Seizing the economic advantage

Written by Sarika Malhotra | Sarika Malhotra | Updated: Oct 3 2010, 08:21am hrs
You might drive by it and maybe just notice the sign board on the road side Noida Special Economic Zone, unaware that a special economic zone in the National Capital Region, situated on the Noida-Dadri road, is abuzz with such activity. Just a few metres from the main road is the Noida SEZ entrance gate, which has a queue of loaded trucks, tempos and rickshaws lined up to get in the zone. The development commissioners office, at a stones throw from the SEZ gate, is bustling with staff and entrepreneurs. Vermajias RP Verma, the assistant development commissioner at the NSEZ, is knownknows the zone like the back of his hand. He calmly says it will not be possible to cover the campus in a day; it spans no less than 310 acres. But we will take you around, he assures.

One has to see it to believe it, as the serenity of the surroundings strike you immediately. A mini walled city, secure and secluded, with 280 production unitsranging from garments, gems and jewellery, electronic hardware, computer softwaremost with swanky offices (even the worlds second-largest, platinum-certified green building) and greenery to match the broad, traffic-free roads, it seems like a desirable address to have on your business card. And so secure is the apparatus that even if the income tax department has to raid a unit on the NSEZ premises, it has to seek permission from NSEZ!

Export Processing Zone (EPZ) model in India is not a new one. The first EPZ was set up in Kandla in 1965. But SEZs have been in the thick of controversies and havent had the smoothest of rides. Land acquisition fallouts, SEZ developers seeking denotification, uncertainty over new tax rules after April 2012 and the finance ministry raising concerns about non-SEZ trade being diverted to tax-free zonesSEZs in India are reeling under many unnerving shocks. However, they have still clocked a staggering 121.4% export growth in 2009-2010 at Rs 2,20,711 crore in a year when exports tanked globally, accounting for over 26% of Indias total exports, and reassuring that the Indian SEZ story is not running out of steam.

NSEZ is a case in point. In the past couple of decades, it has graduated from being an export processing zone (EPZ) to a special economic zone and now the zonal headquarters for all export oriented units (EOUs) for nine statesJammu & Kashmir, HP, Punjab, Delhi, Haryana, Rajasthan, UP, Uttaranchal and the UT of Chandigarh. CPS Bakshi, joint development commissioner, NSEZ, points out how the NSEZ has matured and the role has changed from being a developer of a SEZ to being a facilitator for private SEZs. It has become an apex office for coordinating, monitoring and controlling the private SEZs. As many as 70 SEZs have been approved in north India and they are managed from this office. Our purview and role has expanded; we now have to create and balance a fair playing field for private SEZ developers and SEZ units, says Bakshi

But with some private players denotifying, some eyebrows have been raised. SC Panda, development commissioner, NSEZ, explains that when the SEZ scheme was launched in 2005, there was a lot of positivity, the outlook globally was good and the expectation was that FDI will flow and industrialists will come up with proposals. And that did happen. The proof is the number of SEZs that have been approved in India, he says. Formal SEZ approved are 577 and valid-in-principle approvals are 155. With recession and liquidity problems most entrepreneurs started wondering if they were to develop a SEZ by taking credit, will they be able to service the credit given that the global demand was shrinking. So the expansion has been less than what was anticipated, but despite all these problems, exports from SEZs have been very impressive, he adds.

The Direct Taxes Code (DTC) that comes into affect from April 1, 2012, is also taking a toll on the upcoming SEZ developers and units. Naveen Aggarwal, executive director, KPMG, explains that in order to enjoy profit-linked tax incentives, developers will have to notify their SEZs by March 31, 2012, and units will have to be operationalised by March 31, 2014. SEZ units that were exempted from corporate tax waiver on export income for 15 years, dividend distribution tax and exemption from minimum alternative tax (MAT), will now have to pay 20% MAT. While on one hand a breather has been provided to developers and units by a phased withdrawal of profit-linked incentives, however, the biggest dampener for the industry will be the 20% MAT that will be imposed on both the developers and SEZ units from April 2012. But this by no means spells the end of the road for the Indian SEZ story, stresses Aggarwal.

Even as land acquisition has been the most controversial issue for SEZs, the mood at the NSEZ is different. Workers and entrepreneurs echo that the SEZ has been a boon for them. In the backdrop of low farm productivity and land fragmentation, if for the labourer at least a job in hand is a grace, for the entrepreneur it is the safety, hassle-free environment and good infrastructure that are the big draws. And there is a consensus emerging at the NSEZ. Workers, officials and entrepreneurs agree that both agricultural and non-agricultural land will have to be used to further industrialisation and job creation.

The other bone of contention in the SEZ story is the revenue loss that the finance ministry is feeling the pinch of. In 2009-10, SEZs reportedly had an estimated Rs 3,204-crore tax revenue loss. Bakshi concurs that we have to look at the holistic picture. A pretext is that a lot of revenue that would have been generated is not there because of the tax exemptions. However, the point of commerce is that revenue would be generated if there is economic activity. SEZs have generated economic activity in areas in that otherwise would not have developed as much. As a result, we see positive money churning in the economy. It is the biggest contribution of an SEZ, he says. The NSEZ employs 33,997 persons, including 5,731 women.

If swanky offices catch the eye, the standard design factories (SDFs), too, are noticeable. Both are leased on the campus and the rentals are also much cheaper. Lease rent for a plot is Rs 70 per square metres per annum and for SDFs it is Rs 1,095 per square metres per annum. If an entrepreneur moves out of the SEZ, the possession of the land is given back to the SEZ developer, but the cost of the building is either reimbursed by the SEZ developer or the next person who the developer allots the plot to. And this is regulated by a private agreement between the developer and the unit. Coupled with good infrastructure and low rentals, SEZs provide exemption from customs duty, excise duty, etc, on import/domestic procurement of goods. And the main attraction has been 100% income tax exemption for five years, 50% for the next five years and 50 %of ploughed back export profits for five years thereafter for SEZ units.

The DC is also the labour commissioner at the zone. If a labourer has any problem, he just has to come to the DC office and immediately the problem is redressed, adds RP Verma. Single-window clearance mechanism creates an atmosphere where entrepreneurs can concentrate on their work. All approvals, right from building plans, are approved by this office. We give the import-export code and customs is also here. Its the administrative ease that brings people here. We have a long pendency, as it is very easy to start work here, says Bakshi.

And it is evident. The units that are in the SEZ dont want to go out of the campus and work in the main city. For them, SEZ is an idea whose time has come.