In News: In the Union Budget this year, the government proposed to replace the existing law governing Special Economic Zones (SEZs) with a new legislation to enable states to become partners in ‘Development of Enterprise and Service Hubs’ (DESH).
- The commerce ministry is proposing a host of direct and indirect incentives such as deferral of import duties and exemption from export taxes to revamp Special Economic Zones through a new legislation.
- The proposals seek to provide incentives such as retention of zero-rating of IGST on domestic procurement by a unit in an SEZ; continuation of indirect tax benefits to developers of these zones; and allowing depreciation on sale of used capital goods cleared to domestic tariff areas.
- There is also a plan to extend the corporate tax rate to 15 per cent without any exemptions for units undertaking authorised operations in these development hubs.
- The existing SEZ Act was enacted in 2006 with an aim to create export hubs and boost manufacturing in the country.
- However, these zones started losing their sheen after imposition of minimum alternate tax and introduction of sunset clause for removal of tax incentives.
Special Economic Zones
- An SEZ is a territory within a country that is typically duty-free and has different business and commercial laws chiefly to encourage investment and create employment.
- SEZs are created also to better administer these areas, thereby increasing the ease of doing business.
- Asia’s first EPZ (Export Processing Zones) was established in 1965 at Kandla, Gujarat.
- While these EPZs had a similar structure to SEZs, the government began to establish SEZs in 2000 under the Foreign Trade Policy to redress the infrastructural and bureaucratic challenges that were seen to have limited the success of EPZs.
- The Special Economic Zones Act was passed in 2005. The Act came into force along with the SEZ Rules in 2006.
- Presently, 379 SEZs are notified, out of which 265 are operational.
- About 64% of the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra.
- The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce (Ministry of Commerce and Industry).
Objectives of the SEZ Act:
- To create additional economic activity.
- To boost the export of goods and services.
- To generate employment.
- To boost domestic and foreign investments.
- To develop infrastructure facilities.
Major Incentives and Facilities Available to SEZ:
- Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units
- Exemption from various taxes like Income Tax, minimum alternate tax, etc
- External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.
- Single window clearance for Central and State level approvals.
- Due to a lack of demand for SEZ space and disruptions caused by the pandemic, unutilized land in SEZs exists.
- Multiple economic zone models exist, including SEZs, coastal economic zones, the Delhi-Mumbai Industrial Corridor, the National Investment and Manufacturing Zone, food parks, and textile parks, all of which face issues in integrating the various models.
Competition from ASEAN Countries
- Many ASEAN countries have modified their policies in recent years to encourage global players to participate in their SEZs, as well as working on a developing set of skilling projects.
As a result, Indian SEZs have lost some of their worldwide competitive advantages, necessitating new rules.
What measures were taken by the government to revamp SEZs?
- The government constituted a committee headed by Mr Baba Kalyani, in 2018 to study the existing SEZs of India and prepare a policy framework to adopt strategic policy measures.
Recommendations of the Baba Kalyani committee
- Rename SEZs in India as 3Es- Employment and Economic Enclave
- Framework shift from export growth to broad-based employment and economic growth
- Separate rules and procedures for manufacturing and service SEZs
- Ease of Doing Business (EoDB) in 3Es such as one integrated online portal for new investments
- Extension of Sunset Clause and retaining tax or duty benefits
- Unified regulator for IFSC
- Dispute resolution through arbitration and commercial courts
- The Budget says that the SEZ Act will be replaced by a new legislation that will enable large existing and new industrial enclaves to optimally utilise available infrastructure and enhance competitiveness of exports.
- It will enable the States to become partners in development of enterprise and service hubs.
- It also says that customs administration in SEZs will be fully IT-driven.
- An infra cluster approach is proposed rather than one based on export subsidies which will be open to WTO challenge.
- The new SEZ legislation will have single window clearance and provide high class infrastructure.
- The new dispensation for SEZ, being considered by the government, could allow domestic units to come up in the unutilised area of SEZs and co-exist with SEZ units with proper monitoring.