“When country is celebrating Azadi Ka Amrit Mahotsav and marching towards Atmanirbhar Bharat to counter the evil effects of covid pandemic DESH has become a shot in the arms of national builders.”
The Government plans to table the Development of Enterprise and Services Hubs (DESH) Bill during the ongoing monsoon session of Parliament to overhaul the SEZ Act of 2005 with an aim to make governing provisions of Special Economic Zones (SEZ) more WTO Compliant.
Before discussing the provisions of DESH Bill in detail let us try to understand the existing situation of Indian SEZs and reasons for overhauling the SEZ Act of 2005.
SEZ are special enclaves within the territory of a country, in which business, trade and tax laws are different from the rest of the country and are mainly setup for the export purpose. The basic idea is that in these areas export oriented production can take place free from the plethora of rules, and regulations governing import and export. Any State Government or corporate entity or individual can furnish proposals for setting up such zones.
Presently, in India, SEZs are governed as per the provisions of the SEZ Act of 2005, which is aimed to boost exports, create additional economic capacity, generate employment, attract foreign investments, develop infrastructure facilities. Last but not the least they were established to create a conducive business environment.
In last 17 years, there are 425 approved SEZs under the SEZ Act 2005, out of which 376 SEZ’s are notified and 268 SEZ’s are only operational. Around 5,576 units are approved in these SEZs.
Indian SEZs had Land bank of 47,013.65 Ha which created an incremental investment and incremental employment of Rs.6,45,669.50 crores and 25,61,476 persons respectively.
In India SEZs have not been as successful as the SEZs in countries like Singapore and China. Several issues have been emerged in the functioning SEZs in India. Few of the challenges faced by the Industries in SEZ are as under:
- Lack of flexibility in utilization of land in SEZ for different sectors resulted in unutilised land of more than 25,000 hectares
- Administrative difficulties with existence of multiple models of economic zones such as SEZ, coastal economic zone, National Investment and Manufacturing Zone, Food Park and Textile Park.
- Removal of goods from SEZ to DTA is treated as imports and shall be chargeable to duties of customs including Countervailing duty, Anti-dumping Duty and safeguard duties under Customs Tariff Act 1975. The said imposition of duty resulted in under utilization of existing capacity in SEZ.
- Imposition of Minimum Alternate Tax (MAT), Dividend Distribution Tax (DDT) and Sunset clause provisions made Indian SEZs less attractive
- Inferior infrastructure in land locked states, complicated compliance procedures, rigid labour laws and non-availability of skilled labour.
- Requirement of payment in foreign exchange for services provided by SEZ units to DTA area hindered the growth of Indian SEZs.
- Environmental clearances in project execution of large investment proposals.
- SEZ’s and land acquisition are interconnected. Large amount of land is required for development the SEZ’s which is an uphill task in one of the largest populated country in the World. Land acquisition in Atchutapuram (Vishakhapatnam), Nandigram (West Bengal), Baikampady SEZ are few examples to quote.
- Compliance procedures for SEZ units in relation to transfer of physical and financial assets from SEZ to another entity eligibility to set up a SEZ Unit.
Baba Kalyani Committee
In this background, to address the existing short falls in SEZ model adopted in India, Ministry of Commerce and Industry constituted Baba Kalyani Committee to study existing SEZ framework in India and to prepare Strategic policy measures for capitalizing global growth opportunities with own manufacturing and service base. The committee had submitted its recommendations in November 2018.
Key highlight of the Baba Kalyani Committee report
1) The Committee has recommended to shift focus from exports to promotion of integrated hubs for employment and economic growth.
2) To allow domestic supplies in Rupee/payments to be made in rupee when SEZ with DTA by moving away from incentive linkages from exports so that the condition for Net foreign exchange is not required.
3) One integrated online portal for new investments, operational requirements and exit related matters.
4) Formulation of separate rules and procedures for manufacturing and service SEZs
5) Extension of Sunset clause and retaining tax or duty benefits.
6) Dispute Resolution through arbitration and commercial courts
7) Promotion of MSME participation in manufacture and service units of SEZ
8) Assigning infrastructure status to SEZ units in order to improve access to finance and enable long term borrowing.
DESH BILL 2022
After considering the recommendations of Baba Kalyani Committee report, the Government proposed to table the DESH Bill during the ongoing monsoon session of Parliament to overhaul the SEZ Act of 2005
In DESH Legislation, the government has proposed to create developmental hubs, whose focus is not limited to exports, but also to cater to the domestic markets. The Bill also seeks to integrate existing industrial estates such as textiles and food parks by converting them into developmental hubs.
In the year 2019, WTO panel had said that incentives given to entities located in SEZs violated the agreement on subsidies. So now, the government has decided to overhaul the SEZ rules with DESH Bill.
SALIENT FEAUTURES OF DESH LEGISLATION
Reorganization of SEZ Units into Enterprise Hubs and Service Hubs
As per the proposed legislation, SEZs are recoined with new title “development hubs”. These development hubs inter alia include enterprise hubs and service hubs along with existing special economic zones.
The enterprise hubs will have land-based area requirements and be allowed for both manufacturing and services activities, services hubs will have built-up area requirements and be allowed for only services-related activities. These hubs, will come up under the regional boards of states, can be created by Centre or states or jointly by both or by any goods and services provider.
One of the key aspects of the new DESH Bill is also to promote the expansion of the ambit of service sector units. Currently, only specified services such as IT, ITeS are allowed in Special Economic Zones. Further, LLP and foreign liaison office or foreign branches approved by RBI were brought into the ambit of DESH Bill 2022.
| Particulars | SEZ Act 2005 | DESH Bill 2022 |
| Person | includes an individual, whether resident in India or outside India, a Hindu undivided family, co-operative society, a company whether incorporated in India or outside India, a firm, proprietary concern, or an association of persons or body of individuals, whether incorporated or not, local authority, trust or any entity as may be notified by the Central Government, and any agency, office or branch owned or controlled by such individual, Hindu undivided family, co-operative, association, body, authority, company, trust or entity; | includes an individual, whether resident in India or outside India, a Hindu undivided family, co-operative society, a company including LLP entities registered under Companies Act, whether incorporated in India or outside India, a firm, proprietary concern, or an association of persons or body of individuals, whether incorporated or not, local authority, trust or any entity as may be notified by the Central Government, and any agency, office or branch (including a foreign Liason office or a Foreign branch as approved by RBI)owned or controlled by such individual, Hindu undivided family, co-operative, association, body, authority, company, trust or entity; |
New principles for notifying Developing Hub
DESH Bill 2022 has added following new guiding principles along with existing principles enlisted under SEZ Act 2005, which are tabulated as under:
i) Promotion of innovation, and investment in research and development
ii) Integration with global supply and value chains and maintenance of manufacturing and export competitiveness
iii) Creation of global centres for data and service destinations
The above guiding principles portrays the objects and intention of the framers of the legislature.
Classic Example of Co-operative Federalism
Larger role for states: In the SEZ regime, most decisions were made by the commerce department at the Centre. Now, states will be able to participate and even directly send recommendations to a central board for approval. In other words, the functions of Unit approval committee shall be replaced by the State Regional boards.
State Regional boards would be set up to oversee the functioning of the development hubs. They would have the powers to approve imports or procurement of goods and monitor the utilization of goods or services, warehousing, and trading in the development hub.
Driven by Technology
As per DESH Bill 2022, an integrated online portal would be established and maintained for granting time-bound approvals for the establishment and operation of Development hubs. The Competent authorities (board, regional board) shall dispose the applications in integrated online portal only.
The said mechanism promotes accountability, transparency and easy of doing business in the country.
WTO Compliant DESH Legislation:
Under DESH Bill 2022, the definition of service is not co-terminus with foreign exchange earnings. Further, the service definition expanded its horizon by including manufacturing and warehousing services under its ambit along with Service definition under SEZ Act.
| Particulars | SEZ Act 2005 | DESH Bill 2022 |
| Services | “services” means such tradable services which, –
(i) are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organisation concluded at Marrakesh on the 15th day of April 1994; (ii) may be prescribed the Central Government for the purpose of this Act and (iii) earn foreign exchange |
“services” means such tradable services which, –
(i) are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organisation concluded at Marrakesh on the 15th day of April 1994; (ii)Manufacturing and Warehousing Services. (iii)may be prescribed by the Central Government for the purposes of this Act. (iv)as defined in CGST Act 2017 and included in its schedule |
In other words, DESH legislation goes beyond promoting exports and 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 (i.e, export more than they import) as mandated in the SEZ regime and will be allowed to sell in the domestic area more easily. The hubs will, therefore, be WTO-compliant.
Expansion to Domestic Markets
As per new legislation, development hubs can sell goods in the domestic market where duties is to be paid on the imported inputs instead of the expensive final product.
In the current SEZ regime, duty is paid on the final product when a product is sold in the domestic market. Besides, there is no mandatory payment requirement in forex, unlike in the case of SEZs.
The above proposal enhances price competitiveness and presence of development hub products in domestic market and whereby reduces the dependence of imports.
Development of Qualitative and Quantitative workforce:
In developing countries like India, generation of employment for the masses is critical. In these scenarios, labour intensive manufacture activities need to be attracted for establishment in India.
It is not out of place to mention that the new DESH legislation proposes to establish modus operandi for sub-contracting to or from Development hubs to Domestic Tariff areas. The said proposal may result in win to win situation to both Development hubs and Domestic Tariff Areas by addressing unemployment and in developing qualitative work force in the country.
Dispute Resolution mechanism for resolving Commercial disputes
Under DESH Bill 2022, whenever commercial disputes arise in development hub, the same shall be referred to mediation for resolving commercial disputes by the Hub director. In case the commercial disputes are not resolved through mediation then the same shall be referred to arbitration under the Arbitration and Conciliation Act, 1996 (26 of 1996). The above two stage process facilitates for quick disposal of commercials disputes through out of court settlement and reduce the burden of courts.
Way forward
When our Nation is marching towards its ambitious plan of reaching $ 5 trillion economy by 2025 it is imperative on all stakeholders to own the laws promulgated by various legislative bodies -be it centre or the state and work with win-win spirit leaving no scope for short sightedness. The New India has been experiencing various changes in recent past viz.. Smart cities, GST laws, Insolvency and Bankruptcy laws, PMLA, Sagar mala, Bharath Mala, Digital India, Make in India, Skill India, Stand up India, Start up India. It is the fond hope of law makers that this new piece of legislation DESH 2022 will be another milestone in our journey to become world leader. Needless to say that this legislation throws open a sea of opportunities to various professionals of India in successful grounding of the units with integrated approach.
(the views expressed in this article are strictly personnel and author of this article can be reached at caprudhvigst@gmail.com )
Author Bio
If this Bill is put for public debate an honest introspection of positive role played by various stake holders.Why SEZ is a success in chaina and infested with limitations in India? Here there r many intellectuals to bring out cons and throgh pros conveniently under carpet.
Coming to way forward lot mergers and restructuring proposals will come up which may call for due diligence in applying Insovency and Bankruptcy ACT and other corporate laws