DESH Needs to Serve the Country Better

· GoI’s Latest SEZ Reform needs Six more Features to Attract Big-Ticket Investment

The government has introduced the Development of Enterprise and Service Hubs (DESH) Bill in the ongoing Parliament session. This is going to do a makeover of India’s 268 Special Economic Zones (SEZs).

In 2019, the World Trade Organization (WTO) held that subsidies given to Indian SEZ units violated WTOs rules of fair trade. Thus, the new bill will ensure compliance to the WTO rules.

Kandla in Gujarat was our first SEZ. It was kept up in the mid-1960s. This was followed by EPZ (renamed SEZ in 2005) in Noida, Falta, Madras, Cochin and SEEPZ Bombay. Thereafter, Jamnagar became another SEZ in the Gulf of Kutch. It is home to Reliance oil refinery.

There are many other SEZs, all of them governed by the SEZ Act of 2005.

What are benefits provided to Special Economic Zones (SEZs)?

These are duty-free enclaves, with the industrial estates exempted from various levies that went against export competitiveness.

Units located here can freely import what they need and also enjoy many tax exemptions, such as zero GST on domestic supplies. However, for that, NFE must be posted to earn more foreign exchange than spend over each five-year stretch.

The SEZs operate like offshore zones. Therefore, products and services sold by the units in the SEZs, in the Indian market, face regular import tariffs.

India’s 268 Special Economic Zones (SEZs) are set for a fourth makeover – the Development of Enterprise and Service Hubs (DESH) Bill to do this may be introduced in the ongoing Parliament session. Will DESH make a difference? To answer that, let’s go back to the beginning.

Problems with India’s SEZs?

An SEZ is a walled area housing one or more business units. The developer and operating units get tax and duty concessions not available to firms in the rest of the country.

(1) Indian SEZs are much smaller in size and performance. For example, If Indian SEZ are compared with Shenzhen, then Shenzhen’s area (49,000 hectares) exceeds the combined area of Indian SEZs (47,000 hectares).

(2) The minimum space needed for an SEZ in India is less than 50 hectares. Further, services SEZs can operate from a lonely building.

(3) Small size of SEZs prevents them from offering high-quality common facilities and plug & play ecosystems.

(4) Indian SEZs do not perform when tax exemptions end, and investments dry up. Today less than half the land approved for SEZ purposes is used.

How does DESH plan to change this?

(1) it will remove the restriction that exports should be more than imports over five years. Now units will be free to import any amount.

(2) The SEZs units will be allowed to perform invoicing in rupee to facilitate domestic transactions.

(3) More concessions will be provided to SEZ units which will be selling in the domestic market. For Example, today a firm pays both IGST and import duty on the shirt. But after DESH, a unit will pay IGST on the shirt and import duty payable on fabric. This will discourage the import of shirts and promote shirt-making in SEZ.

(4) It will allow denotification of the selected floors/areas in IT/ITEZ SEZs so the owner can effectively use the space. At present, many buildings in these SEZ remain vacant. These are not being utilized for other purposes. Further, the trend will increase as the work-from-home concept catches on.

What more changes are needed to make SEZs in India more effective?

(1) Get big industries: The government should work to invite a large global anchor firms to kick-start operations in the sectoral hub. Their use of Indian ancillary and component supplier firms will benefit the entire sector. For example, as Suzuki did to India’s automobile sector in the early 1980s.

(2) Be quick: There should be Speedy factory-to-ship movement. It can be done through dedicated freight corridors from all hubs etc.

(3) Aim bigger: DESH should focus not just on SEZs but also on industrial parks for various sectors.

(4) Break barriers:  The government can develop a GSTN-like system to monitor movement. Further, stringent provisions can be made for small-volume high-value items like gold and diamonds to check misuse.

(5) No IT Enterprises: The government should remove IT/ITES firms from the purview of DESH law. There is hardly any import.

(6) Be fair on land:  Many developers bought land with the help of state governments, which used the ‘public purpose’ clause to acquire land. However, a number of pieces of land acquired in the name of SEZs remain unutilized. Therefore, the government should return such non-operational SEZ land to rightful owners.

(7) India needs to learn from Shenzhen, which acts as a self-contained economy. Tax benefits were just a small part and not the primary reason for Shenzhen’s success. The Shenzhen is a large SEZ. Therefore, it has attracted investors, professionals and large anchor firms. Further, the units established in electronics, computers, textiles and chemicals etc. are also large-scale.