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In the next Union budget, the government is excepted to roll out a road map, or at least a policy change, to redesign the future of the special economic zones (SEZs) — India’s islands of export that have so far pulled in investment of Rs 5.2 lakh crore, apart from giving jobs to 22 lakh people, according to official data.The suspense, though, is whether the government will go for a plain vanilla extension of direct tax sops or engineer a change in the very contours of the policy.At present, there are 238 operational SEZs across the country.There is a strong chance that Finance Minister Nirmala Sitharaman may actually propose to redraw the SEZ policy, linking fiscal incentives to employment and investments.
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The SEZ Act of 2005 stipulated incentives only for exporters with an in-built sunset clause of direct tax benefits kicking in from April 1, 2020. As that date is nearing, a policy intervention has become urgent.With just a few weeks left before the Union budget is presented on February 1, the question thus is not so much about whether the government will act upon the SEZ policy or not, but more on how it will forge the path ahead.Will it be a simple tweak or a policy overhaul?The first clues are emanating from the corridors of Udyog Bhawan that houses the commerce and industry ministry. The officials there are discussing a file, informally referred to as the “Baba Kalyani file”.
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Baba Kalyani, chairman of Bharat Forge, a Pune-based manufacturing giant, headed a committee that submitted an 84-page report in September last year on how to reshape the SEZ policy into a framework of employment and economic enclaves or 3Es.The report, gathering dust for over a year, has not yet been made public.ET Magazine, which reviewed the report, finds that the drastic change the panel has asked for is to delink government incentives for exporters alone. Instead, the report envisages a formula of incentivising those who would bring in investments and employment.Currently, exporters have preferred to set up their factories or service centres inside SEZs, mainly because of exemptions from import duties, receipt of single window clearances and most importantly, for availing direct tax benefits.
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The Baba Kalyani panel has called for a continuation of tax sops for five to 10 years, but insisted that the new regime must move from today’s SEZ to a new framework under which there could be a two-tier incentive structure — first based on jobs and investments being created, and second on the zone’s export potential.The panel also recommends that the mandatory export requirement in those hubs need to go. This, however, means that the very character of the Indian SEZ will change. Also, since the SEZ norms are based on a law enacted by Parliament, any modification also needs to be okayed by lawmakers through an amendment.The Kalyani panel’s other recommendations include allowing of payment of domestic services through the rupee, dispute resolution via digital interventions and broadening of the definition of services with regard to SEZs.“There is a critical need to encourage and promote services beyond IT/ITeS like financial service, aircraft and electronics MRO, engineering design, research & development linked with manufacturing, tourism, education etc, which has significant growth potential,” reads the report.Speaking to ET Magazine, Amrit Manwani,managing director of Sahasra Electronics, a Delhi-registered exporter, advocates that the sunset clause must be extended by a few more years. “Some SEZs may survive even if the sunset clause is not extended but SEZs as a concept will then die. Also, in that case, no new investments will come in,” says Manwani, who earlier served as a member of Noida Special Economic Zone, a government-controlled export hub located on 310 acres near Delhi.
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Meanwhile, commerce ministry officials are deliberating with their counterparts from the revenue department to find a middle path on issues that may arise out of an extension of the sunset clause for SEZs.For the revenue department that comes under the finance ministry, the continuation of incentives means losing tax revenues whereas for the commerce department, the worry lies is the continued contraction of exports, making a strong case for not dismantling any infrastructure that is helping exports grow.On Friday, the government said existing and new SEZs would become multi-sector SEZs.Rules on minimum land area requirement for setting up SEZs were also relaxed.However, Vinod Sharma, MDof Deki Electronics, a Noida-based manufacturer of film capacitors, says the incentives for operating from an SEZ have now come down after the government slashed corporate taxes. “For new manufacturers, the corporate tax liability is now a mere 15%. So the need to be in an SEZ is far lesser today,” says Sharma, who chairs a CII’s panel on information communication technology and electronics.For the government, abandoning the huge SEZ infrastructure spread across the country is hardly an option. It has to choose one of two alternatives: either throw a lifeline to SEZs by extending the sunset clause or go in full force taking cues from the Kalyani panel and rewriting the policy itself.
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