SEZ Rules amended to attract more investments, facilitate operations

Last Tuesday, the government amended some provisions in the Special Economic Zones (SEZ) Rules, 2006, in the hope of attracting more investments and providing greater flexibility in the operations.   

 

The minimum contiguous land area requirement is now reduced from 50 hectares to 10 hectares for setting up SEZs exclusively for manufacturing semiconductors or electronic components including display module sub-assemblies, various other module sub-assemblies, printed circuit boards, lithium-ion battery cells, mobile and information technology (IT) hardware components, hearables, and wearables. In Gujarat, SEZs for textiles and textile articles can now be set up with a minimum 4 hectares of contiguous land area. The Board of Approval may relax the condition of encumbrance free area in cases where the land is mortgaged or leased to the central or state government or their authorized agencies.

 

Finished goods can now be exported out of the country or transferred to the customs bonded warehouse to be maintained by any overseas entity or supplied to the domestic tariff area with payment of applicable duties or transferred to the free trade and warehousing zone (FTWZ) unit maintained by any overseas entity in the same or different SEZ according to the instructions of the overseas entity. For units providing manufacturing services in the semiconductor sector, value of goods received as well as value of goods supplied on free of cost basis shall be included in net foreign exchange (NFE) calculations and such value shall be determined in accordance with the customs valuation rules, as applicable. It is now not mandatory that the overseas entity should supply capital goods, raw materials, consumables, sub-assemblies, components and semi-finished goods free of cost to the unit providing services to it and the same may now be procured by such SEZ unit on its own account also.

 

India has 276 operational SEZs with 6,275 units operating in them. Total investment in them is about ₹7.07 trillion and they employ about 3.19 million persons. The exports of goods and services from the SEZ units are about $172.28 billion, about 21 per cent of our total exports. These figures look impressive and a closer look reveals more. About 60 per cent of the exports are from the services sector. About 61 per cent of the units are from the IT and IT-enabled services sector. 41 per cent of the merchandise exports are from the petroleum sector. 52 per cent of the services exports and 40 per cent of the merchandise exports go to the US.

 

The unique feature of the SEZ scheme is the package of concessions extended to SEZ developers for building infrastructure.  Until recently, new SEZ developers and SEZ units enjoyed income tax exemption that other exporters did not. When the SEZ laws came into effect in 2006, the expectations were that world class infrastructure would be built in large SEZs and that they would be major engines of growth. That has not happened. In fact, the observation of many analysts is that substantial investments and exports got diverted to SEZ units because of fiscal incentives. The government auditors have said that their performance is short of the projections. The government has been amending the SEZ laws every now and then to facilitate the operations and attract more investments. The latest amendments also do so.  However, a cost benefit analysis of the SEZs is very necessary to assess whether the scheme should continue indefinitely. 

 

tncrajagopalan@gmail.com