Introduction:
Finance Minister Nirmala Sitharaman, while presenting the Union Budget for 2022-23, said that the Special Economic Zones Act will be replaced with a new legislation. The New Act will enable the states to become partners in Development of Enterprise and Service Hubs.
SEZs:
- Special Economic Zones (SEZs) are geographically delineated ‘enclaves’ in which regulations and practices related to business and trade differ from the rest of the country and therefore all the units therein enjoy special privileges.
- The basic idea of SEZs emerges from the fact that, while it might be very difficult to dramatically improve infrastructure and business environment of the overall economy ‘overnight’, SEZs can be built in a much shorter time, and they can work as efficient enclaves to solve these problems.
Objectives of the SEZ Act:
- To create additional economic activity.
- To boost the export of goods and services.
- To generate employment.
- To boost domestic and foreign investments.
- To develop infrastructure facilities.
Facilities and incentives for SEZs:
- Duty-free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
- 100% Income tax exemption on export income for SEZ units under the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. (Sunset Clause for Units are effective from 01.04.2020)
- Exemption from Minimum Alternate Tax (MAT). (withdrawn w.e.f. 1.4.2012)
- Exemption from Central Sales Tax, Exemption from Service Tax and Exemption from State sales tax. These have now subsumed into GST and supplies to SEZs are zero rated under IGST Act, 2017.
- Other levies as imposed by the respective State Governments.
- Single window clearance for Central and State level approvals.
New Law that promotes infrastructure in SEZs:
- The thinking behind the new law is also to enable optimum utilisation of all the vacant land and buildings in SEZs and industrial parks.
- As commerce minister has been quoted, the infrastructure needs to be used to the maximum and, therefore, the government is looking to convert SEZs into a plug-and-play industrial park ecosystem.
- Services companies appear to have been able to use SEZs more effectively than manufacturing companies. Also, the pandemic has hit the performance of several businesses.
- According to some reports, the commerce ministry is understood to be working to see whether SEZ firms can be allowed to sell goods in the domestic market by paying just an ‘equalisation levy’.
- This levy would be smaller than the regular customs duty that SEZ units are currently mandated to pay while supplying to the domestic tariff area. A lower duty would, no doubt, help boost sales.
- But it will neutralize the advantages that SEZs enjoy, being specifically delineated duty-free enclaves, vis-à-vis domestic manufacturers to ensure a level-playing field.
- To be sure, the changes to SEZs need to be accompanied by better labour laws and lower levels of protectionism.
- Ahead of the Budget, Experts had cautioned industry telling it to brace for increased competition and think global since India was going to sign a host of ‘very deep’ FTAs with advanced economies like Australia, the UK and the EU.
- Indeed, while the government needs to make it easier to do business, exporters too must shape up.
Concerns with present SEZ:
- SEZs in India have not been as successful as their counterparts in many other countries. Several Asian economies, particularly China, Korea, Malaysia, and Singapore, have greatly benefited from these zones.
- Most of India’s new generation SEZs came up not for exporting, but for avoiding taxes. Large fiscal sops, in the form of a bunch of reliefs from central and state taxes, lured developers into building SEZs.
- Most manufacturing SEZs in India have performed below par due to their poor linkages with the rest of the economy. Weak connections of coastal SEZs with their hinterlands inhibited these zones from utilising their full potential.
- Many states did not match the central SEZ Act with State-level legislation, which rendered the single window system ineffective.
- Lack of a robust policy design, efficient implementation and effective monitoring have seriously jeopardize India’s effort to industrialise through SEZs.
