these key tax provisions may delay the passing of the crucial DESH Bill by both Houses of Parliament. The announcement of a new law was made by Sitharaman in the Union Budget in February.

With the monsoon session of Parliament getting over in less than a week, government officials now expect the Bill to be passed in the winter session. The Bill is yet to get a nod from the Union Cabinet.

“There have been several rounds of discussions between the commerce and finance ministries and there has been no consensus yet. The finance ministry was supposed to submit its written comments to the commerce department more than a week ago. A final call will have to be taken by the Cabinet, as the new Bill is a key focus area for the government,” another official said.

The new draft DESH Bill seeks to set up ‘development hubs’ for promoting economic activity, generating employment, integrating with global supply and value chains and maintaining manufacturing and export competitiveness, developing infrastructure facilities, promoting investments, including in research and development (R&D). Such hubs will also include existing SEZs. The new bill, when passed in Parliament, will replace the existing law governing SEZs.

Hitting a logjam

• Draft DESH Bill proposes freezing concessional corporate tax rate of 15% for all greenfield, brownfield units under I-T Act
• Finance ministry not in favour of offering any tax concessions fearing revenue loss
• Lack of consensus on key tax provisions of the Bill may delay its passing in this monsoon session of Parliament
• Union Cabinet will take the final call