The ghost of Nandigram has not been exorcised. The steps taken by the government in the aftermath of the Nandigram debacle got back the feel good factor into the future of SEZ policy and its sustenance as a long-term growth engine. The action by the Supreme Court of quashing the plea put forward by Reliance for its Mumbai SEZ (MSEZ) evoked strong reactions and has created a false sense of uncertainty once again around the feasibility of large-scale multi-product SEZs around the country.
However, over the last two months, policymakers at the ministry of commerce have been active in issuing clarifications that have far-reaching positive consequences. Several open issues have been addressed through amendments and instructions. The pace at which these decisions were taken and indeed actioned, is a positive sign and the policymakers deserve a pat on the back for rising to the occasion. Some of the major initiatives are discussed here.
The first among them is that of vacant land. The connotation of ?vacant land? has always been a bone of contention. Though in a plain vanilla sense, vacant land has a straight forward meaning; potential investors saw this as a missed opportunity since availability of large tracts of vacant land is difficult.
A definition of ?vacant land? has since been inserted in the SEZ rules that defines it as the land where ?there are no functional ports, manufacturing units, industrial activities or structures in which any commercial or economic activity is in progress.? To put it concisely, vacant land has an extended connotation to include land that has complete structures or non-functional ports. As long as such premise does not have any commercial or economic activity in progress, these areas are eligible to be potential SEZs. Ruins can be converted to riches.
The next issue is that of service tax exemption for services consumed wholly within the SEZ. On March 3, 2009, the ministry of finance issued notification 9/2009-Service Tax providing that all units and developers will now be eligible to claim refund of input taxes suffered. This was not well received by businesses, primarily for two reasons. One, SEZs were supposed to be tax-free zones, so why there should be a levy at all. Second, the process of getting refund is unfriendly, time consuming and mired in red-tape. However, notification 15/2009-Service Tax dated May 20, 2009 was issued to provide unconditional exemption to services consumed within the SEZ without following the refund route. Thus, the requirement of first paying the tax and then claiming refunds is dispensed with.
Then there is the issue of leasing on a shift-to-shift basis and disaster management/recovery centres. IT/ITeS SEZ developers had sought clarification whether a developer can lease space in the IT/ITeS SEZ on a shift-to-shift basis. In response to this, an instruction was issued internally to the development commissioners by the ministry of commerce. This, perhaps, is the first step to address the concerns on SMEs who have always been complaining that the SEZ scheme never benefitted them. The instruction now lays down that SEZ developers can lease out space in IT/ITeS SEZ on a shift-to-shift basis subject to certain conditions. Clarifications are also to be issued to tweak procedure and the SEZ rules to enable implementation of this process.
The ministry has also recognised the reality that ITeS businesses, in particular, require a full time disaster management and business continuity mechanism. The instruction recognises this business reality and stipulates that disaster management/recovery centre of foreign companies can be set up in the IT/ITeS SEZs whether manned or not. Though there are practical issues involved here, the fact that the need is addressed is a step in the right direction.
Yet another issue is that of the movement of used/second hand assets. Perhaps the most controversial issue since the initiation of the SEZ regime is the question of whether used assets can be moved by a new unit into an SEZ or not. Instruction no 11 issued on May 27, 2009 has sought to address this question in detail.
So far the SEZ regulations have flip-flopped on the issue. The SEZ rules were amended in August 2006 to stipulate that no previously used machinery or plant could be considered for a new SEZ unit. This was coupled with a retrospective inclusion in section 10AA of the Income Tax Act of a sub-section that restricted movement of previously used machinery or plant subject to a maximum of 20% in value terms. Subsequently, the SEZ rules were again amended to remove the above stipulation on the ground that the income tax regulations had addressed this issue.
The instruction in effect allows for movement of used capital goods in excess of 20% provided prior approval of the development commissioner is obtained. It also specifies that in case used capital goods valuing more than 20% are shifted, such units will not be entitled to income tax benefits. Though there are devils in the detail that need to be vanquished, the instruction comes as a big relief at the time when businesses are desperate to consolidate.
One hopes that the spirit of rationalising and facilitation continues to nurture within the echelons of power. If the current developments are anything to go by, the future of SEZs is more than secure, given that the regime is here to stay and the only way to go is, up.
?The writer is executive director, PricewaterhouseCoopers