SEZs account for about 30-35% of India’s total exports. However, a non-supportive tax structure coupled with limited participation by the states has resulted in an under-realised growth from this sector. In an exclusive interview with The Dollar Business, Rahul Gupta, Chairman, Export Promotion Council for EOUs & SEZs (EPCES) discusses issues that are hampering the growth of SEZs in India.

Ahmad Shariq Khan | March 2017 Issue | The Dollar Business

TDB: Can you tell us about your Council’s efforts aimed at bringing Indian EOUs and SEZs on par with their global counterparts?

Rahul Gupta (RG): The Ministry of Commerce and Industry has set up Export Promotion Council for EOUs and SEZs (EPCES) to serve the export promotional needs of EOUs, SEZs and SEZ developers in the country. The EPCES organises open house interactions, seminars and workshops in different parts of the country to highlight and resolve the issues of EOUs and SEZs. The inputs that we receive from them are then forwarded to the government for the formulation of the foreign trade policy.

We take up the concerns of EOUs and SEZs with various ministries and departments like Commerce, Finance, CBEC, CBDT, RBI, the state governments, etc. We, along with EOUs and SEZs, also participate in trade fairs and exhibitions, both in India and abroad. We arrange and provide benefits to EOUs and SEZ units through the Market Access Initiative (MAI) Scheme of the Ministry of Commerce and Industry, for their export promotion activities across international markets. We also bring out many publications which are of immense help to EOUs and SEZs. In addition, we assist development commissioners, Customs and Central Excise authorities in their day-to-day functioning.

TDB: Many say that the information EPCs collect from various sources becomes obsolete by the time it reaches the ultimate beneficiary. What changes do you recommend?

RG: Given the dynamic global business environment that our exporters operate in, the need of the hour is that all EPCs should be able to effectively monitor and propagate up-to-date commercial data sought by member exporters. At EPCES, we pay special attention to this aspect. In order to give a boost to exports, it is imperative that the EPCs function as professional bodies. For this purpose, executives with a professional background in commerce, management and international marketing and with experience in government and industry should be brought into the EPCs. The EPCs must also adopt the latest technologies and office equipment for prompt dissemination of information to trade and industry bodies for their benefits. They should also train their officers and staff so that they remain on par with similar international trade associations and bodies and are able to compete with them for providing effective and useful services to their members.

TDB: What has been the contribution of SEZs to India’s economy?

RG: Ever since the SEZ Act was enacted in 2005 and the SEZ rules were made operational on February 10, 2006, there has been a tremendous response to the SEZ scheme from both national and international investors. The exports from the SEZ sector in FY2016 touched Rs.4,67,337 crore. SEZs are generating employment for 16,88,337 people in the country and investments worth Rs.4,06,990 crore have been made in SEZs across the country so far.

These figures clearly indicate that the SEZ Scheme is moving in the right direction in achieving its stated objectives of increasing exports, attracting investments, generating additional economic activity and creating world class infrastructure in the country.

So far, 405 SEZs have been formally approved, out of which 329 have been notified and 206 have been made operational.

TDB: Critics allege that by imposing DDT and MAT on SEZs, policymakers have damaged the pro-investor image of SEZs. What is your take?

RG: The imposition of MAT and DDT on SEZs have adversely affected the growth, investments, employment and exports from SEZs and resulted in a loss of valuable foreign exchange for the country. This has created a lot of uncertainty in the minds of SEZ developers and units and has sent the wrong signals to the international investment community that is looking at India for its vast resources of skills and manpower. EPCES has requested that the government should take certain steps which would demonstrate its continued commitment to SEZs. Such steps could include withdrawal or reduction of MAT and DDT rates for SEZs, or the surplus lying unutilised in MAT accounts should be refunded.

TDB: Going forward, what are your expectations from the government so that the landmark reforms, such as GST, continue to act as enabling agents for EOUs and SEZs?

RG: GST is designed to ensure that all producers and distributors are treated as complete pass-through and exports are zero-rated. The model GST law, released in June 2016, does not provide any direct exemptions to the developers of or units in SEZs or EOUs. Thus, up-front exemption from Customs Duty or Excise Duty or Service Tax and CST for a SEZ unit or developer or EOU may not continue as GST may be payable on imports or procurements as per the model GST law.

We need a study that will take into consideration the current practices, benefits and incentives available to SEZs or EOUs, and the proposed scenario under the GST regime based on the model GST law. Since the model GST law does not dive deep into providing clarity on the position of SEZ or EOU units under the GST regime, the same would require various amendments during the drafting of the final GST law, and the study will help them take rational decisions.

"Model GST law does not provide any direct exemptions to SEZs And EOUs"

TDB: What steps have you taken to ensure that the right amendments find their way into the law?

RG: We have organised meetings of EOU and SEZ units and developers with senior officers of Ministries of Commerce and Industry as well as Finance. However, some of our major requests are still pending with them, and they are: (1) the definition of exports in the model GST law need to synchronised with SEZ Act to avoid any dispute; (2) Section 26 and 30 of the SEZ Act requires appropriate modification to give effect and provide exemption from IGST, CGST, SGST on imports as well as domestic procurement of inputs; and (3) since transfer of goods from DTA to SEZ is treated as exports, it may be treated as physical exports. Also, since sub-contracting for SEZs has been fully exempted under GST, I believe, any future GST Council meet would discuss the roadmap ahead with regards to the actual implementation of the exemption.

TDB: The EOUs are standalone export promotion units. They receive neither incentives nor subsidies in any form from the government. Thus, experts believe that a little push from the government can revive exports from EOUs. What is your opinion?

RG: The EOU scheme provides the liberty to entrepreneurs to set up manufacturing plants at any location within the national territory as per their convenience – in terms of availability of raw material and skilled manpower, access to ports, existence of hinterland facilities, industrial infrastructure, etc. Being composite in nature, the scheme brings many fiscal, institutional and procedural benefits to the units under one roof.

Exports from EOUs during FY2015 touched just Rs.98,803 crore. Presently, EOUs do not enjoying income tax benefits. However, for reviewing and revamping of the EOU Scheme, the Ministry of Commerce and Industry had constituted a committee under the chairmanship of S. C. Panda, IAS (former Development Commissioner, Noida SEZ), to suggest measures for revitalising the scheme.

The Panda Committee has submitted 32 recommendations in its report to Dr. Rahul Khullar (then Commerce Secretary), on July 13 2011, for reviewing and revamping of the EOU Scheme. These recommendations constitute various fiscal measures, policy initiatives, administrative mechanisms, procedural simplifications and rationalisations as well as measures to reduce transaction cost in order to arrest and reverse the declining trend in setting up of EOUs. The recommendations would ensure sustainable growth of exports from EOUs.

As of now, some of the recommendations of the S. C. Panda Committee, relating to the Ministry of Commerce and Industry, have been implemented by Ministry of Commerce and EPCES. However, there are a few recommendations which are still pending with the Ministry of Finance.

TDB: What do you envision the role of the states to be in supporting EOUs and SEZs? How do you see the Centre-State equation affecting their growth?

RG: In our opinion, all states have to come up with an export policy which identifies products and services that have significant potential in the global arena. With a view of giving a push to India’s exports, we have requested the government to ask each state to formulate respective export promotion policies focusing on products or services of interest to supplement the Centre’s efforts at boosting the exports from EOUs and SEZs. And, some states have already come out with their export policies.

In India, it is the states that deal with land, electricity, water and value added tax (VAT). Hence, the role of states is very crucial. Going forward, targeted efforts to promote exports from states would result in not just the overall economic development of the states, but also in generation of employment, attracting foreign and domestic investments, increase in economic activities, etc., for the entire nation as well.

TDB: Do you think the states should be given an export target so that they support exports from SEZs and EOUs?

RG: As said earlier, states have a vital role to play in increasing exports, manufacturing, foreign and domestic investments, generating employments, etc., in the country. And EOUs deserve the support and attention of the state governments. And yes, I think fixing exports target for the states can help in achieving objectives for setting up EOUs. EOUs exist in most of the states and many of them are located in the rural areas, whereby they have directly contributed to the all-round rural economic development of the states too.

Well, if the recommendations of the Panda Committee are accepted for implementation, it will be of immense help to this sector to sustain the overall growth and development of EOUs. And the state governments need to take certain measures like providing an exemption to EOUs from state levies on goods supplied to EOUs for increasing exports and economic development of the respective states and as well as the country.

TDB: EPCES is a member of the WFZO. What objectives do you wish to achieve through this association?

RG: The World Free Zone Organisation (WFZO) has been established to bring together free zones from around the world to enable them to achieve shared objectives and address common issues. Today, WFZO has members from 40 countries. Through our association with WFZO, we want that the WFZO to be able to achieve its objective to foster public awareness of the role and contribution to economic growth that free zones have made across the globe.

TDB: How should India’s FTAs be altered to be more in sync with the requirements of SEZs?

RG: We have requested the government to urgently examine the policies, just to ensure that the industries located in SEZs are not adversely affected by India’s signing of FTAs with different countries. One measure in this direction could be to provide the same concessions to SEZs which are being offered to the countries with which we have FTAs.

This will ensure SEZs the continuity to attract investment and boost exports and augment employment. As SEZs cannot be brought under the FTA-related regulations, it is suggested that concessional rates applicable to items, covered by FTAs, be worked out for sales from SEZs to DTA.

SEZ units are in any case subject to the requirement of positive net foreign exchange earning (NFE). Hence, they can only sell the products in DTA after significant value addition as the export value has to be more than the import value to achieve NFE. We believe that any international investor would make an investment in the SEZ only if it is able to utilise its production facilities to make sales in the huge domestic market as well. We don’t think an investor is likely to come to SEZs only for exports.

TDB: Domestic manufacturers prefer to source raw materials and inputs from FTA countries instead of SEZs due to duty concessions. What can be done to help level the playing field?

RG: We have already submitted our suggestions to the government to provide the best FTA rate of duty on the sale of goods from SEZs to DTAs to make sure that value addition, manufacturing and employment in the country are increased. If the finished product is directly imported into the domestic market, it leads to foreign exchange outflow of the product. Whereas, if we encourage manufacturing in SEZs, then SEZ units will import only the inputs and manufacturing would be carried out within the country. This way, we will reduce imports and save on foreign exchange while at the same time generating employment and increasing manufacturing activity in the country.