It will be taken up sooner than later, even though the government’s legislative business agenda for the Winter Session of Parliament from December 4 did not include the proposed amendments to the Special Economic Zone (SEZ) Act, 2005, to remodel the SEZs into ‘Exports and Make for India’ hubs from its current focus of only ‘Export Hubs’.
This makeover of the SEZ Act was in line with the government’s new tagline of “Make in India, Make for the World” to position India key pillar of the global supply chain.
However, the original idea was to bring the Development of Enterprise and Service Hubs (DESH) Act to create hubs that are not only focused on exports but also on serving the domestic market. The aim was to replace the SEZ ecosystem, which was losing steam, with DESH.
The SEZ Act extended a structured environment for businesses by offering income tax incentives, customs duty exemptions, streamlined procedures, and infrastructure support, these encountered challenges later due to the introduction of the minimum alternate tax (MAT) and the sunset clause for income tax exemption.
Under the DESH Bill, all customs duty exemptions were to be allowed like it was available in the SEZ Act. Additionally, to comply with the World Trade Organisation regulations, the Bill also proposed the elimination of the necessity for positive net foreign exchange for DESH units and giving them access to domestic markets.
However, the ambitious DESH Bill, which was proposed on the Union Budget on February 1, 2022, could not proceed further due to differences among union ministries and the realisation that many of the proposals need the active support of the states to succeed. That’s because too many things were tagged with the DESH Bill such as the promotion of One District One Product and the development of export infrastructure, among other ancillary goals.
So, the Union government thought of implementing the key proposals of DESH by amending the extant SEZ Act, which was easier to execute as bringing all stakeholders on board was proving time-consuming.
The proposed amendments in the SEZ Act were aimed at providing a flexible framework for the sale of products manufactured in the domestic market, called the Domestic Tariff Area (DTA) on payment of customs duty and IGST on the imported components.
Other amendments in the SEZ Act proposed to make de-notification norms for SEZs easier and streamline the approval process for units. This would help real estate developers lease out unused spaces to domestic businesses by refunding all duties and tax benefits availed.
Often developers move out of the SEZ scheme due to poor market response, lack of demand for SEZ space or when it does not make business sense. More than 100 cases of de–de-notification have been approved by the government since 2008.
However, as things stand today, neither the DESH Bill nor the SEZ Amendment Bill is likely to be taken up in Parliament in December, partly due to the thinking that as general elections are around the corner, it would be appropriate to take this up afresh after a new government is formed in May 2024. Stakeholders have waited this long, they can wait for another six months for a well-thought-out roadmap to make India a manufacturing-services hub.
In the meantime, the government should use the opportunity to thrash out all the issues with stakeholders including state governments, non-SEZ businesses and taxation issues.
India’s growth is closely interlinked with the growth of its states. This is more so as India aims for a USD 30 trillion economy by 2047 from USD 3.5 trillion as of 2022, to become a developed nation in the 100th year of its independence, propelled by radical policy changes and reforms in governance by 2030.
Under the proposed new framework state governments were to be included as key partners to strengthen the single window-based clearances and also usher in a simplified regulatory regime with an emphasis on high-quality infrastructure.
The concerns on SEZ units and non-SEZ units also need to be addressed to strike a balance to ensure the benefits to one do not hurt the other.
SEZ units have been demanding that the customs duties on domestic sales be at par with what exporters from Free Trade Agreement (FTA) countries pay. However, non-SEZ manufacturing units have opposed this as this would give greater tax concessions to SEZ units and hurt non-SEZ unit business.
Since greater flexibility of domestic sales will end up distorting the export focus of SEZs, careful structuring of the relaxations has to be worked out.
After the initial rush, the interest in setting up new SEZs has diminished and new applications are rare now. Presently, 425 SEZs have been formally approved amongst which 376 have been notified and 272 are operational. Of these, 270 SEZs are exporting at present. Out of this, 163 are IT/ITES, 25
Total exports from SEZs stood at USD 156 billion (60 per cent services) in 2022-23. This is too little for a country like India with the largest population in the world aspiring to be a developed nation.
The impact of large economic hubs has been transformational in the economies of China, South Korea, Taiwan and Vietnam. India has failed so far. China’s Shenzhen SEZ region alone annually contributes USD 250-300 billion in exports.
Post-COVID-19 pandemic, the world’s trust in China as a major player in the supply chain has been under strain and developed countries are looking for alternative destinations for their supply chain security.
The world can’t wait long for India to catch up. So, India has to get its act together to create a conducive environment for MNCs to set up units in ‘Exports and Make for India’ hubs.
