Domestic tariff area (DTA) units could use SEZ facilities

To help special economic zones (SEZs) absorb global economic shocks, the government plans to allow them to make available their excess installed capacities for the use of industrial consumers in the domestic tariff area (DTA). The idea is to ensure that industrial capacities built up in SEZs don’t remain idle in case another global slowdown occurs and dry up export demand. Of course, such contract manufacturing by SEZs would be bereft of any tax relief.

The move follows the reports that several SEZ developers are planning to exit due to weak demand in overseas markets consequent to the economic crisis.

A set of amendments to the SEZ Rules on the cards would also include fixing time lines for development of the zones and a reduction in the mandatory minimum area for farm SEZs from 100 to 40 hectares, official sources told FE.

Scores of SEZs have been hit by the global crisis. At the last count, 12 developers have sought an exit and nine of them have got the Board of Approval nod for that. The Essar group, which has almost built a steel SEZ at Hazira, is among those who want to shed the SEZ tag.

The present norms mandate that SEZs can take orders from Indian companies located outside the zones (DTA) only if they are for exports. The proposed rules would allow SEZs to take up orders from any Indian firm located outside. The idea is to let SEZ units use their excess manufacturing capacity to process orders from companies located outside the zones.

Experts believe that the move will give domestic companies access to state-of-the-art machinery in the zones.

“SEZs will be able to provide manufacturing services to DTA units. It will help the zones to achieve economies of scale,” said Tapan Sangal, senor manager, PricewaterhouseCoopers.

To ensure that there is no loss to the exchequer, the DTA unit will have to provide the SEZ with the required raw material, finished goods and other consumables. The SEZ units will do the value addition, a kind of contract manufacturing, and return the finished goods to the DTA firm. Prior government permission is required for taking such orders.

The move will not impact the net foreign exchange commitments of the zones—earnings from exports will have to be more than imports in a block of five years. “There will not be any loss to the exchequer as all inputs will be provided by the DTA unit. And since goods supplied by DTA units to SEZs for processing is not an import, there would not be any need to achieve net foreign exchange surplus for such orders,” said SEZ expert Hitender Mehta, head, Vaish Associates, Gurgaon.

Explaining the proposed amendment, a commerce ministry communique to SEZ developers said: “The present amendment has been proposed with a view to effectively utilise the installed capacities in the SEZs, especially in times of economic downturn, and also to help the DTA units to get the benefit of value addition as would have obtained from overseas.” The proposed amendments will be notified after comments are received from the SEZs.

The proposed amendments also intend to erase some policy grey areas and clear some bottlenecks. For instance, the proposed amendments seek to provide a 10-year timeline for development of the minimum built up area of the zone. Moreover, it also says that the developer of the SEZ should get at least one unit approved in the zone within three years of getting the green signal. The present guidelines only say that a developer has to take ‘effective’ steps to implement the approval within three years.

According to the proposed rule, a SEZ will be considered as operational when a unit gets approved. The current practice is that at least one unit will have to start exporting goods to declare the SEZ operational. “The current practice led to practical problems as it is not possible to record exports from SEZs within three years of approval. State government approvals for SEZ master plans can take up to three years,” said Mehta.

Moreover, to promote agri-based SEZs, the commerce ministry has proposed to decrease the minimum area from 100 hectares to 40 hectares. “To promote agro-based industries, it is proposed to optimise the area required, as otherwise the minimum area prescribed is such that agro-based SEZs may not come up,” the commerce ministry explained.