Need to make SEZ laws error-free

Trinamool Congress leader and new Railway Minister Mamata Banerjee has called for a review of the Special Economic Zones (SEZ) policy. Whoever takes over as the Union commerce minister will have to do it in any case, as it is nearly four years since the SEZ Act, 2005, came into effect and over three years since the SEZ Rules, 2006, were put in place. A performance assessment can do no harm but certainly the SEZ developers who have already acquired land and sunk their money in developing infrastructure and the units, which have obtained approvals and started their operations, should not be left wondering for long as to whether any policy changes will affect them. They need to be assured quickly that any policy changes will affect only the intending SEZ developers and SEZ units.

Apparently, Banerjee is mainly concerned about diversion of fertile farmland for creating SEZs. She, of course, knows that the issue of diversion of farmland for industrial use is not SEZ-specific. Any industrial unit will require land. A policy is already in place regarding the role of governments in such matters and rehabilitation of displaced persons. Any review of the SEZ policy must necessarily take a holistic view of all the aspects related to industrial development and try to strike a better balance between the need to take our manufacturing capabilities to new heights and optimal use of the available resources, always keeping in view the interests of the affected persons.

Another point that would merit review is the legal dispensation. The SEZ Act, 2005, and SEZ Rules, 2007, have been relatively stable. Some glitches, however, need to be sorted. For example, the Act does not provide for denotification of SEZs. The Rules provide for sale in the Domestic Tariff Area (DTA), but not for stock transfer to DTA. The Rules say that if no export incentives are to be claimed, goods can be sent from the DTA to SEZ under cover of only an invoice but exporters need to submit bill of export as proof of exports.

Besides such hiccups in the SEZ Act and Rules, even other laws are not fully aligned with the concept of treating SEZs as foreign territories. Initially, the finance ministry granted exemption from service tax for the services provided from DTA but consumed in SEZ. This gave rise to many disputes. Then the finance ministry ordained that tax must be paid on all taxable services provided from DTA to SEZ, but the tax will be refunded if the services are rendered in connection with the authorised operations. Now, it says that tax on services consumed within the SEZ will be exempted, but for services partially or wholly consumed outside the SEZ, tax paid will be refunded. Why the finance ministry could not think of applying the Export of Services Rules, 2005, for supply of services from the DTA to SEZ is something difficult to understand.

The new commerce minister must not only review the SEZ policy but also constitute a committee of legal experts familiar with SEZ laws and other tax laws to advise on corrections required. He must create the confidence that the government is sensitive to the demands for drafting error-free laws and proper alignment of all related legal provisions.

E-mail: tncr@sify.com