The Hindu Business Line : SEZs have to be special

The Special Economic Zones will become popular and really take off in the manner desired only if the proposed law governing them conforms to and upholds the basic concept behind the zones. Further, the rules and procedures must place minimal restrictions and impose limited obligations, besides guaranteeing the developer and the units in the zone full freedom. Otherwise, the objective of making SEZs engines of growth can never be realised, says P. P. Prabhu.

THE Finance Minister, Mr P. Chidambaram, in his Budget speech said: "The Government is of the view that Special Economic Zones are growth engines that can boost manufacturing, exports and employment... SEZs require a special fiscal and regulatory regime.

The Commerce Minister will shortly introduce a Bill for regulating the SEZs and it is my belief that the passing of a such a law would be a significant milestone in our quest to become a major hub for manufacturing and exports".

Both the views expressed, that SEZs could be growth engines and that a special law is required for promoting SEZs, have been made in the past also and well accepted.

The then Commerce Minister, Murasoli Maran, who pioneered the concept in 2000, wanted the SEZs to be modelled on the Chinese SEZs. He wanted them to be symbols of Indian endeavour to remain internationally competitive and relevant. Maran even announced that approvals would be given for two SEZS — one in Positra in Gujarat and another in Nangunery in Tamil Nadu. Now, even after four years, no greenfield zone is operational, though a number of State governments have been keen to facilitate the development of SEZs in their States and some have also framed special SEZ legislation.

But the Government, apart from converting the existing Export Processing Zones into SEZs, has not been able, mostly due to differences in perceptions among the various departments of the Centre, to introduce the special dispensation that is absolutely essential to make the SEZs special and attractive to potential investors. Apart from some ad hoc policy statements and a few piecemeal notifications, the special law has not been forthcoming, though a draft legislation was prepared. Even the New Foreign Trade Policy says little on them.

It is heartening, therefore, that both the Finance and Commerce Ministers are keen to enact an SEZ Act that will be progressive enough to attract huge investment and generate substantial employment. SEZs can deliver results, if not on the scale seen in China, definitely more than the erstwhile EPZs (export processing zones), only if the proposed law ensures the key and essential feature — that the zone shall be treated for all purposes as foreign enclaves.

Excessive bureaucratisation

The earlier Bill provided for many approvals and controls. Apart from the nod required for establishing the zone, which is fair enough, there was to be an approval committee, consisting of nominees of different departments, with the authority to approve the import and procurement of goods, monitor the utilisation of goods and services imported into the SEZ, and so on. Also, every unit required approval after scrutiny by the Development Commissioner (DC). The intention was honourable and pragmatic — to ensure effective single-window clearance.

Without such a provision, perhaps, every government department would demand that every investment proposal should take separate approvals from the prescribed authorities, which would be worse.

The risk in the present approach is that larger the size of any approval board or a committee, greater the possibility of delays and, furthermore, a larger number of unnecessary and stringent conditions being imposed, providing enough ammunition for any monitoring agency subsequently to cause headaches to the developers or the units in the zones.

It would be far more transparent if the forthcoming Act were to provide that the government shall lay down the nature of activities that would be permitted within the zone, the conditions of approval and the obligations, the responsibilities of the developer and the units, the reporting procedures, and so on, and leave it to the development commissioner to monitor compliance.

Lack of clarity

There was a provision in the earlier Bill that the DC shall be responsible for the development of the SEZ. Such an open-ended provision may give rise to a wrong notion that DCs can interfere in the day-to-day management of the SEZs.

The earlier Bill also provided for an SEZ authority for each zone; it could apart from undertaking measures for the development, operation and management of the zone, review the functioning and performance of the zone, even fixation of the user charges.

It is obvious that the future SEZs will be developed by private promoters, may be in association with state agencies. Hence, the responsibility as also the authority for the development of the SEZs, attracting investment, creating the infrastructure, maintenance of the SEZs, besides the day-to-day operations, could remain with the developer.

The function and role of any government functionary may be limited to facilitation, assistance and guidance to the units in the zone, besides acting as the nodal point for collection of information and monitoring and interfacing with various government regulatory authorities.

Of course, there would be need for a provision that if the developer were to fail or remiss in discharging his responsibilities or if there were to be any infringement or violation of conditions of approval, the government could step in to take over the management of the SEZ and entrust the responsibility and the authority to the DC.

In the new Act, the powers and functions of the developer, the Authority and the DC may need to be clearly spelt out, besides the system and procedure for resolution of differences and disputes.

Missing rights

A positive feature of the earlier Bill was the fiscal provisions, according the developers and the units in the zone exemptions from Customs duty on imports and central excise duty on domestic procurement, deduction in respect of profits and gains, and so on.

Otherwise, the proposed Bill, like most legislation, only gave the Government the necessary authority to impose conditions and obligations but did not make any mention of its commitment to the developers or the units located therein. It may reassure investors if there were to be provisions in the forthcoming Act, specifically laying down the rights of SEZ units, for example, that there shall be no restriction on import or export, that there shall be no interference in the movement of inputs or output and if any clearances at the ports or any approvals from any regulatory agencies are required, they shall be given in less than 24 hours; that no authority other than the DC shall have the power of inspection, that there shall be absolutely no restriction on movement of materials within the zone from one unit to another, nor there shall be any restriction on DG (diesel generating) sets.

Also, it could be spelt out that no wastage or input-output norms would be applicable, that sale of scrap in the Domestic Tariff Area will attract only the applicable duty, that the units would be able to undertake job work for the DTA units and would be able to get their goods processed in the DTA. Such explicit assurances may appear unnecessary, being inherent in the concept of SEZ, but specific provisions in the Act codifying the rights would, apart from providing comfort to the prospective entrepreneurs, obviate any need for clarification subsequently and also eliminate scope for possible harassment.

Empowerment of States

The previous Bill had a welcome provision that the Central or the State Government may exempt SEZs from any one or more provisions of any law. Such an enabling provision should enable the Central or the State government to exempt SEZ units, initially if necessary on an experimental basis, or for a specified period, from the provisions of certain statutes, say, the Contact Labour Abolition Act.

While the intention behind the provision was farsighted, it appears that in actual practise the principle is not being honoured.

The SEZ legislation, framed by some progressive States, are not being approved by the Centre, perhaps, because the laws provide for authority to exempt SEZ units from the provisions of various statutes.

It is hoped that the proposed law will empower the States to grant exemptions from the provisions of the most statutes relating to manufacture, ranging from the Factories Act to Stamps Act, (barring those relating to security and overall environment) and encourage, and not constrain, the States willing to take the initiative to promote SEZs within their jurisdiction as deemed fit by them.

The SEZs will become popular and really take off in the manner desired only if the proposed law governing the them conforms to and upholds the basic concept behind SEZ, and further the rules and procedures place minimal restrictions and impose limited obligations, besides guaranteeing the developer and the units in the zone full freedom, flexibility and rights besides exemption from inspector raj.

Otherwise, the SEZ will become nothing better than the erstwhile EPZs, except in name, and not like the SEZs elsewhere in the world. Then, the objective of making SEZs as engines of growth can never be realised and they will remain, not as our best dream projects, as envisaged by Maran, but mere dreams.

(The author is a former Union Commerce Secretary.)

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