SEZs return to tepid welcome; govt has no winning formula for their success

The sole advantage of the Indian SEZ Act still remains tax arbitrage, where most of the provisions are, in any case, on the sunset route

Without much debate, after a ten-year hiatus, Special Economic Zones (SEZ) are back again on the government agenda. The first cabinet meeting of the new central government has approved the introduction of the Special Economic Zones (Amendment) Bill, 2019 in Parliament in the monsoon session. But without changes to state-level labour laws and faster rules for acquiring land, SEZs won't spur economic growth. 

With India’s massive employment challenge, the SEZs were the right policy but are now a decade late. As the policy was not thought through, it became a pariah in 2009 just when several other Asian economies embraced it big time to improve their manufacturing prowess. Neighbour Bangladesh was one of the first to introduce the The Bangladesh Economic Zones Authority Act and the Bangladesh Hi-Tech Park Authority Act in 2010, followed rapidly by Myanmar, to finally Vietnam in 2018. 

The Bill to replace the Special Economic Zones (Amendment) Ordinance, 2019 (12 of 2019) will now allow trusts to set up an SEZ. It will be an interesting to watch which trust becomes the first to seek government permission to build an SEZ. It could shore up the bottomline of an enterprise from tax exemption, but the policy is unlikely to act as a ballast for growth since the weaknesses from the first edition continues to hobble the SEZ policy. 

The sole advantage of the Indian SEZ Act still remains tax arbitrage. Most of the provisions in this space are, in any case, on the sunset route. A 100 per cent income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first five years, scaled down to 50 per cent for next five years thereafter, plus 50 per cent of the ploughed back export profit for next five years will terminate from assessment year 2020, unless finance minister Nirmala Sitharaman does something about it. Earlier benefits like nil Minimum Alternate Tax, exemption from dividend distribution tax as well as income tax exemption from export income have gone. Tax holidays for existing software technology parks were made at par with SEZ and finally with the role out of GST in 2017, exemptions from central sales tax, from service tax and state sales tax became zero-rated, just as they are for any exports from anywhere else in India.

Whatever remains only helps in the case of enterprises like GIFT city and other single-building based units, but does not add up to spread manufacturing. What could instead help there is exemption from the state level labour laws. Or of land laws, preferably both. With the promulgation of the LARR Act in 2014, the land laws are not conducive either. The Rs 14,000 crore thermal power project of the Adani group in Jharkhand which has invited controversies over its status has been negotiating for land since 2014. The proposed 1600 MW project to supply electricity to Bangladesh is significant because it is the first in the power sector to earn the status of an SEZ. The commerce ministry last year changed its earlier policy to allow a stand alone power project to claim an SEZ status for export of power instead of being restricted to supply to only the units within the zone. 

Of the 232 operational zones today, only 25 are multi-product, the rest are from the service sector (mostly IT companies). A commerce ministry fact sheet shows that in 2018-19, these SEZs have exported about $76 billion about a third of India’s exports. Yet as our total exports have remained stagnant this decade, the exports from SEZ have fared likewise. Only some of the units have migrated to them to bloat their share compared to the rest of the economy. No Indian SEZ has acquired the scale of any of those like the Chinese, UAE, or even Kenya and Mauritius multi-unit economic zone. India’s sole entry in the fDI Magazine list of top 10 in the year 2018 is Aequs SEZ which is again a single company venture. SEZs could have really helped mass manufacturing using the advantage of India’s cheap labour. We now have a costly labour force and costlier land. The new SEZ framework does not work in this picture.