Reviving investments in SEZs

By: | Updated: February 27, 2015 5:41 PM

SEZs are crucial for Make-in-India and boosting exports.

A tax policy is a choice that a government makes keeping in mind the macro- and micro-economic aspects. However, implementing it is a tricky task. As we countdown to February 28, it is time to start scribbling what the industry expects. Not too long ago, the government unveiled the SEZ scheme with a bang; the scheme envisaged giving boost to manufacturing, attracting investments, driving exports, creating jobs and providing a world-class infrastructure for businesses set up in these zones. Across the board fiscal sops were extended for setting up SEZs and carrying out authorised operations.

The SEZ scheme took off well with a number of investors lining up to seek government approvals. But, over the years, implementation and operational challenges started daunting investors. There has been a continuous flip-flop by the government on the regulatory framework and providing fiscal incentives to SEZs. Thus, this sector has not been able to scale up as envisaged. A large number of SEZs remain underutilised and underdeveloped and several investors have even exited from the scheme. Needless to mention, manufacturing sector remains the Achilles’ heel of our economy.

From a fiscal standpoint, as we step into yet another year, there is hope that in order to revive SEZs, several unfinished items in the agenda will be taken up by the government in this Budget.

Withdraw or reduce MAT and DDT on SEZs: The Finance Act, 2011, broadened the scope of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) by bringing in SEZ developers and units under the ambit of MAT, diluting the benefits offered under the SEZ scheme. While there is a lot to be done to revive investor interest in SEZs, the removal of MAT and DDT on SEZs needs to be addressed. Levy of MAT/DDT during the tax holiday period increases burden on developers and units and also increases uncertainty.

Allow a branch of a foreign company in an SEZ to carry out DTA or related party transactions in a DTA: A foreign company can set up a unit in an SEZ as a branch; however, a branch is restricted to carry out any DTA transaction or a transaction with its affiliate in a DTA and has to operate on a standalone basis. While there is no restriction in an SEZ to carry out DTA transaction, such anomalies are detrimental to attracting foreign investors.

Enabling ECB for SEZs: We have to enable External Commercial Borrowings (ECB) for large projects like SEZs for opening up of low cost financing for developers and consequently cheaper infrastructure for businesses.

Implement recommendations of Rangachary Committee report, pertaining to the requirement of ‘new employees’ in an SEZ unit: As per the provision of section 10AA, there is no requirement with regard to employment of new employees for claiming tax deduction. Accordingly, the condition of ‘new employees’ cannot be imposed while examining the eligibility of the taxpayer for deduction under section 10AA. In this regard, the Department of Commerce has also clarified that there is no limitation on transfer of manpower to SEZ units. The CBDT clarification capping transfer of manpower from an existing unit to a new unit to 50% should be withdrawn.

Customs duty on DTA sales: To encourage India to become a global manufacturing hub, DTA sales are inevitable. But high customs duty levied on such domestic sales is a deterrent. This duty on DTA sales is levied even on value added in India—labour, material, etc—which is at a rate higher than FTA rates on certain items. Customs duty should be levied on ‘duty foregone basis’ on domestic sales from SEZs and ‘no customs duty’ should be levied on valued added in India.

Enable SEZs to issue Form I to sub-contractors: Under the scheme, SEZ developers/units and also the contractors/sub-contractors appointed are entitled for CST exemption on inter-state procurement of goods used for setting up and for authorised operations, on furnishing duly signed Form I. But, under the CST Act, there is no enabling provision or rule that provides for issuance of Form I to the vendors of contractors or sub-contractors appointed by developers/units. This results in additional cost to the SEZ unit to the extent of CST charged by the suppliers to sub-contractor. This defeats the very intention of providing fiscal benefits to SEZ developers/units.

Success stories of SEZs can be witnessed even in neighbouring China where a limited number of large, self-sustainable, confined enclaves have been created near ports to boost exports. The SEZ success story so far and its benefit to the Indian economy cannot be denied. SEZs contribute to about 25% of India’s exports and generate significant employment.

SEZs are an important mainstay for supporting the ‘Make in India’ campaign and boosting exports. The onus of stimulating investment in SEZs lies with the government. The future of SEZs would greatly depend on the ability of the government to bring stability to this policy regime and reinstate the fiscal incentives carved out under this scheme.

Kiran D Mehra

The author is senior manager, Tax & Regulatory Services, PwC India

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