Reforms inadequate for reviving interest in SEZ scheme

Expectations such as abolition of MAT and Dividend Distribution Tax for special economic zones have not materialised

 

While unveiling the annual supplement to the Foreign Trade Policy, the commerce minister announced a package of reforms for reviving investor interest in special economic zone (SEZ) scheme. Entrepreneurs setting up or running SEZ units got little to cheer. 

Developers can now set up multi-product SEZ with 500 hectares of land and sector-specific SEZ with 50 hectares of land. For every additional 50 hectares of contiguous area, an additional sector would be allowed on a graded scale to be added in the existing sector-specific SEZ. Flexibility to set up additional units in a sector-specific SEZ has been provided by introducing sectoral broad-banding to encompass similar or related areas under the same sector. Additions to pre-existing structures, not in commercial use, would be eligible for duty benefits similar to any other activity in SEZ. Minimum land requirement for setting up IT/ITES SEZs has been abolished and the minimum built up area requirement has been brought down to 100,000 square metres in 7 major cities, 50,000 square meters in other B-class cities and 25,000 square meters in other cities. Transfer of ownership of SEZ units including sale will be allowed.

SEZ policy was a response to complaints of Indian businessmen about poor infrastructure, high interest rates, inspector raj, multiplicity of taxation, rigid labour laws and eroding competitiveness. The idea was to attract investments, boost exports and generate large employment through export-led strategy, the way China had done. But, giving in to demands of various sections of the trade and even many state governments, smaller SEZ were allowed to be set up especially in the IT, gem and jewellery and bio-technology sectors, port based SEZ, sector-specific SEZ, single company SEZ and so on. It resulted in large number of SEZs but none of them even remotely comparable to the kind of SEZ that China has. One of the important objectives of SEZ, creation of world class infrastructure for exporters, remained elusive.

The introduction of MAT undermined the assurance of a stable tax regime, more so as the initial expectation that only the exporter friendly commerce ministry would make any changes was belied. Controversies regarding land acquisition by developers and global economic slowdown worsened the situation Finally, liberal incentives through reward schemes like Vishesh Krishi Gram Udyog scheme (5 per cent), Focus Market Scheme (3-4 per cent), Focus Product Scheme (2-5 per cent), Served from India scheme (10 per cent), Status Holder Incentives scheme (1 per cent), Incremental Exports Incentives scheme (2 per cent), etc, gave more benefits to units outside the SEZ. Zero duty EPCG scheme took away one of the attractions of SEZ. Naturally, the initial euphoria waned and investments in SEZ stalled.

This year, the major expectation was that transferable duty credits through reward schemes will be made available to SEZ also. Abolition of MAT and Dividend Distribution Tax for SEZ was also expected. These expectations have not materialised. Benefits under reward schemes plus duty drawback on FOB value of exports for DTA units far outweigh the attraction of Income Tax benefits under the SEZ scheme. So, the chances of entrepreneurs opting to set up manufacturing or service units in SEZ do not look promising. If the prospects of entrepreneurs setting up SEZ units, despite the very useful provision to let them sell their units, are not bright, the developers are also unlikely to invest in SEZ, despite liberalised minimum area requirements.

Email: tncr@sify.com