The Hindu Business Line : `Uncertainties on SEZs must be removed'

After enactment of the SEZ Act, investors gained confidence in the policy's stability and continuity, and the response has been enthusiastic. — MR L. B. SINGHAL, DIRECTOR-GENERAL, EXPORT PROMOTION COUNCIL FOR SEZS AND 100 PER CENT EOUS

The troubles at Nandigram in West Bengal over the acquisition of land for a Special Economic Zone (SEZ), the process of rapid industrialisation through exclusive export manufacturing locations, with a single-window clearance for projects, has suffered a distinct jolt. An empowered Group Of Ministers (eGoM), headed by the Union External Affairs Minister, Mr Pranab Mukherjee, is in limbo after its last inconclusive meeting on January 22. Yet, the Commerce Ministry mandarins, including Minister Mr Kamal Nath, have been pitching for operationalising all SEZs, accorded formal approval and where land is in the possession of the developers. They contend that the 234 SEZs that have got formal approval involve 33,807 hectares of which roughly 17,800 hectares is owned/possessed by State Industrial Development Corporations. The rest of the land is already with the developers, which means no fresh acquisition would be involved.

Winding up the debate on the motion of thanks to the President's address in Parliament on March 8, the Prime Minister, Dr Manmohan Singh, expressed the concern of the House whether "a particular process of industrialisation is leading to loss of availability of land at a pace which has undesired consequences and those concerns have to be taken on board." Not only did he say that the concerns arising out of land acquisition must be addressed but emphasised that, "if we have made a mistake in enacting the particular Act, we do not stand on any formality; we will make necessary corrections."

It must be remembered that the Special Economic Zones Act, 2005 and the Special Economic Zone Rules 2006 became operational only effective February 10, 2006 and within just one year, the SEZ concept is being questioned.

For answers to the understandable agonies and uncertainties plaguing the SEZ units, Business Line spoke to Mr L. B. Singhal, Director-General, Export Promotion Council for SEZs and 100 per cent Export-Oriented Units (EOUs).

Excerpts from the interview:

What is the status of SEZs that were unveiled with much fanfare a year ago only that threatens to be a flash in the pan?

Logically, legally and rationally we must notify all SEZs that have been approved by the inter-ministerial body — the Board of Approval (BoA). Based on such approvals, people have gone and acquired the land and documents filed with the Commerce Ministry for notification. Similarly cases approved by BoA and where land has been acquired hassle-free by the developer in collaboration with the State government should also be notified immediately.

The important message that was intended to be conveyed by the enactment of the SEZ Act was stability and continuity of policy. Though the SEZ policy was announced in the Exim Policy 2000, till the SEZ Act was promulgated, there was no enthusiastic response from the global investors in the SEZ scheme. Even in cases approved, financial closure was not achieved. It was only after enactment of the SEZ Act that investors got the confidence in the stability and continuity of the policy and the response has been enthusiastic. Hence we must remove all uncertainties immediately.

What of the freeze on further SEZ notification and its fallout?

Yes, certainly by putting on hold notifications of SEZs that have been approved by BoA, there is a feeling of uncertainty in the minds of global investors. Developers such as Brandix from Sri Lanka, Ascsendas from Singapore, Taiwanese investors, and others are becoming a bit jittery because such formalities as notification, after due approval, are completed in days in other countries.

BoA comprises representatives from the Ministries of Commerce, Finance, Home Affairs, Law and others and these decisions have been taken by consensus, as required by the SEZ Act. International investors are naturally saying one thing: "No surprises". Unfortunately, we have been springing up one surprise after another creating uncertainties in their business calculations.

Can you explain the imposing of export obligation (EO) on the SEZ units, as proposed by the Finance Ministry at the last eGoM?

One needs to look at the background of the formulation of the SEZ policy and the enactment of SEZ Act. When it was an Export Processing Zone (EPZ) policy, then the EPZ units were getting the benefit of duty-free import of raw material, capital goods and exemption from 100 per cent income-tax for 10 years.

At that time they were subject to the value addition and EO norms. EPZ units were also entitled to sell in the domestic market at concessional duty of 50 per cent. The SEZ policy sought to simplify the procedures and make the life of SEZ units easier.

SEZ units are basically getting the same benefits that they were as EPZ units — such as duty-free import and IT exemption. On the contrary, the benefits have been curtailed. They could sell in the domestic market at a concessional duty of 50 per cent but, now, in the SEZ scheme, they have to pay 100 per cent duty on the finished products.

Earlier, they were entitled for 100 per cent IT exemption for 10 years. Now they get 100 per cent exemption for five years, then 50 per cent for the next five years, and 50 per cent exemption for another five years on reinvestment.

Hence, while devising the SEZ package, the main consideration was to simplify the procedures and, accordingly, the value addition and EO requirements have been done away with. Hence we must not bring regulations applicable to the EPZ.

If that were the case then SEZ units would certainly be asking for allowing sale in the domestic tariff area (DTA) at 50 per of duty. It is imperative that the provisions of the SEZ Act and Rules must be allowed prevail without any interruption and the scheme provided stability and continuity.

What are your views on SEZs making ITA-1 (International Telecommunication Agreement) items and selling substantial portion of production in the domestic market?

ITA-1 items are allowed to be imported into the country without any duty, as per international agreement. If we do not encourage manufacturing of these products, they would continue to be imported without any duty.

By encouraging manufacturing of these products in the SEZs, we are creating employment in the country, bringing new technologies and managerial practices. The experience in SEZ world over is that the new technology and managerial practices brought in these enclaves percolate to other areas, leading to all-round development.

In any case, domestic sales by SEZ units are subject to income-tax, leading to revenues for the country besides employment creation. The individuals working in these SEZs are also subjected to personal income-tax. If we impose any export obligation, I am sure these investors have the option of taking their investments to other countries.

The success in bringing these investors into India, through the SEZ policy, would, by the stroke of imposition of export obligation, be lost; we would be driving them away and killing the goose that lays the golden eggs.

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