“Strategy is a commodity, execution is an art” – Peter Drucker
This explains the whole anatomy of the declining interests of exporters in investing in Special Economic Zone (SEZ). Let’s have a glimpse on the current situation of SEZ.
Chinese export-oriented model making China a “factory of the world” and Special Economic Zone (SEZ) policy developed alongside the eastern provinces along the sea coast, largely contributed to increasing the merchandise trade of China. Therefore, the Government of India in 2005 tried to replicate the Chinese model and announced SEZ Policy.
Indian SEZ followed the model of Export oriented incentives rather than Chinese SEZ which focused on increasing Foreign Direct Investment (FDI), liberalised labour laws, independence regard to trade activities etc.
Owing to the SEZ policy, Exports from SEZs in India rose 21% to Rs 7.01 lakh crore in 2018-19 from Rs 5.81 lakh crore in F/Y 2017-18.
But the lucrative 100% tax exemption for a Special Economic Zone is about to come to an end on 31st March 2020. The sun may set on this exemption as the Union Budget 2020 didn’t consider to extend the sunset clause in Section 10AA of Income Tax Act for the tax holiday.
According to Section 10AA of Income Tax Act, a unit who begins to manufacture or produce articles or things or provide any services before 1st April 2020 shall be allowed a deduction of:
i. 100% of profit or gains derived from exports for a period of 5 consecutive years starting from the year when the unit begins to manufacture or provide any service.
ii. For the next 5 consecutive years, 50% of the profit or gains derived from exports
iii. For the next 5 consecutive years, amount not exceeding 50% of the export profits subject to a condition of crediting to a reserve account called the “Special Economic Zone Re-Investment Reserve Account”
Planning to turn India into an export house, SEZ policy has hardly been able to draw significant foreign investment as it became a place of profit shifting and introduction of 18.5% Minimum Alternate Tax (MAT) & 20% Dividend distribution of tax (DDT) neutralised the tax deduction.
Eyeing the gamut of fiscal incentives like tax holiday and duty-free import of raw material, many SEZ developers found it a lucrative real estate opportunity thereby emerging up with credit worthy projects but the land acquisition & labour laws caused a major hindrance in the implementation of the SEZ policy. Because of the poor policy execution about half of the land notified for SEZs are lying vacant and as on November 2019 out of the total 417 approved SEZ only 238 is operational.
Only Information Technology & ITES has reaped the benefit of SEZ as It accounts for 60% of the operational SEZ.
SEZs might have performed better had they been incentivized as hub guaranteeing better business conditions through effective infrastructure & liberalised labour laws. Central government should have planned in focussing only on few but large zones as the future zones of excellence in manufacturing which should have been developed closer to port and in key manufacturing hubs. As in the case of China, SEZ is strategically located closer to ports or borders for reducing the cost of transportation & are considerable in size. For example, Hainan, a province in China is a complete SEZ covering an area of 34,000 sq. km i.e. 34 times the area of Mumbai whereas India’s SEZ comprises of 0.2-0.3 sq. km.
Another obstacle faced by the SEZ unit is the levy of Customs duty on sale to Domestic area. A solution to it can be the reversal of duty or tax benefits on inputs used for manufacturing for sale to Domestic Tariff Area (DTS) to be followed similar to Export Oriented Unit (EOU) framework rather than the existing policy of levy of Custom duty on DTA sale.
High level Baba Kalyani committee was set up by the Ministry to address this issue and revitalise the SEZ so as to make it World Trade Organisation (WTO) compliant. The committee suggested to revamp the policy and convert it into Employment and Economic Enclaves (3Es).
They proposed that the quantum of incentive should be based on the following factors:
1. Investment committed
2. Job creation
3. Promoting women in jobs
4. Value addition
5. Technology differentiation
6. Trade Potential
7. Priority Industry
rather than the current export based incentives.
After the tension amongst the United States & China regarding the tariff disputes & outbreak of coronavirus in China, companies will be looking for alternate countries to invest. But the companies are preferring to invest in countries like Vietnam & Thailand rather than India because of unfavourable policies & lack of incentives. Therefore, it is time for the current government to gear up and work on the liberalisation of India’s policies to achieve its “Make in India” target.