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Will the newly proposed DESH bill change the SEZ landscape of India

DESH is also expected to enable states to play a greater role in the integration of all existing industrial parks within states with existing SEZs across the country.

DESH bill, SEZ, investment, domestic market, manufacturing sector, employment, NFE obligation, logistics, government
DESH bill is expected to bring about a paradigm shift by moving the focus from exports to domestic investments. Image: Bloomberg

– By Mohammad Athar (Saif)

With the Government’s focus on domestic investments, easing compliances, and integration of land banks and procedures, the DESH bill is expected to be a game changer in times to come.  These changes will require organisations to rethink and reimagine their operations and quickly come up with transition plans.

India’s target of becoming a USD 5 trillion economy by FY 2026, with a contribution of USD 3 trillion and over USD 1 trillion from the services and manufacturing sector respectively, requires accelerated investments. While India’s service sector continues to show appreciable growth, the manufacturing sector has been lagging, necessitating urgent interventions. While the 2005 SEZ Act was brought in with the hope of making India a manufacturing powerhouse of the world, it had very limited positive effect. The 262 operational SEZs set up over this period currently have only 5,576 operational units and account for less than 20 per cent of the country’s exports.

The Government of India initiated several steps to improve the investment attractiveness of SEZs and constituted the Baba Kalyani Committee to suggest changes to India’s SEZ policy based on inputs from various stakeholders. As part of this endeavour to create a policy framework that enables India to become an attractive global destination for manufacturing and services, the Government of India is bringing out a new legislation to replace the existing SEZ Act, 2005 – the Development of Enterprises and Service Hubs (DESH) Bill.  

The DESH bill is expected to be tabled in the monsoon session of the Parliament. The bill is expected to bring about a paradigm shift by moving the focus from exports to domestic investments, eliminating compliance and procedural challenges, and integrating multiple models of economic zones such as SEZs, coastal economic zones, and food and textile parks. In transforming the existing SEZs into enterprises and service hubs, the focus will be on boosting economic activity and the domestic market, integrating the various models, facilitating ease of doing business and generating employment. DESH is also expected to enable states to play a greater role in the integration of all existing industrial parks within states with existing SEZs across the country.

The new bill is expected to ensure tax rebates/refunds/financial subsidies to developers/companies in the hub, in a manner similar to the existing SEZs, but with no export compulsion NFE obligation. Existing ports, airports, inland container depots, land stations, etc., are proposed to be transformed into Development Hubs with a clear demarcation of processing and non-processing areas.

Preparing for the changing landscape 

Will the proposed changes require businesses to reposition themselves and cause some turbulence in supply chains? The short answer is yes. There will be complexities for developers, manufacturing and service units and elements of the supply chain in terms of governance as well as operations. More than 1 lakh acres of land within the current SEZs is still not occupied. Transforming this land into development hubs will be a boon for developers, enabling them to service domestic and global clients looking to set up their manufacturing units and service operations, targeted at the fast-growing Indian market. The existing businesses within the SEZs will accordingly need to rethink their business strategy as the conversion of their zone into a Development or Enterprise Hub would bring in new opportunities. Businesses will also need to start looking at the vendor ecosystem, inbound and outbound logistics, operating strategies, tax restructuring, transfer pricing, regulatory requirements, incentives, people management and the best ways to maximise the benefits they stand to gain under the DESH law.

However, there are some open issues which the draft DESH Bill seeks to identify and address through consultations with stakeholders. While the earlier SEZ Act did provide for enhanced Ease of Doing Business (EoDB) through single-window clearances through the office of the Development Commissioner, the implementation has been a mixed bag in some states which did not do away with their individual departmental approvals. How well this single window will be implemented under the DESH Act remains to be seen. This is also true of the various tax breaks that the DESH bill proposes to bestow. Would the process of obtaining these breaks be smoother and dispute free? Coordinated action from the Government of India, state governments, industry associations, investors and all stakeholders, along with efforts to address any teething issues, could make DESH a game changer for India and go a long way towards realising the goal of making it a USD 5 trillion economy by FY 2026.

(Mohammad Athar (Saif) is Partner and Leader – Industrial Development at PwC India)

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