Grey areas persist in SEZ policy

MOHAN R. LAVI | Updated on August 26, 2013 Published on August 26, 2013

Policy boost or party-pooper?

The minimum land holding norm has been relaxed, but there’s uncertainty about tax rebates.

Tony Robbins, an American life-coach, once said: “In life you need either inspiration or desperation.” Policymakers in India seem to have had both these attributes when framing the rules for Special Economic Zones (SEZs). Inspired by the idea of getting greenbacks from units located in exclusive zones, the first tentative steps towards a policy for such zones were taken in 2000. After a few policy flip-flops, a robust SEZ Act was passed in 2005, which attracted both investments and inflows.

At first blush, the numbers are certainly impressive — investments of over Rs 2.39 lakh crore and exports of Rs 4.76 lakh crore at the last count. However, a detailed examination reveals skeletons in the cupboard — 589 units have been formally approved, 389 have been formally notified out of which only 170 are operational. In 2011, two SEZ units accounted for more than 42 per cent of total exports and FDI interest in these units has been waning.

These factors coupled with two troubling monsters — the gigantic current account deficit and the rupee which appears keen to establish new high-jump records — forced the Government to turn to desperation, and change the policy for SEZ units recently.

Revised Policy

For multi-product SEZs, the minimum land requirement has been brought down from 1,000 hectares to 500 hectares. For sector-specific SEZs, it has been brought down to 50 hectares.

Norms were also relaxed for setting up zones in the North Eastern states, hilly regions, Goa and Union Territories, as well as for setting up exclusive SEZs for electronics hardware and software, handicrafts and agro-based food processing.

While the minimum land requirement norm has been done away with for IT\ITES SEZs, developers would have to adhere to minimum built-up area criteria. The requirement of one lakh square metres as built-up area will be applicable in Mumbai, Delhi (NCR), Chennai, Hyderabad, Bangalore, Pune and Kolkata. For Class B cities (15 in number, including Ahmedabad and Bhubaneswar), minimum built-up area would be 50,000 sq. metres, while for all other cities (Class C), 25,000 sq. metres built-up area would be applicable.

The introduction of sectoral broad-banding provides the flexibility to set up additional units in similar or related areas in a sector-specific SEZ. The existing policy allows for parcels of land with pre-existing structures not in commercial use to be considered as vacant land for notifying a SEZ.

Spoiling the party

While these amendments seem to have come a bit too late and are certainly not going to attract a million dollars overnight, deciding to keep mum on the withdrawal of minimum alternate tax (MAT) and dividend distribution tax (DDT) is not going to help matters.

Section 27 of the SEZ Act, 2005, along with the Second Schedule to the Act, proposed tax breaks to these units at 100 per cent for the first five years and 50 per cent for the next five.

The imposition of MAT on these units from 2011 spoilt the party and DDT complemented it. The Direct Taxes Code added salt to the wounds by proposing an investment-linked deduction as against the more popular profit-based deduction.

Profit-based deduction sounds attractive to the investor, whereas an investment-based one is bound to be a deterrent.

The maybe/maybe not approach that the Government has adopted towards taxing SEZ units is not earning them any credits.

Stable and lasting policy

A Chinese researcher, Chee Kian Leong, of Nanyang Technological University, did an analysis of the performance of SEZs in China and India; he studied their role in liberalising the respective economies and their impact on economic growth.

The results indicate that exports and FDI growth have positive and statistically significant effects on economic growth in these countries.

Not for the first time in framing critical laws has the Government shown initial commitment, which has later turned lackadaisical and tame.

Instead of doing a post-mortem after the damage has been done, the Government should revisit the entire Act and make it a really attractive proposition to attract investments.

Once this is done, it should vow not to touch the policy for at least five years. Only then will the present perception in some quarters, that investments in SEZ units are more like real estate projects with slightly lower taxes, change.

(The author is Director, Finance, Ellucian.)

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Published on August 26, 2013
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