DESH & 'videsh'

The proposed Bill will create asymmetries

The commerce ministry’s Development Enterprise and Services Hub (DESH) Bill, 2022, has reportedly run into strong objections from the finance ministry over extending tax concessions to special economic zones (SEZs). North Block has argued that these breaks would “create havoc” for units outside the zones. Even if it were accepted that the finance ministry is arguing from the revenue maximisation perspective, its basic contention is spot on for multiple reasons. The DESH Bill seeks to replace the ill-fated SEZ Act of 2005, the United Progressive Alliance’s attempt to emulate China’s export-driven manufacturing strategy that transformed that country within a mere quarter century. But the Indian experiment failed spectacularly, principally because the private sector-driven SEZ developers leveraged the tax arbitrage to create a massive real estate play. The upshot was that SEZ locations were not always optimal for export-oriented industries. Not surprisingly, supply eventually outstripped demand. With large tracts of SEZs, often comprising fertile farmland, lying vacant and many applying for delisting subsequently, the draft DESH Bill, which will cover all existing and new large industrial enclaves, seeks to maximise infrastructure use and enhance India’s export competitiveness.

But as before, the Bill proposes a 15 per cent concessional tax rate for an extended period for both greenfield and brownfield ventures. Crucially, it offers the additional sweetener that SEZ units in the notified areas will be permitted to sell in the domestic tariff area (DTA) provided they pay the duties foregone on inputs but not on final goods. In the earlier law, goods supplied from an SEZ to a DTA were considered imports, since an SEZ is deemed “a customs territory outside India” and were liable for full customs duties plus integrated goods and services tax. It is this asymmetric arrangement in the new law that the finance ministry has questioned. In the words of one official, it would create business units each of which would have a “DESH” area and “Videsh” area with differential tax treatments. In a country in which existing tax laws are complex and contentious enough, such intra-unit variances are likely to see an explosion of tax disputes that will defeat the purpose of the new Bill. That apart, it would also precipitate the confusing situation of creating an inherent disadvantage for DTA units producing the same goods as DESH units that come up enjoying tax breaks.

As things stand, the finance ministry’s objections are likely to delay the introduction of the Bill, so a Winter Session passage looks increasingly unlikely. This is not necessarily an undesirable development. As a bailout for a failed business built on a flawed model, it is difficult to see how the DESH Bill, despite its promise of decentralised single-window approval processes, can substantially alter the investment landscape in India or enhance export competitiveness. Land acquisition by the private sector, the first step in the SEZ process, has proven a near-intractable problem to date. As such, a more universal approach to the vexed problem of deficient infrastructure, red tape, and arbitrary and unpredictable policy intervention would benefit the country far more than reviving a largely unsuccessful attempt to emulate China.