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Special economic zones — Major challenges: Multiple models, unutilised land and additional taxes.

Date: 27-12-2017
Subject: Special economic zones — Major challenges: Multiple models, unutilised land and additional taxes
India’s special economic zones (SEZs) — a key element of the country’s industrial and export promotion policy over the past couple of decades — are faced with numerous challenges, including over 25,000 hectares of land lying unutilised in these preferential treatment industrial enclaves, lack of flexibility to utilise land for different sectors, multiple models of operation, domestic sales by the SEZs facing a disadvantage due to payment of full customs duty, and lack of support from state governments for an effective single-window system. These were among the points listed out by officials in the Ministry of Commerce on October 7 this year, when the SEZ division of the ministry gave a presentation to Suresh Prabhu, Minister of Commerce and Industry, and C R Chaudhary, Minister of State for Commerce and Industry.

India’s SEZ experience has been disappointing till date. On November 28, 2014, the Comptroller and Auditor General stated in its report on SEZs: “Considering the significant shortfalls in achievement of the intended socio-economic objectives by all the sectors of SEZs, there is an urgent need for the government to review the factors hindering the growth of non-operational and under-performing zones.”

SEZ is an enclave area that is deemed to be a territory outside the customs territory of India for its authorised operations. The Centre’s Foreign Trade Policy 2004-2009 stated: “SEZs are growth engines that can boost manufacturing, augment exports and generate employment. The private sector has been actively associated with the development of SEZs. The SEZs require special fiscal and regulatory regime in order to impart a hassle-free operational regime encompassing the state-of-the-art infrastructure and support services.”

The presentation to Prabhu and Chaudhary listed the challenges faced by the SEZs and the possible solutions for them. The first challenge mentioned in the presentation is: “Unutilised land (more than 25,000 hectares) in SEZs. Lack of flexibility to utilise land in SEZs for different sectors.” The solution to this challenge, according to the presentation, is: “Optimal utilisation of vacant land in SEZ. Allowing flexibility of land use and removing sector-specific constraints.”

On the request of the SEZ developers, the Board of Approval (BoA) on SEZs has approved 81 cases of de-notification of SEZs as on June 30 this year. “The reasons given (by developers) for these request for de-notification include economic slowdown, poor market response, lack of demand for SEZ space and change in the fiscal incentive regime for SEZs, etc,” Nirmala Sitharaman, then Minister of State for Commerce and Industry (Independent Charge), told Rajya Sabha on July 26.

N Gokulakrishnan, AIADMK Rajya Sabha MP, asked a written question in Parliament this year if “it is a fact that misuse of SEZ lands is rampant in the country” and whether “any estimation has been made up to what extent the (land of) SEZs are being misused”. Sitharaman replied to Rajya Sabha on April 12: “Land is a state subject. The BoA approves a proposal for establishment of a SEZ subject to the terms and conditions prescribed in the SEZ Act and Rules. The approval is granted only after the concerned state government recommends the setting up of the SEZ. The implementation of SEZ projects by developers is monitored by the development commissioners as per SEZ Act and Rules on a regular basis. No rampant misuse of SEZ lands has been reported.”

The second challenge mentioned in the October 7 presentation is the existence of multiple models of economic zones such as SEZ, coastal economic zone, Delhi-Mumbai Industrial Corridor, National Investment and Manufacturing Zone, food park and textile park. The presentation noted that the group of secretaries of various central government’s departments have recommended “rationalisation” of these models. Moreover, the Department of Industrial Policy and Promotion (DIPP) and the Niti Aayog is going to “develop and master plan for industrial clusters” in order to deal with this challenge.

The third challenge has been the under-utilisation of existing capacity. Currently, SEZ units are not allowed to do “job work” for domestic tariff area (DTA) units. Any area that lies outside of SEZ or any other custom bonded zone in India is known as the DTA. Goods and services going into the SEZ from DTA is treated as exports and goods coming from the SEZ into DTA is treated as imports. The commerce ministry’s presentation noted that “optimal utilisation of existing capacity in SEZ units” should be done by “allowing job work for DTA”.

As on September 9 this year, the number of SEZs that have been notified in India are 372. Out of these, 222 SEZs are operational and 150 SEZs are non-operational, according to the Ministry of Commerce and Industry. Currently, the SEZs employ about 17.8 lakh persons across the country. In 2016-17, exports from SEZs were of around Rs 5.23 lakh crore — 53.89 per cent of the exports were from “computer and electronic software” sector.

The fourth challenge, according to the October 7 presentation, is that the domestic sales of SEZs face a disadvantage as “they have to pay full customs duty”, as compared to the lower rates with the Association of Southeast Asian Nations (ASEAN) countries due to free-trade agreement (FTA). The presentation suggested that the “best FTA rates” should be allowed for domestic sales, too. Imposition of Minimum Alternate Tax (MAT) on SEZs from April 1, 2012, as well as imposition of income tax on new SEZs and new units from April 1, 2017 and April 1, 2020, respectively, has been stated as the fifth challenge facing the SEZs currently. The presentation advocated restoration of income tax benefit as well as MAT exemption.

The sixth challenge for the SEZs has been the lack of support from the state government when it comes to developing effective single-window system for clearances, according to the presentation. The seventh challenge has been the “requirement of payment in foreign exchange for services provided by SEZ units to DTA area”. To deal with this problem, the presentation has suggested an amendment in the definition of “services” in the SEZ Act, 2005.

The presentation also listed various SEZ issues raised by the Confederation of Indian Industry (CII). The CII stated that there should be simplification of the process of granting environment clearance by the Union environment ministry and repeal of certain sections of the Urban Land Ceiling Act, 2007. The presentation noted that the CII also raised four SEZ issues that fall in the domain of the finance ministry or the Reserve Bank of India — grant infrastructure status to buildings of SEZs and industrial parks, permit external commercial borrowing (ECB) for entire SEZ infrastructure, allow a refinancing option through ECB; relax the “risk weightage norms” for the real estate sector.

Source: indianexpress.com

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