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Aerial view of the amphitheater at eVolve – The GenNxt IT Park in IT SEZ, Mahindra World City, Jaipur. Developers have build infrastructure in huge tracts of land but in the present condition are finding it difficult to attract exporting units.
Special Economic Zones (SEZs) came into being a decade back with extravagant praise. The 'big idea' was to enhance exports and earn precious foreign exchange. Considering that an SEZ was completely exempted from income tax, these zones were successful in achieving their mandate, even clocking a stellar exports growth of 121% in FY2011. But that's where the good news ends. Today, we are faced with a pertinent question. Is the modern day SEZ policy encouraging enough to help India realise its export ambitions? Or is there a need for an overhaul in the rules that guide, control and dictate the functioning of SEZs? The Dollar Business investigates reasons for the unhappy state of affairs of these special 'export' zones and if revival is a possibility.
Sisir Pradhan | August 2016 Issue | The Dollar Business
Recently, an interesting piece of news caught our eyes – speculations are rife that the Ministry of Commerce and the Ministry of Human Resource Development are in talks to allow foreign universities to set up their campus in India's Special Economic Zones (SEZs). This was apparently being done to address the shortage of quality higher educational institutes in the country and, not surprisingly, to utlise the vast tracts of land that remain unutilised in SEZs across the country! Foreign universities in SEZs could be a good idea, as that will sort out the contentious issue of repatriation of profits in the Foreign Education Providers Bill (note: at present, repatriation of profits by foreign educational institutions is barred under Indian law) and Indian SEZs could become an attractive destination for Asian students. Sounds logical! But even this logic cannot mask some obvious questions that any logical Indian reading this paragraph will ask – why do such large tracts of lands remain unutilised across India's notified SEZs? Aren't policymakers doing anything to address the issue? Why is it that of late, we see a slew of notifications denotifying SEZs? And above all, what are the underlying reasons behind the fact that the much-touted SEZ scheme, which was framed after five years of brainstorming, is unable to attract manufacturers and service providers? Straightforwardly put – why are the once extravagantly praised SEZs losing relevance in the modern times?
Talk to any SEZ developer or a unit operating from an SEZ across the country, and one common factor (responsible for the decline) that most will point to is that the "tax structure for SEZs is no longer attractive". Well, that is a logical concern and surely needs to addressed. But then, is it all? Or, is there a deeper malaise that dwells in these 'so-called' special zones? Perhaps structural issues, as many point out, lie behind the fall of SEZs. SEZs have served the nation well by enhancing exports, attracting investments and generating employment. So, what has suddenly happened that investors have become wary of them?
If we go back in time, the SEZ scheme, a successor to the Export Processing Zone (EPZ) scheme, for the first time became part of India's Foreign Trade Policy in 2000 to promote exports from the country. In order to impart stability to the SEZ regime and create greater economic activity and employment through the establishment of SEZs, a SEZ Act was also enacted. Lest someone accuses policymakers of being in a hurry, we shouldn’t forget the fact that the SEZ Act materialised only in 2005, after 5 long years of debate and discussions. The idea was to let private investors develop sector specific or multi-product facilities that would provide common infrastructure for export oriented units operating within a notified zone.
[Autumn 2015 edition of Canton Fair in China) If we take a closer look at China’s overall internal and external policies, they've been framed keeping in mind the impact on exports. ]
In a bid to lure private investors to set up SEZs, the then Union government used the tried and tested tax holiday scheme, reinforced with facilities and incentives such as duty free import or tax-exempted domestic procurement of goods for the development, operation and maintenance of an SEZ, exemption from Central Sales Tax (CST) for both developers and units, and Service and Income Tax exemptions for a block of 10 years in 15 years’ timeline for developers.
From the surface, the SEZ proposition looked tempting, but in a hurry to boost exports and attract investments policymakers overlooked, knowingly or unknowingly, two critical factors. First, to assess whether the Income Tax exemption scheme was sustainable in the long run. Second, while it may have been a good idea to incentivise developers and units that earn foreign exchange for the country and generate employment, a logical mechanism to award units performing well rather than extending incentives to even the non-performers was overlooked.
[ A large number of MNCs and large Indian conglomerates have set up their export-oriented units in special economic zones to avail the many benefits. However, flip-flops in policy have made them wary of investing further. ]
Notably, the units based out of SEZs have to be net foreign exchange earner (NFE) and are not subject to any predetermined value addition like the ones based out of DTA. As such, there are no minimum export performance requirements except being NFE positive. Hence, a key 'performance' indicator was given a miss while framing the Act.
Further, interestingly, SEZ Act 2005, which was supposed to bring in policy stability, has in the last 11 years itself undergone about 24 major amendments, including the ‘U-turn’ on exemption from various taxes, including Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT),mandated in the original SEZ Act of 2005. Considering this, how can one even expect businesses to flourish in SEZs, leave aside giving exports a leg-up?
With the enactment of the Act, there was a flurry of activity. Developers rushed to get large tracts of land notified as SEZs, and the incentives were attractive enough to attract businesses to set up units in these facilities. Prior to the enactment of the SEZ Act, 2005, there were seven Central Government SEZs and 11 state and private sector SEZs. However, since the inception of the Act, 417 SEZ development proposals have been approved in India. Tax and other incentives fuelled the growth of exports from SEZs between FY2007 and FY2014, but revenues have been on a decline since FY2014. Also, there has been a sharp decline in interest from developers. But then, the re-imposition of MAT and DDT are not the sole reason for the decline in exports from SEZs. In a zest to enhance exports, the government has over the years initiated a number of schemes to incentivise exports from DTA, prominent among them being the Duty Drawback Scheme, Focus Product Scheme (FPS), Focus Market Scheme (FMS) and now the Merchandise Exports from India Scheme (MEIS). The country also went on a FTA signing spree during the same period. These schemes and trade agreements made exports from DTA an attractive proposition without the restrictions that were applied to units in SEZs. That brings us to wonder, shouldn't the government take a more holistic approach towards exports and work towards a framework that addresses the concerns of both DTA units and SEZ units while promoting exports?
It is not just SEZs that have registered a negative growth in exports. Overall, month-on-month, merchandise exports from India has also come down. According to Directorate General of Commercial Intelligence and Statistics (DGCIS) data, India’s merchandise expor
t has come down from $314.41 billion in FY2014 to $310.34 in FY2015 and it further slipped to $261.14 billion (provisional figure) in FY2016.
The downward trend in exports from India has been shown as a reciprocation of overall slowdown in the global economy and fall in crude oil prices and commodity trade. Interestingly though, if we take into account a WTO report, China registered a positive exports growth of 11.39% for March 2016 as compared to the corresponding period previous year. Hence, the performance of SEZs can’t be seen in isolation. Other factors that should have added together to enhance India's exports haven't been heroic either!
A mechanism to award sez units performing well was overlooked while framing the sez act
While India is being viewed as the next growth driver for global trade after China, its volatile trade policy and inconsistent infrastructure have not let exporters and importers to operate at the optimum level and exploit the full potential of foreign trade.
China’s political system, which is immune to the change in leadership of the country, in the meanwhile, has allowed its foreign trade community to enjoy a unilateral and consistent policy, keeping in view the long-term and broader goals in foreign trade. It has also used its dominant position in the global supply chain to enhance its stature, which is now in no way lesser than the biggest of economic super powers in the world.
If we take a closer look at China’s overall internal and external policies, be its advances in South China Sea, or an indifference to the stand of US in most global issues, or sanction of funds to African nations, or the String of Pearls strategy, each clause contained in its economic, defence, external affairs and foreign trade policies has been conceptualised keeping in mind its direct or indirect impact on its exports.
It goes without saying that two of the major economies that have largely influenced and fuelled the growth of global trade in modern times have been China and United States. While US has been a consumer driven economy with a strong inward merchandise traffic for its domestic consumption and with exports largely focused on high-tech products, China, on the contrary, has tuned its economy and infrastructure to be more export oriented with a strong focus on export of mass manufactured goods with a heavy dose of value-addition.
And when it comes to India, exports from the country only started taking off in the early 1990s following the economic liberalisation. However, the country from the very beginning lacked a foreign policy that was strongly aligned with its trade policy. Only in recent couple of years we have seen the single-purpose intent to achieve broader economic goals of the country with external trade being key. One big reason for this being our leaders who in the past have always wanted to portray a picture of India being a "neutral country". Two States While SEZs in India have not performed to potential in recent years, interestingly enough, India was the first country in Asia to adopt the SEZ modality and had developed an Export Processing Zone (EPZ) in line with the principles of SEZ at Kandla in 1965. Kandla had a distinctive advantage of being next to a major port, land acquisition was hassle-free since vast patches of barren land with very low population density was available, there was negligible labour unrest, and tax incentives were extended by both the Union and state government. The EPZ was later converted to SEZ after the enactment of the SEZ Act.
In fact, the multi-purpose Kandla SEZ is till date one of the biggest and most successful operational SEZs in the country. “The SEZ had exports [physical exports] of Rs.4,227.08 crore in FY2016. However, DTA sale and deemed exports from the SEZ in FY2016 was Rs.1,098.86 crore and Rs.10.16 crore, respectively. Hence, the total production from the SEZ comes to Rs.5,336.10 crore,” the office of Administrative Officer (P&C), Kandla SEZ tells The Dollar Business, through an email communiqué. With 250 operational units, the Kandla SEZ has also generated direct employment of 25,759 (data as on December 31, 2015). [Notably, the combined exports from all SEZs in Gujarat was Rs.1,35,633 crore in FY2016, which accounts for about 40% of the country's exports from SEZs.]
Interestingly, it was the success of Kandla EPZ that had inspired the policymakers to adopt and implement the same model on a pan India basis and thus the SEZ Act came into consideration. However, the kind of success that Kandla SEZ and later other SEZs in Gujarat have achieved has not been seen in other parts of the country. Outside, Gujarat, at large, successful SEZs have largely been restricted to regions that were already prosperous as industry clusters!
Sezs from gujarat account for about 40% of total exports from sezs in india
If we take a closer look at the lifecycles of SEZs in a multi-party system that India is, it becomes clear that state governments have had much to do with the success (or the lack of it) across these clusters. Speaking on the participation of State governments to promote export promotion in general, Tara Patnaik, CEO of Falcon Marine Exports, says, “Barring a few, most state governments have very little or no interest in promoting exports from the state since revenues that are generated from exports go to the Union government. The state governments need to understand that export also generates direct and indirect employment for the local youth and also stimulates the local economy.”
Interestingly, Gujarat has also formulated the Gujarat SEZ Authority Rule to provide clarity on the conferred powers to various state government authorities and their responsibilities. The states of Jharkhand, UP, Karnataka, Punjab, Chandigarh, Kerala, West Bengal, Maharashtra, and Madhya Pradesh have also laid down State SEZ Policies. Still, only seven states – Andhra, Telangana, Maharashtra, Gujarat, Tamil Nadu, Kerala and Karnataka – account for about 92% of all established SEZs in India.
The Gujarat example is evidence of the fact that there is a dire need for participation of state administration while formulating and implementing SEZ policies. Lack of unified monitoring and synced co-ordination between various government and non-government agencies is contributing to the delay in identifying grey areas in SEZ operations and hence affecting output at SEZs.
Stressing on greater integration of various stakeholders associated with SEZs, Dr. Jong Woo Kang, Principal Economist in the Regional Cooperation and Integration Division, Asian Development Bank (ADB) says, “While India was an early adopter of SEZ modality by starting with Asia’s first SEZ in Kandla in 1965, the SEZ experiment has been less impressive due to rigid policies, unattractive incentives, lack of single-window facility, etc." Dr. Kang believes that creating special zones is an economic experiment that needs to be well positioned under a country’s development strategy and industrial policy, and thus, should be supported with strategic thinking and strong political will.
And why not? The SEZ development programme should be integrated into the broader economic policy framework if policymakers are really serious about improving national investment environment and boosting exports from the country. In fact, SEZ development programme should be closely coordinated or linked with wider economic strategies as they evolve, supporting foreign and domestic investments in SEZs, promoting linkages with domestic economy, and upgrading the human capital with the country moving up along the industrial value chain. "At every stage, both the broader development programme and the SEZ policy need clear, consistent, and credible political commitments at the central government level and should entail an effective coordination mechanism across state and local
governments,” adds Dr. Kang.
Drawing a comparison of business environment in developing and developed economies, as per experts at Asian Development Bank, though business environments in developing economies in Asia are improving, significant bottlenecks still exist in general businesses environment which affect firms operating inside and outside SEZ zones. One such indication is the average time required for export and import of goods from various countries. According to World Development Indicators while it requires an average 7-8 days for export or import of goods in North America, the average time significantly increases to 18-20 days in East Asia and the Pacific in 2014. And the delay in export and import is spread across all units, be it within or without an SEZ.
Worl
d Bank Enterprise Survey 2016 reveals that it is not just India but even stakeholders of export units operating out of SEZs in other Asian countries like Bangladesh and Malaysia point out that unfriendly tax regulations, non-availability of skilled labourers, lack of access to electricity and finance, etc., are key obstacles to exports growth.
India and China being two major economies in Asia, it is worthwhile to look at China's SEZ model to understand the reasons for there success and draw lessons from the dragon. Malini L. Tantri, Assistant Professor, Centre for Economic Studies and Policy (CESP), says, “There is a lot that India needs to learn from the SEZ model in China. SEZs focusing on manufacturing sector require lot of manpower – skilled, semi-skilled and unskilled. However, there is no systematic and organised method to source labourers in India. It is an irony that while India on one hand struggles with the issue of unemployment, on the other, there is no mechanism to streamline the gap between labour demand and supply. Like India, China also has a large pool of human resource but they have established labour bureaus which act as catalysts by evaluating the requirement of manpower at various SEZs and then supplying manpower as per demand across locations.”
While there are several online and offline avenues available to source skilled manpower in India, but there is hardly any organised methodology for the unskilled population to get employed. Hence, many touts and middlemen take advantage of the situation and exploit labourers. Of course, India has it's Employment Exchanges, but these exchanges have failed to address the need of unskilled and semi-skilled labour to a large extent. The government needs to make these exchanges deliver and act proactively to supply labour pool to various SEZs so that productivity of export oriented unit doesn’t suffer due to scarcity of manpower.
Interestingly, till the late 80s, both Indian and Chinese economies had very limited integration with global trade. India with its socialist economic agenda was in a self-imposed isolation until it was forced to liberalise its economy in early 1990s. On the other hand, though China also had a closed economy till late 80s, it used its isolation years to scale up its industrial and logistics capability. Hence, when the General Agreement on Tariffs and Trade (GATT) happened in 1994 and one year later the World Trade Organisation (WTO) was established, China was ready to capitalise on its low cost labour and high industrial productivity. And, as the rest is history, the country soon became an integral part of global supply chain.
China initially started with development of four export economic zones to experiment with market-oriented economic reforms which covered laws, regulations, taxation, land, labour, finance, customs and immigration, among others. Following the success of the model, gradually it was replicated in other parts of the country with region-specific amendments. Soon the economic zone programme was diversified into various forms like Export-oriented Manufacturing Zones, Bonded Areas, Economic and Technological Development Zones, Cross Border Economic Cooperation Zones and High & New Technology Industrial Development Zones. Possibly the sector and need specific approach worked well for China, but what translated the efforts into success was the creation of an ecosytem to support these zones and a policy framework that was result focussed. China also had the vision to acquire technology in return for the incentives it gave to foreign investors in the SEZ sector.
Let us draw a comparison between Shenzhen, China’s first SEZ which was developed in 1978, more than a decade after India set up the Kandla EPZ in 1965.Shenzhen was a small border town with a population of 30,000 at the time of getting the SEZ City grant. In the last three-and-a-half decades, it has become a large metropolitan city of global stature with a population of more than 10.78 million permanent residents and is an epicentre of manufacturing in South China. Shenzhen also has the third busiest container handling Port in China and its airport is the fourth-busiest in the country.
(IT&ITES sector has the highest share amongst sectoral SEZs. Since the sector is less dependent on broader infrastructure like rail, road and port connectivity, inefficiency of the logistics sector in India has not affected its exports as adversely as it has sectors whose mainstay is merchandise exports. The sector though has been impacted by withdrawal of MAT exemption, and many units plan to shift base to DTAs.)
On the contrary, Kandla, a success story by Indian standards, still remains mostly unknown to Indians, leave aside foreigners (barring those in the ports, SEZ or shipping business). [Imagine yourself talking to an American buyer and proposing, "You can get containerloads of t-shirts from Shenzhen", versus, "You can get containerloads of t-shirts from Kandla."] Moreover, Kandla is yet to get full-fledged air connectivity with the existing rail and road connectivity left wanting for more. [A search for air tickets from Kandla's airport (Gandhidham) to Delhi and Mumbai for random dates in August on two of India's most popular online travel services sites yielded the following results, "Aargh! No flights found. There were no flights found for this route and date combination" and "Sorry! No matching flights found. Please modify your search and try again." That's how far our oldest SEZ has progressed – no air connectivity yet!]
China acquired technology in return for the incentives it gave to foreign investors in sezs
Container traffic is considered as the yardstick for mature manufactured goods trade, but Kandla Port, which is apparently the largest Union government port, is yet to have a proper container handling terminal. Gandhidham is the nearest human habitat from Kandla SEZ, but it is still a small township.
The contrast with Shenzhen is stark, and the lack of holistic long-term vision and policy is apparent when one looks at Kandla SEZ.
Apart from China, South Korea and Malaysia are other Asian nations that have used SEZs in an effective way to move up the global supply chain, and from import substitution to export promotion, by pursuing industrialisation through formation of economic clusters for major manufacturing sectors.
Technology integration in the infrastructure of any institution is key in a digital world. Having said that, the state of India's SEZs can be gauged from the fact that India, despite being a major exporter of IT and ITeS, the integration of IceGate (a portal that provides e-filing services to the trade and cargo carriers and other clients of Customs Department) with the SEZ Online system to facilitate paperless transaction for movement of goods for imports and exports from SEZs to Ports, was ‘introduced’ on pilot basis in Madras SEZ only on January 19, 2015. Understandably, until very recently, trade from SEZs involved a lot of paperwork.
According to the Ministry of Commerce's annual report for FY2016, currently there are 344 ports or Customs points through which India’s exports and imports take place. But due to infrastructural constraints, only 126 of these ports are Electronic Data Interchange (EDI) enabled and the rest (about 65% of total!) are still operating on manual system or in Non-EDI mode. As a result, at present only a part of India’s export and import data is captured through EDI mode at Customs (for exports, transactions accounting for 65.19% of value). The remaining data called Non-EDI data is still transmitted with a greater time lag which at times extends to one month.
Moreover, infrastructure for high-speed goods movement between SEZ and port also contributes in terms of savings and adds to the profit of exporters. Stressing on ease of cargo movement, Brandon Fried, Executive Director, The Air Forwarders Association, tells The Dollar Business, “In places like China, road transport is less expensive. But over vast distances, when time is short, air cargo is the only viable choice. India, though, has separate challenges altogether, including its legendary road infrastructure issues that have been a factor in obstructing the country’s commercial development. I wouldn’t say India is not addressing these issues, but it must certainly look at China as an example where speed and efficiency have been a priority. India needs to invest in its road infrastructure and airports, as China does within its 5 year plan. I understand India is a democratic country and, unlike China, faces certain challenging legal constraints. But then, US also has its own infrastructure challenges with how we plan to fund highway improvements. The reality is that the Chinese have taught us how goods need to be transported to airports and seaports quickly. That’s what Indian lawmakers can learn.”
China started developing its port sector in 1980s with a comprehensive roadmap, backed by robust road, rail and air connectivity and SEZs near ports to make ports economically self-sustainable and make nearby industries internationally competitive by cutting down on transportation cost both for inbound and outbound cargo.
Good infrastructure is also crucial to ensure the success of businesses inside the zones. This includes good connectivity as well as quality infrastructure inside the zones which can support efficient business operations. Good zone design and environmental standards result in efficient utilisation of scarce resources and contain negative spillovers.
According to the Ministry of Commerce, as on May 10, 2016, out of 205 exporting SEZs, 116 SEZs are dedicated to IT, ITES, electronic hardware, semiconductor and services, followed by 20 multi-product SEZs, 13 engineering products SEZ and 12 SEZs dedicated to pharmaceuticals and chemicals. In fact, IT & ITeS exports from India has crossed $100 billion and India’s share in global IT services outsourcing was about 56% at the end of February 2016.
Since the services sector is less dependent on broader infrastructure like rail, road and port connectivity, the inefficiency of the logistics sector in India has not affected services export as adversely as merchandise exports. Moreover, realisation of return on investment in the services sector is far quicker than merchandise trade and as such India's focus has been more on this sector. 
But banking on services alone is wrought with risks, as they are nimble by their very character. The incentive strategy to promote exports has encouraged a tendency among investors in the services sector to move their base as per the benefits extended by the government. Giving an example of the effect of change of policy, B.V.R. Mohan Reddy, Chairman, Cyient Ltd., says, “Software Technology Parks were extremely attractive wherein all the profits made from STP based units were exempt from Income Tax under section 10A of Income Tax. The tax benefits has expired since March 2011. STPIs without tax exemption are not attractive because of physical and procedural hassles in running operations. In addition, the advent of SEZs around the same time which provide Income Tax benefits became attractive and many companies opened new facilities in SEZs as opposed to renewing existing STPI licenses.”
The SEZ policy got a lot of flak from critics as the income tax holiday meant a virtual loss of revenue for the government. But the introduction of MAT on SEZs effective from April 1, 2012 has been a major upset for investors. The drop in export revenues and loss of interest from developers and units can be directly traced back to the event. Stressing on a stable tax regime, Anil Yendluri, CEO, Krishnapatnam Port, says, “In case of SEZs, a lot of hype and interest were generated some time ago. But once implementation began, it lost steam. One should talk about tax and revenue loss only when there is creation of revenue. By putting MAT, we are discouraging people to invest in SEZs!”
[ Aerial view of Vrindavan Tech Village (IT SEZ) in Bangalore: Indian conglomerates have set up their export-oriented units in special economic zones to avail of the many benefits. ]
Interestingly, the Finance Ministry was recently considering a proposal to abolish all direct tax benefits for SEZ units and developers of non-operational SEZs (before April 1, 2017), but then decided to extend the deadline only for SEZ units till March 31, 2020. It's worth noting here that the Commerce Ministry was demanding that the profit-linked deductions should be made available for new SEZs units starting operations by March 31, 2023.
Malini L. Tantri of Centre for Economic Studies and Planning (CESP), however, disagrees that tax benefits are required to attract investment. She says while tax benefit is needed to generate interest among investors, such benefits should be linked to the performance of export units operating out of an SEZ. “If performers and non-performers are measured with one yard stick, it is definitely discouraging. If an exporter doesn’t perform, it shouldn’t get the incentive,” she stresses.
Though the modalities of tax incentives is debatable, the imposition of MAT & DDT and certain other policy changes have definitely affected India’s exports from SEZs. No doubt, this change in tax structure for SEZs is seen by many as an effort of the government to increase revenues during a time marred by a global economic slowdown. But then, there are many like Krishan Malhotra, Partner, National Practice Head (Tax), Shardul Amarchand Mangaldas & Co., who feel that intelligent tax reforms for SEZs are required if policymakers really want to boost export-manufacturing. “In order to support the Make in India initiative, the government needs to keep capital spending up to spark investment revival, cut corporate tax rate, exempt SEZ from MAT, rationalise TDS provisions, accept recommendations of Income Tax Simplification Committee and bring reforms in tax administrations,” says Malhotra.
And then there is this lure of a slew of incentives for manufacturing in DTA –sans restrictions that govern SEZs – that is forcing export-oriented units to scout for opportunities outside SEZs. While SEZs today can sell to a DTA area, they are bound by many constrains that hinder their access to a large and lucrative domestic market.
At present, SEZs account for over a-third of India’s exports. They can receive a fair treatment. The talk of killing the Minimum Alternate Tax (MAT; current rate of 18.5%) and Dividend Distribution Tax (DDT) has done the rounds for over four years now. So much so that in this time frame, SEZs have actually become unviable for many manufacturing units. Removal of the sunset clause for manufacturing units across SEZs is another element that should be considered. Late last year, there was another glimmer of hope for SEZs. Debate on whether SEZs would be allowed to sell their produce in DTAs at zero or minimal duty rates
(as applicable to an FTA partner for any given product) was on. Speculation is that in recent times, the Finance Ministry rejected the Commerce Ministry’s proposal on grounds that such a move will cause harm to DTA manufacturers. If the Finance Ministry feels that allowing SEZs to supply goods to DTA units at zero or minimal duty will not only cause revenue loss to the nation but will harm DTA manufacturers as well, isn’t it a matter of present truth that the country is losing tax revenues when it is importing from FTA partners?
And how about these DTA units being anyway handicapped when it comes to selling goods that are being imported from India’s FTA partners? Rather, giving SEZs this benefit will help create more jobs within India, reduce our trade deficit and help Make in India a real dream. Why should India help create more jobs in Thailand and Philippines, while ensuring that millions amongst its own are unemployed?
Even in the case of a refugees crisis, only a well-fed nation can spare “measurable” room. Or how about this: “If you had the heart to sign FTAs with ASEAN, SAARC and other foreign nations, how about an FTA with your own nation’s SEZs?” Illogical? Perhaps logic is a liar too!
Despite having been treated like a foster child (rather, a prodigal one!), SEZs still remain an important tool that can help the country upscale its share in global trade.
But that can only achieved through a stable and focussed result-oriented policy regime. It's high time that we look beyond an incentive-based system and develop an ecosystem that encourages excellence in achieving global standards. A policy that encompasses legal aspects, taxation, as well as development of infrastructure and skills, and ease of doing business are hygiene factors in today's globalised economy. What is needed is to go beyond and look at focussed means to encourage SEZ developers and units to move up the value chain such that their products are high in quality while being cost competitive. And when India's SEZs are able to do that, profits will automatically follow, leading to the revival of this very critical sector. And India will again hail the rise of SEZs. Need we say more?
DR. Jong Woo Kang, Principal Economist in the Regional Cooperation and Integration Division, Asian Development Bank (ADB)
TDB: What’s your take on the business environment at SEZs in Asian developing economies?
Jong Woo Kang (JWK): A sound policy regime establishes a robust legal and regulatory framework that spells out the rules of the game for all stakeholders and mandates a high degree of transparency and accountability. Ideally, the SEZ authorities should enjoy a large degree of autonomy, providing a one-stop service. In terms of resources, especially in low and lower-middle income economies establishing enclave-type zones, labour is the key resource. Therefore, a flexible labour market for unskilled and semi-skilled workers is one of the major attractions. As economies progress, skilled labour can become more important. To draw labour with the necessary techniques and managerial skills to the zones, providing housing, social services and other amenities can be used as major inducements.
SEZ policy must also address the basic infrastructure requirements of SEZs, such as water, power, telecommunications and transport. Ready and low-cost services are a big selling point for the most attractive zones. For many exporting producers in SEZs, global connectivity with the help of reliable transport services can be critical. Increasingly, telecommunications complement transport services and therefore good Internet access is now essential to exporters tied to the global value chain.
Business environments of developing economies in Asia are improving in the above aspects. However, significant bottlenecks still exist in the general businesses environment which affect firms operating inside and outside the zones. One such indication is time required for export and import. In 2014, according to World Development Indicators, while time to export and import ranged 7-8 days in North America, it took 18-20 days in East Asia and the Pacific. Firms inside SEZs in Bangladesh, Malaysia and India pointed out tax regulations, availability of skilled labourers, and access to electricity and finance as key obstacles in doing business, according to The World Bank Enterprise Survey data.
TDB: Which countries have impressed you the most in terms of development in SEZs?
JWK: China has effectively used SEZs in achieving higher economic productivity and structural transformation. It started with four zones in the initial stage to experiment with market-oriented economic reforms that covered laws, regulations, taxation, land, labour, finance, customs and immigration, among others. After the model met with success, the zone programme and relevant reforms were gradually rolled out throughout the nation in more diversified forms. Korea and Malaysia have also used SEZs to perfection in shifting from import substitution to export promotion and pursuing industrialisation through the formation of economic clusters for major manufacturing sectors.
TDB: What should policymakers across developing countries keep in mind while finalising policies for the development of SEZs?
JWK: An SEZ is more likely to be an effective catalyst when there is an enabling macroeconomic and industrial framework and deepening economic liberalisation, economic space planning for optimal land use and cluster development, along with effective resources use planning based on the cost-benefit analysis of fiscal and non-fiscal incentives.
Most importantly, creating zones is an economic experiment that needs to be well positioned under a country’s development strategy and industrial policy, and thus, should be supported with strategic thinking and strong political will. Successful examples like East Asian countries such as People's Republic of China, Republic of Korea and Taipei have all met these conditions. Given the expanding and deepening global value chains (GVCs) and regional value chains (RVCs), due in part to growing volume of efficiency-seeking (vertical) FDIs, and SEZs' potential role in strengthening businesses’ participation (into these value chains along the spectrum of upstream and downstream segment of production lines), success of SEZ in one county can have a positive impact on inter-country and global trade through the channel of the production networks.
TDB: What is your opinion about SEZ’s growth in India? What are the other initiatives that the Indian policymakers must undertake to make SEZs more effective and help SEZs contribute to exports in particular?
JWK: While India became an early adopter of SEZ modality by setting up Asia’s first EPZ in Kandla in 1965, the SEZ experiment has been less impressive due to rigid policies, unattractive incentives, lack of single-window facility and many other issues. With the enactment of a comprehensive SEZ law in 2005, the country is making efforts to improve institutional quality, boost industries and encourage investments into SEZs with sizeable outcomes. Combined with the government’s reform agenda, SEZ modality possesses a huge potential for the economic growth. Especially given a time when the world trade is undergoing tough times, the need to encourage SEZs is even greater. It's easy to understand that, isn't it?
DR. S. P. Sharma, Chief Economist, PHD Chamber of Commerce and Industry
TDB: What is your general feeling about the SEZ concept?
S. P. Sharma (SPS): Special Economic Zones (SEZs) have been recognised as an important mechanism for trade and investment promotion, creation of infrastructure, employment generation, increase in foreign exchange earnings and improving export competitiveness. Though SEZs have been in existence for decades, they have only recently started attracting attention. This can largely be attributed to the globalisation of trade and financial markets. The establishment of India’s first SEZ unit, Kandla EPZ and its consequent success had served as an inspiring model for Indian policymakers to construct and implement a dedicated regulatory framework on SEZs.
TDB: What has been the economic impact of the SEZ Act?
SPS: Generation of employment in SEZs rose 15 times from about 1 lakh people in 2006 to about 15 lakh in 2015. Level of investment within SEZs increased from Rs.4,000 crore to Rs. 3,00,000 crore and exports upscaled from Rs.22,000 crore to Rs.4,00,000 crore during the same period. However, it is observed that the SEZs model in India could not reap the expected rate of benefits due to several bottlenecks in our economic system. There are procedural bottlenecks, unavailability of vast land, lack of adequate infrastructure, rise in cost of operations and lack of skilled manpower. A major impediment is the re-imposition of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT). Frequent changes in SEZs policy is one of the major reasons for dwindling investor confidence in these export-manufacturing zones.
TDB: Which are the countries where the progress of SEZ impresses you the most?
SPS: The first successful implementation of an EPZ was at Puerto Rico (in 1962) and India (in 1965), followed by Taiwan, and the Philippines. Among countries where the SEZ model has been most successful are China, Hong Kong and Singapore.
TDB: What are the basics that policymakers should keep in mind while finalising policies for development of SEZs? From your experience which countries have optimised the usefulness of SEZs?
SPS: There are three main issues that policymakers should bear in mind while formulating policies for development of SEZs. These are related to making economic zones successful in attracting firms that create jobs, ensuring that zones are economically sustainable and deliver positive externalities, including facilitating upgrading and structural transformation and catalysing economic reforms and ensuring that economic zones are sustainable from an institutional, social, and environmental perspective. There were zones established in the 1970s and 1980s in East Asia’s “Tiger Economies”, which were critical in facilitating their industrial development and upgrading processes and playing the catalytic role in processes of economic growth and adjustment processes. Similarly, China launched SEZs on a huge scale to provide a platform for attracting FDI that not only supported the development of China’s export oriented manufacturing sector, but also served as a catalyst for sweeping economic reforms that were later extended throughout the country.
TDB: What more needs to be done by policymakers in India to make SEZs more effective?
SPS: In India, the growth potential for SEZ sector is immense, provided the government makes stable, favourable and highly transparent SEZs policy to build on the confidence of investors in SEZs. Further, the government should focus on SEZs and make sustained efforts to sort out issues with an eye to boost manufacturing, exports and employment in the country.
TDB: MAT imposition in SEZs – has that hurt SEZs?
SPS: It is seen that the approach of SEZ developers and units towards SEZs has become pessimistic in the present times and the developers feel that operating in Domestic Tariff Area (DTA) has become more beneficial as compared to operating within SEZs, especially after withdrawal of exemption from Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) in SEZs. In addition, relative advantages enjoyed by SEZs in terms of fiscal and other incentives vis-à-vis DTAs appeared to have declined because of schemes such as Duty Drawback Scheme, FPS, FMS, and now MEIS and SEIS, etc., which have adversely impacted the confidence of SEZs developers and units in the concept of SEZs. The government under the new FTP set an objective of increasing India’s exports of merchandise and services from $466 billion in FY2014 to $900 billion by FY2020. However, on an average, the country’s exports registered a fall of around 16% from December 2014 to April 2016! At this juncture, SEZs can play an instrumental role in exports recovery. Policymakers need to address bottlenecks for SEZs in India including prescribing time limits for several administrative procedures like granting approvals, submission of documents, adopting single-window clearance and reconsideration of imposition of MAT and DDT among others. Efforts should be made in the direction of retaining the motivation of the existing developers and units in SEZs and encouraging prospective entrepreneurs to enter SEZs.
Niranjan Hiranandani, Chairman & Managing Director, Hiranandani Group
TDB: Many developing economies in Asia have reaped benefits of SEZs to enhance their domestic economy and exports. There is a feeling that India's SEZs have not lived up to their potential. Are we on the right track?
Niranjan Hiranandani (NH): Every country has its own ways of doing business and aspects of taxation and legal issues differ from country to country, so any comparison would ideally, need to be along similar parameters – which isn’t the case. Some countries, through SEZ and similar facilities, have provided their local industry with huge tax-waivers and subsidies as ‘support’ in the process of being globally competitive, some have gone further and provided funds to market their products/ services in global markets. In India, the knowledge part is perfect – we have accepted the need for specified zones (i.e. SEZs) from where Indian businesses can compete with global businesses on a level-playing field. The Indian government, over the years, has laid the legal framework for creating SEZs. It has supported Indian businesses in global growth opportunities through marketing activities in global markets. From the perspective of the Indian government, they did a good job. Indian businesses seem to think a bit differently. In recent months, we have seen a push on two initiatives: ‘Make in India’ and ‘Ease of doing business’. From a business perspective, these are aspects which need to be in place before we start talking about SEZs and what they can offer Indian businesses. From a real estate developer’s perspective, the ‘successful SEZ’ concept is all about ensuring a global outlook and global standards – from planning to execution to running and maintenance.
It is not just the geographical entity i.e., a specified enclave, and units situated within that enclave which get tax exemptions or other benefits for business done with other countries, that write the success story of an SEZ. An SEZ needs to be conceptualised and created with amenities and facilities of global standards, it needs transport linkages as also other legal permissions and clearances to be done in a ‘single-window’ set-up. Most important, an SEZ has to be planned in a manner that best suits the industry it is being created for. The specifications of an IT and ITeS SEZ, for example, will be very different from one created for engineering or mechanical products, and India’s real estate developers are taking steps to ensure we create these to perfection.
So my opinion with regard to the overall business environment to set up and run an SEZ in India as compared to other developing economies in Asia is that we are on the right track, but we have miles to go.
With regards to countries where the progress of SEZ impress the most, the list is topped by China – the Chinese don’t just create SEZs but also provide the support structure and marketing muscle.
TDB: How can we make SEZs more effective?
NH: There is a need to understand that setting up an SEZ is not just about tax exemptions and similar benefits, it is about creating a scenario where excellence is encouraged – so that the country’s products and services can compete in the global marketplace. For policymakers, the moot point is: it is not about real estate development or taxation benefits; rather it is the quest for global levels of excellence so that our products and services can compete in any market, worldwide. Legal aspects, taxation aspects, application of labour laws, creation of logistics, communication and transport linkages are definitely a ‘must’. More important are aspects that ensure excellence and adoption of global standards.
India can learn from the policies of the ASEAN nations, these countries, apart from China, have adopted the SEZ model to promote exports in a big way. So, Singapore, Malaysia and Thailand are examples where there is some learning for us; it needs to be kept in mind that these countries have largely used the SEZ model to drive growth in those products and services in which they already had an advantage.
TDB: Do successes of SEZs in one country have an adverse impact on other countries in general and global trade in particular?
NH: Well, the jury’s still out on this. China’s manufacturing SEZs are definitely impacting manufacturing units in other countries; but if China’s products are flooding markets in other countries, it is also because of the subsidies the manufacturing units in the Chinese SEZs get, as also the fact that transportation costs of such Chinese SEZ manufactured products are lower than the average global transportation costs and so on. It is a scenario in which the SEZ is just one part in a very exhaustive process which ensures globally competitive prices for products manufactured in those countries. It ends up becoming a large volume-based business strategy, and logically speaking, it would definitely impact other countries in general and global trade in particular. By how much; that is something which will differ on a case to case basis.
TDB: What is your opinion about the growth potential for SEZ sector in India? What more needs to be done by the policy makers in the government to make SEZs more effective in contributing to the country’s economy in general and exports in particular?
NH: SEZs are seen as ideal to promote exports, given the need for a level-playing field for domestic enterprises and manufacturers to be competitive globally. Given this logic, the growth potential for SEZ sector in India is immense. Following global trends, India brought in the Special Economic Zone (SEZ) policy in the year 2000. The states have worked towards making SEZs located within their boundaries a success, given the stated advantages: enhanced foreign investment; as also providing an internationally competitive and hassle free environment for exports. In India, we have not been able to emulate the success of, take as an example, the Chinese SEZ model – and there is a learning from this, which hopefully, we should see the powers-that-be doing the needful, to ensure the SEZs play their role in India’s development.
As regards to what more needs to be done by the policymakers in India to make SEZs more effective in contributing to the country’s economy in general and exports in particular, it is already being done – we are seeing the Indian Government becoming more responsive to needs of the industry as also creating policies that are a positive for growth of the economy. Maybe, it could have been done a bit quicker, a bit more in terms of what areas are getting covered – a holistic look is required. Look at how China works its SEZs to achieve success: it is a combined effort of different ministries and government agencies that makes it happen.
TDB: Do you think the inconsistency and unpredictability in tax structure is one of the reason for the lackluster performance of SEZs in India? What are your views on the existing taxation policies for SEZs? What has been the impact of the imposition of MAT and DDT?
NH: When we look at MNCs operating in India, this aspect – inconsistency and unpredictability in tax structure – is something they have an issue with; for Indian companies which are on the way to becoming MNCs with support from SEZs would, logically speaking, also find the same issues disconcerting.
If one looks at the past, things were not as good as we would have wanted; but when one looks at the past couple of years, there have been improvements – and we are looking forward to more positives happening in the days to come.
The government has shown a willingness to work in sync with industry’s requirements, to create the environment in which we can succeed in global markets. This includes taxation and related issues as well. Indian businesses have hopes from the powers-that-be as far as the future of SEZs is concerned. There is immense potential still in these exports hubs.
Rahul Gupta, Vice Chairman, Export Promotion Council for EOUS and SEZS (EPCES)
TDB: How do you view the potential of the SEZ sector in terms of its contribution towards the country’s economy in general and exports in particular?
Rahul Gupta (RG): Undoubtedly, this sector plays an important role in providing the much-needed thrust to many of our globally focused units that are keen to have a share of the export pie. SEZs have registered considerable growth in the last decade and today account for about 30-35% of the country’s exports.
I believe that going forward, SEZs will be a veritable catalyst in terms of expanding our trade frontiers and augmenting the India's foreign exchange earnings. To ensure this the entire gamut of ‘enabling’ ingredients have to be made available to the sector. In my view, we should be able to increase our export share by 50% in the next three years.
TDB: Do you think the incentives extended by the states and Union Government are compelling enough for entrepreneurs to set up units within SEZs? How do you compare these incentives to the option of setting up an EOU given the fact that the latter can be set up anywhere in the country and with relatively limited operating conditions?
RG: Investor interest in SEZs took a beating after the government imposed the Minimum Alternative Tax (MAT) and Dividend Distribution Tax (DDT) in 2011. One major deterrent of this sector is that the raw material approval committee takes its own time to decide upon a case. This is in glaring contrast to Domestic Tariff Area (DTA) where manufacturers can avail raw materials without approvals. This challenge is clearly responsible for the migration of businesses from SEZs to the DTA and is causing a loss of capital as far as SEZ investors and promoters are concerned. However, we at EPCES are taking corrective measures to reverse the trend.
TBD: We have seen a number of SEZs being denotified in recent times and investors seem to have lost interest in developing SEZs. Do you think SEZs have lost relevance due to frequent shift in policy guidelines, especially with regards to taxation policies?
RG: Yes, it is true that frequent shifts in policy guidelines have hurt the SEZ segment. Investors rely on government promises with unflinching faith. Hence, it is the onus of the government to stick by their pronouncements for the sector. Not adhering to these pronouncements can have a negative impact on investor temperament and even destabilise the sector. A case in point is the government’s rollback of the initial reprieve period of 15 years (to seven years) for investors.
I would like to add here that we have huge expectations from the current Modi-led government and have observed a lot of dynamism in his team and the policymakers are aware of our concerns with respect to the present state of affairs at SEZs. I am glad to tell you that we are working in close coordination with the Commerce Ministry that is now seeking fresh ideas on the subject.
TBD: According to you, why did India fail to emulate the ‘SEZ success story’ of China? What do you think are the bottlenecks in our system?
RG: The failure can largely be attributed to the fact that India lacks China’s long-term vision in terms of policy. Here the government is addressing the sector with short-term policies that do not accommodate a sustainable vision for the future. This does not make any sense, especially because across the globe all tax benefits or incentives that have been given to the SEZ sector are for the long term – at least for 25 to 30 years. China’s existing SEZ policy is stable and spans three to four decades. In contrast our SEZ policy of 2005 has seen several changes and modifications. In June 2011, we witnessed the imposition of 10% Dividend Distribution Tax (DAT) on 10% book profits of developers and units located inside the SEZ and in April 2012, MAT was imposed at 18.5%. Further, China has never witnessed any rollback in policy and they effectively have a single-window system that facilitates trade very robustly.
TDB: Since India has signed a large number of free trade agreements (FTAs) over the years, SEZ units are at a relative disadvantage in terms of selling to the Domestic Tariff Area (DTA). During the time of a slowdown in major export markets, SEZ units are hard pressed to take advantage of the large Indian domestic market that India. Your thoughts on the Catch-22 situation?
RG: Yes, the gloomy global business outlook has added to the woes of unit-owners in SEZs. Today, no SEZ can only work on the doctrine of 100% exports, and as such, some of its produce has to go to DTA. The government has allowed sales to DTA but we do not get the preferential rates that exporters from FTA countries get. Therefore, we are requesting the Ministry to allow SEZ units to sell their products in the domestic market after paying the same preferential tariffs applicable to manufacturers in countries with which India has a free trade agreement.
TDB: Among SEZs, the Kandla SEZ has been performing rather well. Taking its example, what lessons do you wish to send out to other SEZ operators across the country?
RG: There are some states that have emerged more SEZ friendly than the rest. Some are more revenue-rich and some are more pro-manufacturing. There are about four to five states that have exempted the sales tax applicability on SEZ altogether – a factor that has given a fillip to unit owners. We have taken into account all the good practices from across the country and in our upcoming workshop with the Commerce Ministry in September, we shall share these with all our stakeholders.
TDB: There are issues pertaining to operational inefficiencies, infrastructural inadequacies, impediments in the smooth inflow of foreign investment and exit clauses for de-notification of SEZs. Further the CAG report 2015 Audit observed that just 38.78 % of SEZs have become operational after their notification. Surprisingly 52% of the land allotted remained idle even though the approval dated back to 2006. Land acquired for public purposes was subsequently diverted (up to 100% in some cases). Your thoughts.
RG: We have already invested around Rs.3 lakh crore in this sector to make it functional. Hence, going forward, we have no option but to make it work. The yeoman service of SEZs in terms of employment creation and enriching the country’s export basket cannot be overemphasised. Today, the country’s SEZs account for global trade worth Rs.40 lakh crore, which compared to its initial share value of only Rs.40 crore [about a decade back] is exponentially massive. It will be wrong to say that SEZs have not performed.
I do not see any major impediments in the inflow of foreign investment or exit clauses for de-notifications of SEZs. However, with Brexit happening, foreign investments into SEZ are destined to dwindle in the coming times.
If someone has misused the SEZ land, then I am all for punitive action. However, I would also advocate rewards for any high performer, and for those who are doing their business
ethically. A differential rewarding system will work.
Malini L. Tantri, Assistant Professor, Centre for Economic Studies and Policy (CESP)
TDB: The SEZ Act, 2005 came into effect after five years of deliberation, to provide a stable policy regime. Do you think that change in taxation has affected investor confidence?
Malini L. Tantri (MLT): The concept of SEZs is not new to the Indian economy as it was earlier existing as Export Processing Zones (EPZs). Former Union Minister for Industry, Late Murasoli Maran had realised the potential of SEZs in transforming the economy of a region during a visit to Shenzhen, in China. SEZ-led industrialisation had completely transformed the landscape of Shenzhen that was essentially a small fishing town in late 70s. Initially, right after the proposal for SEZs in India was tabled in 2000, all existing EPZs were converted to SEZs. However, in my view, Indian policymakers could have done better by considering the factors that contributed to the success of SEZ-led economic and industrial growth in Shenzhen. SEZ as a concept has been successful in China because it co-exists with a variety of elements that have a conducive impact. Further, the concept was introduced at a time when China had started a shift of policy from socialism to capitalism.
The case in India is not the same. Here the shift to the SEZ format happened after promoting EPZs for over a decade. Therefore, in order to ink a comprehensive and effective SEZ policy, the policymakers were required to take a pragmatic account of the EPZ policy. However, this has not happened. While we are currently debating about all the incentives related to SEZs, policymakers lack focus on important matters like the content/mandate of the EPZ policy, rationale and objectives of introducing the SEZ policy and the bottlenecks of the EPZ policy. Due to lack of focus on these factors, the policymakers ended up giving too many incentives in the SEZ Act of 2005.
On the contrary, policymakers in China while contemplating the SEZ policy, tried to understand the basic problems hindering exports or trade or progress of a region and tried to rectify the issues. Relaxing the rigidity that was inherent in the existing system translated to a big encouragement for the foreign investors. We are still lagging in our understanding of the inherent problems, pertaining to SEZs and ports, that plague our trade sector. Moreover, if we take trade indicators like ‘ease of doing business’, and if policymakers are eager to make SEZs deliver effectively, they need to address issues that are acting as bottlenecks instead of complete overhaul of policies.
TDB: Are you saying India needs to look beyond MAT and other incentives?
MLT: Incentives like MAT removal or other tax holidays do not matter as much as we require a conducive business environment minus any obstacle. On an average an Indian trader encounters more than 10 agencies just to secure permission for exporting goods. Moreover, the requisite papers need to be moved physically since there is no online portal even in the context of an SEZ. EDI or electronic transfer of data among multiple agencies is available for those who operate outside an SEZ. However, though there is a provision of SEZ Online to facilitate exchange of information in the electronic format within an SEZ, in reality a lot of work is done manually. To create an environment of ease of doing business within the country, infrastructure and institutions facilitating trade need to be streamlined. There is another vital question that is not being taken into account – are the tax exemptions really benefitting exporters? Incidentally, 38% of the exporters that I interacted with in the course of my research said that the incentives are only on paper. In my view, it is not incentives but reforms that can perhaps give an unprecedented fillip to our exports.
TDB: Can you please elaborate on the structural reforms that can help the performance of SEZs?
MLT: Following the advent of SEZ Act, 2005, all the seven EPZs, prevailing prior to the SEZ Policy, were converted into SEZs. Located in seven different states, these seven SEZs were in-charge of the new SEZs that came into existence after 2005. For example, Cochin SEZ is in charge of all SEZs in Kerala and Karnataka. Currently, the two states have around 68 SEZs that come under the jurisdiction of Development Commissioner, Cochin SEZ. This has increased the work load on the Development Commissioner and other officials of Cochin SEZs and as a result the decision making process is getting affected.
Sangeeta Prasad, CEO, ICIC, Mahindra Lifespace Developers Limited
TDB: Please give a brief outline of the infrastructure at your SEZ and your experience related to the overall business environment of India in terms of setting up SEZs.
Sangeeta Prasad (SP): The concept of Mahindra World City (MWC) involves creation of integrated, economic nerve centres, with a design and development philosophy essentially characterised by environmental responsiveness and social inclusivity. 'Life', 'Livelihood' and 'Living' are the three pillars of the philosophy of this concept. Today, the MWC developments comprise two integrated business cities operational in Chennai and Jaipur, which together span more than 4,400 acres, providing state-of-the-art facilities to more than 130 reputed Indian and global companies.
Consequent to the promulgation of the SEZ policy during 2000-2005, approximately 850 acres at Mahindra World City, Chennai were carved out as Special Economic Zones (SEZs) and became operational in 2005, much before the SEZ Act came into effect in February 2006. The success of MWC Chennai, coupled with the rise of the DMIC (Delhi Mumbai Industrial Corridor) influence zone and Rajasthan’s emergence as a preferred investment destination, paved the way for the development of the second Mahindra World City in Jaipur in 2007.
As pioneers of SEZs in the Indian corporate sector, we were able to identify the need for integrated urban ecosystems that would provide enabling infrastructure, promote economic growth and reduce multiplicity of controls and clearances. The Mahindra World Cities have accordingly been developed in partnership with state industrial development corporations.
TDB: What are your views on the growth potential of the SEZ sector in general?
SP: The government, via its ‘Make in India’ vision, is focused on increasing local manufacturing and growing exports; this can provide significant fillip to the SEZ sector, especially in the areas of manufacturing and engineering. With the right policy support, the SEZ sector can help achieve increased localisation in manufacturing and higher exports.
India was an early adopter of SEZ modality by setting up Asia’s first SEZ in Kandla in 1965. However, the SEZ experiment has been less impressive due to rigid policies, unattractive incentives, lack of single-window facility, etc. With the enactment of a comprehensive SEZ law in 2005, the country is making efforts to improve institutional quality, boost industries and encourage investments into SEZs with sizeable outcomes. Combined with the government’s reform agenda, SEZ modality possesses a huge potential for the economic growth.
TDB: Do you think SEZs have lost their purpose due to frequent shift in policy guidelines?
SP: There has been limited growth in SEZs due to the combination of a global economic slowdown and a slew of measures like MAT, DDT, etc., which have reduced the overall attractiveness factor. Frequent changes in policy parameters have also led to uncertainty amongst stakeholders.
Fiscal and operational incentives for domestic industry can significantly boost manufacturing, FDI and local investment, thereby creating employment. In this context, extended support to SEZs via conducive policy measures can achieve far-reaching economic transformations. SEZs have attracted investments worth Rs.3.76 lakh crore and have created additional employment for more than 15 lakh people. And, renewed focus on support for SEZs through policy interventions can drastically improve the outlook for the sector.
Withdrawal of MAT on SEZ developers and units and withdrawal of DDT on developers are some recommendations. Concessional Customs Duty at the rate of 50% DTA sale or payment of Excise Duty on DTA sale from SEZ is another vital suggestion. There should be an amendment in the rules regarding tax benefits for creating Non-Processing Area for earlier completed project or ongoing project. Bond cum legal undertakings need to be executed by the unit upon obtaining the Letter of Approval and without submission of lease deed. There should be payment of Custom Duty on DTA sale on a monthly basis (instead of a daily basis).
Most importantly, SEZ projects should be treated as infrastructure projects.
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