SEZs sputter on infrastructure woes, tax traps

Special economic zones, supposedly export hubs and growth engines of the Indian economy, have clearly failed to live up to the promise.

Special economic zones (SEZs), supposedly export hubs and growth engines of the Indian economy, have clearly failed to live up to the promise. Exports from SEZs grew just over 15% in 2011-12, compared with the country?s overall exports growth of 21%. Besides, while there has been a fall in India?s investment rate in recent years, SEZs witnessed an even worse drought in new fund flows.

Cumulative SEZ investments reported a flat growth (-0.46%) in 2011-12, showing investors are no longer attracted to them. Not surprisingly, SEZ employment generation has fallen too.

At present, there are as many as 154 SEZs operating in the country including 15-odd multi-product zones. Given the slow and staggered pace at which new zones are coming up and the flurry of exits, there is little hope of a reversal of the sector?s flagging fortunes.

Tax sops will be available only for existing SEZ units and those operational by March 2014. With the economic slowdown, only a few of the 400-odd notified SEZs are ever likely to go on stream.

SEZs, trumpeted by the UPA government as zones of economic efficiency, showed promise in the initial years, attracting cumulative investments of R2 lakh crore and creating 8.5 lakh jobs. In the absence of tax incentives and infrastructure support, some of these investments might never have materialised and for that reason, the policy might still not be considered a failure, some analysts feel.

?Tax sops are important for the manufacturing industry to gather momentum, given the rising cost of production due to rising input and labour costs, infrastructure deficit and delays in clearances,? said Aradhna Aggarwal, senior fellow at the National Council of Applied Economic Research.

Ironically, the government is now considering a revamped SEZ policy with fresh tax sops and relaxations in the minimum area requirement to a quarter of the present specifications.

Sources in the commerce and industry ministry told FE that the decline is under scrutiny. The ministry is expected to float some draft proposals aimed giving relief to these units by the end of the month.

According to the source, suggestions include the following: ?Any zone that is not built around the identified 40 million-plus cities and state capitals will become eligible for duty benefits on capital investment for construction of hotels, hospitals, schools and colleges, residential and business complexes and training, leisure and entertainment facilities in what is billed as non-processing area infrastructure. The zones will be eligible for the tax concession if they are built 50-100 km from an urban conglomerate and facilities have to be for exclusive use of SEZ employees.?

The source said: ?The ministry will also be proposing that in the case of SEZs constructed in 123 backward districts, this infrastructure can also be used by those who are not part of the zone.?

A scheme to build exports infrastructure and connectivity in SEZs is also under consideration. There is also a proposal to extend the benefits of export schemes to SEZ units to make up for the loss due to the 18.5% minimum alternate tax. Such an effort comes in wake of the the continuous declining performance of SEZ and their contribution to exports, the source added.

OP Kapoor, director general of export promotion council for SEZs and export-oriented units said if such measures are quickly put in place, the declining performance can be arrested. The economic slowdown, opposition to MAT and dividend distribution tax on SEZs are pushing up SEZ denotification, Kapoor added.

Recently, a parliamentary panel blamed the government for the lack of industries in almost half of the SEZs set up since 2006 and diverting fertile land acquired from farmers to realtors. The standing committee on commerce said though land was acquired for SEZs, ?no industries have come up there; only 154 SEZs have become operational out of 389 notified.?

?SEZs? performance could have been far better if these projects have been spared land acquisition problems. We have been highlighting the need for reducing the minimum area requirement along with amendments in the rules for contiguity,? said Manoj Goyal, senior vice-president, Raheja Developers.

SEZ developers and units are worried over the proposed MAT, which will be effective from the assessment year 2012-13. The Direct Taxes Code, which is being vetted by a parliamentary standing committee, also speaks about MAT on SEZs. To sustain investor interest in the sector, the commerce ministry is batting for differential MAT rates for SEZs and domestic tariff area (DTA) units ? 20% for DTA and 10% for SEZs.

Rising SEZ denotification is also concern. Since 2008, the Board of Approval on SEZs has approved 46 cases of denotification, which is seen as a reflection of policy deficit in guiding the SEZs.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 17-05-2012 at 04:17 IST