The government formulated the Special Economic Zone (SEZ) policy in 2000 and implemented it through the Foreign Trade Policy. The objective behind creating SEZs was to attract foreign direct investments, develop infrastructure, facilitate access to global markets for domestic companies, and encourage exports. After the initial momentum, the SEZ framework lost steam leaving a yawning gap between the initial promise and actual delivery.

Moreover, India’s SEZ framework was under challenge before the Dispute Settlement Body (DSB) of the World Trade Organization, which eventually ruled that India’s SEZ policy was inconsistent with the WTO guidelines.

Whilst the SEZ framework faced challenges, the global business environment underwent a dramatic change due to the pandemic-induced lockdowns. Covid-19 forced governments to impose a comprehensive work-from-home (WFH) protocol to productively engage employees and meet operational challenges. Most companies continued the WFH or switched to a hybrid model even after the lockdowns were lifted.

Pandemic effect

However, SEZs faced operational difficulties in obtaining permission for WFH during the pandemic and thereafter due to certain restrictions on the use of capital goods including laptops for specified purposes, movement of goods from/to SEZs, issuance and validity of identity cards, etc., leading to business losses and a compulsion to start ‘on-site’ work and even prompting units to reimagine their continuation under the SEZ scheme.

The government acknowledged the challenges faced by SEZs and to address the concerns, the Ministry of Commerce issued a notification on July 14, 2022, inserting a new Rule 43A in the SEZ Rules, 2006, setting out a policy for permitting WFH for employees of SEZ units.

The new rule lays down the categories of employees — that is, employees of IT and IT-enabled services, temporarily incapacitated employees, travelling employees and offsite working employees — who shall be permitted to WFH or any place outside the SEZ, subject to a limit of 50 per cent of the total employee strength. The validity of this permission will be for a year from the date of such consent, subject to an extension that cannot exceed one year at a time.

Further, the Ministry issued instruction No.110, dated August 12, 2022, providing SOPs for implementing provisions contained in Rule 43A. The new Rule comes with several procedural and administrative compliances on SEZs, taking away the required flexibility.

The SEZ framework in India had been under stress even before the pandemic and the Ministry had constituted a SEZ Policy review committee under the chairmanship of Baba Kalyani, Chairman of Bharat Forge, to evaluate the SEZ Policy and give suggestions to remove bottlenecks. A detailed report was submitted by the committee, underscoring the need for a major revamp of the SEZ scheme.

To address the operational and compliance challenges and to redraw the scheme to make it more attractive, the government is formulating a new scheme — the ‘Development of Enterprises and Services Hubs’ (DESH). The Bill was expected to be tabled during the Monsoon Session of the Lok Sabha but has been deferred. It is expected that a WTO-compliant DESH Bill will be implemented during the current fiscal, which would promote economic activity, generate employment, attract investments, remove bottlenecks and adopt key recommendations of the Baba Kalyani report.

DESH is expected to provide more flexibility to the units currently operating under a stricter SEZ law and for new units that register under DESH. It is expected that SEZ and its successor DESH would factor in current demands, including the popular WFH culture. Many units are confronted with a large-scale employee exodus, as employees refuse to operate ‘on-site’ and prefer the WFH model for the obvious advantages of better work-life balance.

SEZs are counting on the government to implement the DESH Bill at the earliest to address the current challenges, so that units can operate more flexibly and foster growth.

Barad is Partner, and Singhania is Director, BDO India

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