The introduction of a proposed Bill in Parliament to replace the special economic zones (SEZs) Act could see further delay, as the commerce and the finance ministries are still in the process of finding a common ground on tax incentives and some other key provisions of the draft Bill.
People close to the development told FE that the Bill is unlikely to be tabled in the upcoming Budget session of the Parliament, as was anticipated. In fact, the commerce ministry was initially planning to introduce the Development of Enterprise and Services Hub (DESH) Bill in the winter session of the Parliament, which got over on December 23. The Budget session is scheduled from January 31 to April 6, with a near one-month recess in between.
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Both the ministries are still in talks to resolve differences after the revenue department rejected the commerce ministry’s proposal to extend a benign corporate tax rate of 15% until 2032 for greenfield and certain brownfield units in these proposed hubs.
“The broad contours of the draft Bill are expected to be finalised after the Budget session. As such, the finance ministry is busy preparing the Budget for FY24, which is the top priority now,” one of the sources said.
FE had reported on October 5 that the finance ministry had formally opposed the proposed tax incentive. It had also expressed its reservation on another proposal to integrate the hubs with the domestic market, as such a concept goes against the current SEZ structure with clear export obligations based on which certain incentives (such as duty-free imports of goods) are extended to these units.
In the past, too, the finance ministry had raised similar concerns over granting tax incentives to SEZs, in sync with its bid to prevent fiscal erosion and its vision to herald an exemption-free and simplified tax regime. It had also resisted the idea of allowing SEZ units to sell goods in the domestic market at zero or nominal tax, instead of the usual customs duty.
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However, it was expected to soften its opposition to freezing the concessional tax for both manufacturing and services units for a decade this time, as it had already trimmed such a tax to 15% for new manufacturing units that will begin operations by March 2024 (it’s now expected to be extended to March 2025). But the possibility of a loss of potential tax revenue at a time when the government is striving hard to reduce the elevated fiscal deficit seems to have promoted the finance ministry to stick to its stand.
The DESH Bill was necessitated to woo investors after the government set a sunset date for SEZ units to start operations (June 30, 2020) to be eligible for a phased income-tax holiday for 15 years. This dampened the appeal of SEZs that were once touted to be the key engine of India’s export growth. Sensing this, the commerce ministry had incorporated the benign tax and some other provisions in the draft DESH Bill to redraw investors into these hubs.
Moreover, India lost a case at the World Trade Organisation filed by the US, which had claimed New Delhi was offering illegal export subsidies through these SEZs. A modern framework for such hubs was also required to boost industrialisation, in sync with global best practices.
Consequently, the draft Bill has proposed to scrap the primary requirement for an SEZ unit to have positive net foreign exchange (NFE) for five years; instead, the unit’s performance will be evaluated on the basis of “net positive growth” (NPG) under the proposed Bill. The NPG of a unit will be based on certain parameters, including employment generation and economic activity.
However, as sources have said, the finance ministry’s fresh reservation about the lack of export focus of these units stems from the concern that it would spur demands for similar incentives for firms outside these zones.