SEZ Sops can be Based on Employment, R&D, Green-Tech Use, instead of Export Income, says ICRIER Study

‘To abide by WTO Rules, India may Need to Stick to Non-fiscal Incentives’

Incentives for units in Special Economic Zones (SEZs) can be based upon other performance indicators such as employment generation, investment in research and development and use of sustainable practices such as green technology as the government is looking at replacing existing export-linked sops incompatible with global trade rules, a paper by researchers in a Delhi-based institute has suggested.

In a report released on October 31, 2019, a World Trade Organisation (WTO) dispute panel had ruled that certain domestic export incentive initiatives provided by India, including tax sops for SEZ units, were incompatible with its rules.

US complaint

The complaint against India was filed by the US. India, subsequently, filed an appeal against the ruling, but is continuing to take steps to replace all the schemes marked as ‘errant’ by the WTO including the popular Merchandise Export from India Scheme and SEZ incentives.

“The Commerce & Industry Ministry is actively looking at an alternative structure of incentives for SEZs that will not be linked to export income. It is in talks with various stakeholders including institutions and is also looking at SEZ models in other countries,” an industry official said told BusinessLine.

India can take examples from other countries and focus on incentives linked to improving the quality of jobs and technology upgradation within the SEZs, the paper by ICRIER researchers point out.

Non-fiscal sops

“The focus should be on providing non-fiscal incentives such as incentives for adopting green and sustainable business practices, which are very important to cater to key export markets such as the US and the EU. In addition, complementary facilities such as certification and laboratory testing facilities should be subsidised, so that product quality is ensured, and more units are encouraged to set up their base within the SEZs,” the paper stated.

As of June, 2020, there are 255 operational SEZs in India which include 25 multi-product SEZs and remaining are sector-specific SEZs. The share of exports from SEZs in total exports increased from around 5 per cent in 2005-06 to 32.6 per cent in 2018-19, according to the paper.

SEZs’ demand

Adding credence to a demand often made by SEZ units, the paper proposed that duties levied on goods produced in the SEZ units and sold to the DTA (domestic tariff area refers to the rest of the country falling outside the zones) should be at par with the lowest tariffs imposed on India’s Free Trade Agreement partners.

As sales from SEZs to DTA are, at present, subject to full customs duties, units in the DTA prefer to import items from countries with which India has free trade agreements as they then have to pay much lower preferential duties and sometimes no duty at all.