After nearly two decades of being in force, the government is set to revamp the Special Economic Zone Act, of 2005 and replace it with the proposed draft Development of Enterprise and Service hubs. The bill is set to be tabled during the ongoing monsoon session of the parliament to overhaul the SEZ Act of 2005. Such a draft is prepared on the recommendations of “Baba Kalyani Committee” which was constituted in 2018 to evaluate the SEZ policy and make it WTO compatible.
Background
Earlier in the current year’s budget speech, finance minister Shrimati Nirmala Sitharaman announced to replace of the current SEZ act with new legislation. According to experts, the introduction of new development hubs and the reform of current SEZ regulations will greatly strengthen India’s economic competitiveness in both domestic and international markets, resulting in higher investments and employment.
Why revamp SEZ Rules?
Failure of SEZ
A number of firms have also abandoned these zones allegedly because of inconsistent policy. These company units were persuaded to relocate when tax breaks were removed (imposition of MAT), the sunset clause was activated, and numerous ASEAN (Association of Southeast Asian Nations) countries loosened their regulatory rules. Due to sector-specific constraints, the vast amounts of land within the SEZs are also under-utilized and lying idle.
In the 262 operational SEZs in the nation, the commerce and industry ministry has started the process to make it easier to de-notify unoccupied premises larger than 100 million square feet and worth 30,000 crores so that they can be utilized for industrial or other purposes
WTO Rules
Indian income tax laws allow SEZ to enjoy tax holidays for up to 15 years in a step-wise manner. It is allowed a 100% tax holiday for 1st 5 years of export income, a 50% tax holiday on the next five years of export income, and a further 50% tax holiday for the next five years based on conditions of creating reserves for capital expenditures.
Geneva-based WTO’s dispute settlement panel found such tax holiday policy along with other export-related schemes under foreign trade policy 2015-2020 (extended to September 2022) are inconsistent with WTO rules. The dispute settlement panel found they were in the form of prohibited subsidies under the “Agreement on Subsidies and Countervailing Measures” since it directly linked taxes incentives with the export. Such policies are said to be non-competitive as directly subsidizing the exports can distort the market prices.
Target of US $ 1 trillion economy
Accelerated investments are necessary if India is to reach its goal of having a USD 5 trillion economy by FY 2026, with contributions of USD 3 trillion and over USD 1 trillion from the services and industrial sectors, respectively. India’s industrial sector has lagged behind, demanding immediate actions, even while the country’s service sector is still expanding significantly.
Only 5,576 operational units and less than 20% of the nation’s exports are accounted for by the 262 active SEZs established during this time.
DESH could be a game changer for India and help the country achieve its objective of becoming a USD 5 trillion economy by FY 2026 with coordinated action from the Indian government, state governments, industry groups, investors, and all other stakeholders.
What’s new in the DESH?
The new goes beyond promoting exports, and has a much wider objective of boosting the manufacturing power and creating employment opportunities through “development hubs”. SEZs will be revamped and renamed as “Development Hubs”. Several laws that presently impose restrictions on them will be lifted. These centers will promote both domestic and export-oriented investment.
- Creation of a single-window clearance process for the timely approval of these establishments and the operation of hubs. The clearance process is to be hosted on an online portal which is set to be developed within 6 months from the commencement of the Act.
- The draft suggests that any trade disputes be resolved through mediation. Further, where any commercial dispute could not be settled through mediation or has been settled in part by mediation, parties have to go through an arbitration procedure.
- Replace the “net foreign exchange earning” with “net positive growth” which would be based on various parameters such as employment and economic activity.
“The move from export-focused centers to comprehensive economic hubs would entail several concessions and ease of restrictions being offered to attract investors who would be able to sell in the domestic markets and do contract manufacture for businesses outside of these hubs”
Draft Note issued by Government
Proposed formation of Development Hubs
DESH is said to have retained the concept of bounded zones from the legacy legislature, i.e., treating boundaries like that of foreign territory for customs purposes.
- Enterprise hubs: It is proposed that such hubs will have a land-based area requirement to permit both manufacturing and services activities. Additionally, it is proposed to give states more flexibility in how they integrate all currently operating industrial parks with SEZs that already exist across the nation.
- Service hubs: It is proposed to have built-up area-based requirements to be allowed only service activity.
✓ Planned pre-cleared zones for specific industries to support plug and play.
✓ Units in pre-cleared zones will be deemed to have received central and state government clearance.
✓ Floor-wise de-notification for IT and ITeS (IT enabled services) intended to facilitate exit. This would allow the built-up area in the service hub not to be contiguous. - Infrastructural Changes: It is proposed to convert existing ports, airports, inland container depots, land stations, etc. into development hubs with distinct boundaries between processing and non-processing sectors.
Proposed Tax structure
- The revamp of SEZs will come with a financial package that may include a 15 percent direct tax freeze for units and hubs until 2032 in the case of new and existing construction projects.
- The strategy calls for deferment of integrated GST on imported raw materials and the basic custom tax.
- DESH also allows for sales in the domestic market with duties to be paid only on imported inputs and raw materials, which in the case of SEZ have to be paid on the final product. Further, it is proposed to levy an equalization levy to bring taxes in part with those provided to units outside in case of sale in domestic markets.
Greater Autonomy of state government and bodies
State boards would be established to monitor the operation of the hubs. They would have the authority to authorize imports or purchases of goods and to keep an eye on the trading, storing, and utilization of commodities and services within the growth hub. In the legacy SEZ regime, most decisions were made by the Central departments.
Government’s remarks on revamped SEZ rules
We are in the process of drafting a SEZ 2.0… We will recast the SEZ Act in the next couple of months…This new Act will lead to the revival of activities in SEZ areas. They will be manufacturing for both international and domestic markets
– Commerce secretary BVR Subrahmanyam
The new SEZ Act will be WTO-compliant and will have a single window (clearance system). High-class infrastructure will be there and more benefits will be there
– Commerce secretary BVR Subrahmanyam
There could be a single-window system for both central- and state-level clearances, and for that, we may even think of putting states on the approval bodies either at state or regional level
– Commerce secretary BVR Subrahmanyam
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