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In early 2018, India’s export promotion schemes came up for a challenge by US in WTO, for alleged infringement of the multilateral Subsidies and Countervailing Measures Agreement. As per this agreement, export subsidies are prohibited as these are likely to have adverse effects on the interests of other Members. Under WTO dispute report no. WT/DS-541/R, five sets of measures viz. the Export Oriented Units, Electronics Hardware Technology Park and Bio-Technology Park (EOU/EHTP/BTP) Schemes; the Export Promotion Capital Goods (EPCG) Scheme; the Special Economic Zones (SEZ) Scheme; Duty-Free Imports for Exporters Scheme (DFIS); and the Merchandise Exports from India Scheme (MEIS) came under polemics. USA alleged that measures under these schemes were export contingent subsidies inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement. One such scheme that came under WTO spotlight is SEZ scheme. The fiscal measures including Customs Duty, IGST, and Income Tax exemptions under the scheme were objected. As per para 7.99 of the WTO panel report, it was noted that for approving a unit in SEZ, among other conditions, “positive net foreign exchange earning” is a necessary condition under SEZ Act. India argued that the SEZ Act aims to achieve the “overall economic development of areas within its territorial control (which) is crucial to the sovereign functions of a country, and not just export promotion. India also referred to Section 5 of the SEZ Act, under which inter alia generation of economic activity, development of infrastructure, and creation of employment opportunities are the objectives of the scheme. These objectives are not export contingent.  On 31.10.2019, the verdict of WTO dispute settlement came against India.  Though India filed an appeal (which is pending) against the adverse order, it has already started making its policy framework more WTO compliant.

In June 2018, the Government constituted a Group of eminent persons under the chairmanship of Baba Kalyani, Chairman M/s. Bharat Forge, to study the Special Economic Zone (SEZ) Policy of India.  The Group submitted its report to the Government in November, 2019.[1] The Group recommended a Framework shift from export growth to broad-based Employment and Economic Growth (Employment and Economic Enclaves-3Es).The group also recommended formulation of separate rules and procedures for manufacturing and service SEZs.

Desh Hubs Are We Ready To Plug In

The Hon’ble Prime Minster launched Make in India scheme in 2014 with the aim of accelerating economic activity and employment generating activity within India. In her Budget Speech for 2022-2023, the Hon’ble Finance Minister observed that, “the Special Economic Zones Act will be replaced with a new legislation that will enable the states to become partners in ‘Development of Enterprise and Service Hubs’. This will cover all large existing and new industrial enclaves to optimally utilize available infrastructure and enhance competitiveness of exports”.

On 15th July this year, the Government mentioned ‘The Development of Enterprises and Services Hubs (DESH) Bill, 2022’ in Lok Sabha[2]. The Bill seeks to revise Special Economic Zones Act and to frame Rules. If one relies on various bytes trickling in, a paradigm shift in the policy regarding SEZ is in the offing. The new proposed policy seeks to make these enclaves go beyond export –orientation. The focus is shifting from export promotion to enhancement of domestic economic activity and employment growth. The very acronym DESH exudes a patriotic fervor. The mnemonics also help in better strategization. These hubs are likely to cater to both domestic and international markets, and NFE as a precondition is likely to be done away with. As per reports, the proposed bill may retain zero rating of IGST on domestic procurement, as well as it may work as a customs duty deferment scheme; if so, the new framework may substantially reduce the working capital needs of the units, as they may need to eventually pay taxes only at the time final domestic clearances, if any. This may increase liquidity with the entrepreneurs and reduce the capital cost. The government has also launched several PLI (Production Linked Incentive Schemes) in certain sectors. With this emphasis on domestic production, the ground is being ripe for fresh capex uptick in the economy. The proposed clusters are envisaged not only for manufacturing sector but also separately for service sector. The scope of these hubs is likely to be widened from the current IT and ITeS services to cover a broader spectrum of services. It is also expected that a special dispute resolution/ arbitration mechanism will be put in place for these Hubs. There is a possibility that these entities will be treated as bonded zones and customs duty forgone will be charged at the time of domestic clearances rather than the customs duty on finished goods.  If the NFE clause is done away with in the proposed hubs, the domestic clearances are eased, the proposed single window clearances implemented in cooperation with the states in true spirit, and the duties and taxes, especially customs duties, are deferred till final domestic clearances, setting up of units in these proposed hubs is likely to be considerably cost advantageous as well as compliance advantageous vis-a vis existing SEZ scheme. Though the definite contours will crystallise in due course, the bytes show that the scheme can be a game changer in the economy, particularly when India itself is big consumption theme. Aspirant business entities, especially particularly if planning to be part of both global and local supply chains, may find the proposed scheme quite attractive.

[1] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1555650

[2] http://loksabhadocs.nic.in/bull2mk/2022/15.07.22.pdf

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