“DESH” – Re-Calibrating SEZ – What is in Store?
{Development of Enterprise and Service Hubs (DESH)}
A Special Economic Zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country’s national borders and their aims include increasing trade balance, employment, increased investment, job creation, and effective administration. Additionally, sops were also offered in the form of tax holidays, where upon establishing themselves in a zone, they are granted a fixed period of lower taxation.
Globally, the first SEZs appeared in the late 1950s in industrialized countries. They were designed to attract foreign investment from multinational corporations. The first amongst them was in Shannon Airport in Clare, Ireland. In the 1970s, SEZs were also established in Latin American and East Asian countries. While many countries have set up SEZs, China has been the most successful in using SEZ model to attract foreign capital. In the case of China, mainstream economists agree that the country’s SEZs predominantly helped to liberalize the formerly traditional state. Without the SEZs, China may not have been able to successfully implement the same level of national reform. Therefore, as far as China was concerned, SEZ pivoted themselves both in Politics as well as in Economics.
Well!! India was one of the early birds amongst developing nations in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. The history is that be, the SEZ policy first came into inception on April 1, 2000. The prime objective was to enhance foreign investment and provide an internationally competitive and hassle-free environment for exports, benefiting exporters. The idea was to promote exports from the country and realize the need for a level playing field which must be made available to the domestic enterprises and manufacturers to be competitive globally. Subsequently, the SEZ Act 2005, was enacted on 23rd June 2005. to provide the umbrella legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs. The procedures were notified through SEZ Rules 2006 with effect from 10th February 2006.
However, India’s SEZ scheme came under the WTO scanner in 2019, when it ruled that India’s SEZ policy violated WTO norms of restrictive trade practice, as it gave direct tax benefits to net-foreign exchange positive entities (i.e. those who earned more forex than they spent) for five years. The World Trade Organization’s dispute settlement panel decreed that India’s export-related schemes including the SEZ Scheme were inconsistent with WTO objectives and Obligations since they directly linked tax benefits to exports. According to the WTO standards, to which India is also a signatory, member countries aren’t allowed to directly subsidize exports as it can distort market prices leading to pecuniary advantages when it comes to global competition. It defies a level playing field amongst the global competing entities. So, India had to conform to the international commitment.
Further, in addition, as the days passed by, the configuration of SEZ scheme also started losing its attraction after the introduction of minimum alternate tax (MAT) and also a sunset clause to remove Direct Tax sops. SEZ units used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the plowed back export profit for another five years. This provided this with an enormous advantage, with huge elbow room to maneuver legally.
Therefore, India had no option but to re-calibrate its economic policy of incentivizing exports through Tax sops and re-orient itself to facilitate three EEEs i.e. Employment, Economics, and Enclaves. Consequently, this new Draft “DESH Bill-2022” has been brought with an objective to replace SEZ Act, of 2005. The intention was expressed by the honorable Finance Minister, during the Budget Speech 2022. The Government now plans to table the “Development of Enterprise and Service Hubs (DESH) Bill 2022” during the upcoming monsoon session of the Parliament. This bill will replace the current Special Economic Zones (SEZ) Act,2005, and become a broad-based, Integrated, time-driven, single window approach.
With this primary objective in mind now, India plans to fundamentally reorient its Special Economic Zones (SEZs) which were earlier just one-stop vehicles to increase foreign investment & exports, into industrial hubs that will focus on boosting manufacturing for the domestic market also, rather than only selling abroad. The bill aspires to allow the productivity of the business entities to its fullest capacity and efficiency aiming at a much wider economic objective beyond promoting exports, to manufacturing and employment. The revamped SEZs will be renamed as development hubs instead of economic zones. Under the renamed Development of Enterprise and Service Hubs (DESH), the stakeholders will be freed from many of the rules that burden SEZs: for instance, regulated DTA transactions, the requirement of Contagious boundaries, austere entry and exit pre-conditions, now they will no longer be required to beget foreign exchange positive and will be allowed to sell in the domestic market much more easily.
Nevertheless, as in the current scenario, all customs duty and GST exemptions that are allowed in the extant Act, now will continue to be available under the proposed new Act as well. On the other hand, the units operating within the new hubs will no longer benefit from direct tax incentives extended by CBDT (Central Board of Direct Tax), which will be scrapped, a move that will make the hubs compliant with World Trade Organization tenets.
Further, according to the draft DESH Bill as proposed, the development hubs will be allowed to sell outside the demarcated area or in the domestic market with duties only to be paid on the imported inputs and raw materials instead of the final product. This is where “DESH” legislation goes beyond promoting exports. It has a much wider objective of boosting domestic manufacturing and job creation through ‘development hubs’. These hubs will no longer be required to be net foreign exchange positive cumulatively in five years as mandated in the SEZ regime, while they will be allowed to sell in the domestic area also more easily. The hubs will, therefore, be WTO-compliant as well. “DESH” legislation also provides for an online single-window portal for the grant of time-bound approvals for establishing and operating the hubs. As selling goods in the domestic market from development hubs will be much more lucrative now, the Bill proposes an “Equalization levy” for clearance in the domestic market. Besides, there is no mandatory payment requirement in foreign exchange.
In the current SEZ regime, most decision-making process is being taken by the Ministry of Commerce at the Centre, while the states have a very minor role to play. But now states would be able to participate in the whole process. State Boards would be set up to oversee the functioning of the development hubs. These would approve the import or procurement of goods and services in the concerned development hub and monitor the utilization of goods or services or warehousing or trading in the development hub. The Development HUBS (on the same lines as the Unit Approval Committee) will be headed by Two Hub Directors, who will, unlike now, have arbitration powers also, while their primary responsibilities will be marketing Business Hubs and attracting new industries into the Hub.
In a nutshell, the following are the key features of the proposed DESH Bill: –
- The DESH bill seeks to expand the ambit of the SEZs firstly to make them WTO-compliant and perform roles that go beyond export orientation.
- It aims to set up ‘Development hubs’ for promoting economic activity, generating employment, integrating with global supply and value chains and maintaining manufacturing and export competitiveness, developing infrastructure facilities, promoting investments, including in research and development (R&D). Such hubs will include all existing SEZs.
- The proposed legislation also seeks to emphasize promoting not only manufacturing but trading and provisions of services too, by broad-banding definition of services & allowing multiple services to come together. In SEZs, only specified services such as IT, ITeS are allowed. But now all services in alignment with GST laws will be allowed, which includes services like liaison offices as well. This will benefit Indian Services Industry to a very large extent.
- Need-based separate rules and procedures for manufacturing and service SEZs will be formulated.
- The Bill is the outcome of proposals made by an expert committee constituted under the leadership of Shri Baba Kalyani, Chairman, Bharat Forge to study and suggest reforms in the SEZ policy.
- The proposed law does not seek to make it mandatory for the SEZs to have positive net foreign exchange earnings. It seeks to focus on single-window clearances. The SEZ online system, Customs EDI and GSTN would be interfaced.
- According to the draft Bill, there will also not be any requirement to have specific demarcation for trading and warehousing activities.
- While there won’t be any direct tax benefits as were given to SEZs which ran into trouble with WTO norms, some indirect tax benefits on customs and GST would continue to be there. The benefits are classified into Fiscal and Non-Fiscal incentives. On the Fiscal side, there will be exemptions from Customs Duties, Central Excise Duties, GST levy, and other Cesses. But Income tax benefits are not proposed to be extended, while Duty drawback facilities would continue. On the Non-Fiscal side, Bank loans will be easy, while borrowing costs may also come down. The basic objective is to Make in India, Serve from India and Serve Globally as there are no NFE restrictions.
- They would be allowed to sell in the domestic market with duties to be paid only on imported raw materials and inputs instead of final products.
- DESH bill also provides for an online single-window portal for the grant of time-bound approvals for establishing and operating the hubs.
- There may be a negative list of Operations instead of a Specified list of Authorized Operations as the experience in Service tax regime shifting from Specified Scenario to Negative list scenario helped not only in the ease of doing Business by also Tax administration to a larger extent.
- These development hubs can be set up by the Centre or state, or jointly by them or by any manufacturer of goods and/or Provider of services. There will be a Unified regulator for International Financial Services Centre (IFSC) and also extending incentives for availing services from IFSC SEZ by domestic institutions.
- A key differentiator between the new and the old law is that under DESH, hubs will allow units to make optimal use of their idle infrastructure by delivering services to customers in India – DTA instead of just focusing on exports, as was the case earlier. A facility of sub-contracting for customers outside HUB(/SEZs) without any restriction or cap at any level has been proposed.
- Dispute resolution through arbitration and separate commercial courts exclusively for HUBs and units in the HUB with the guidance of the Honourable Chief Justice of the respective states will be added advantage for speedy litigation management.
- The scheme also proposes to impose an “equalization levy” as discussed earlier, on firms in the DESH – Hubs when they sell goods in the domestic market. The levy will likely be lower than the regular customs duties that SEZ units are currently mandated to pay while supplying to the domestic tariff area (DTA). However, it is expected to neutralize the advantages that SEZs enjoy, being specifically delineated duty-free enclaves, vis-à-vis domestic manufacturers.
Before bidding adieu ………….
The Bill marks a “fundamental swing” from linking SEZs with exports to possibly leveraging the hubs for domestic consumption and increased employment generation. This is definitely a paradigm Shift by the policy architects. The fact that states will be more closely involved and even existing industrial parks & industrial estates may be converted into these development hubs would mean bigger scale and increased efficiencies. From the Industry’s point of view, they need to start assessing the impact and potentially rebook their existing supply chain models, systems, and processes to fall in line with the new legislation to get a complete comprehensive advantage and benefit most.
In fine, these hubs will facilitate both export-oriented and domestic business, playing the dual role of “Aatma Nirbhar Bharat” making India and its citizens self-reliant and at the same time go global with an impeccable brand value. Effective implementation of the law could act as a lever for India’s sustainable economic growth and further improve India’s rank in the ease of doing business Index.
Jai Hind!!!
Author Bio
Starting with a brief history of origin of SEZ to the current DESH Bill, 2022. Excellent analysis.