Budget FY23: Special Economic Zones may get a Budget boost

New SEZ legislation is likely to be guided by the recommendations of the Kalyani committee

There could possibly be some upside in the estimate of GDP itself allowing the government a higher fiscal space.
There could possibly be some upside in the estimate of GDP itself allowing the government a higher fiscal space.

The Union Budget always sparks speculation, but for Budget FY23 some speculation surrounding the amendment of the Special Economic Zone Act now has greater credence, following commerce secretary BVR Subrahmanyam’s recent statements. “For the first time, you will find specific paras addressing us (the commerce ministry). The old history of us wanting something and the finance ministry not doing it is no longer there. We have brought harmony there,” Subrahmanyam said in his address at the Confederation of Indian Industry Partnership Summit. The reference is to the commerce ministry and the finance ministry often not being on the same page, especially on tax incentives to SEZ units and allowing them to sell in the domestic tariff area. The Budget is expected to announce simplification of SEZs as the commerce ministry is rewriting the legislation.

The SEZ Act was passed in Parliament in 2005, followed by the rules being promulgated in February 2006 with the objective to attract foreign direct investment, develop world-class infrastructure and create a globally-competitive and hassle-free environment for companies engaged in exports of goods and services. As many as 425 SEZs were granted formal approval and 35 received in-principle clearance as on November 30, according to the official Fact Sheet on Special Economic Zones. But only 268 of these remained operational. SEZs across the country employed as many as 2.36 million people. While the SEZ policy has been leveraged by companies in the services sector, those in manufacturing have languished in comparison.

Calls for assistance to SEZs gained traction after the pandemic hit their operations hard, as this newspaper has reported. Outbound shipments of manufactured products and trading services from SEZs crashed by 21% from a year before to Rs 2.46 lakh crore in FY21, while the country’s overall merchandise exports dropped by only 3% to Rs 21.54 lakh crore according to data collated by the Export Promotion Council for export-oriented units and SEZs. Services units, the dominant segment in SEZs, appear to have coped with the pandemic’s impact better. Still, overall exports (both goods and services) from SEZs recorded an almost 5% decline in FY21, against a 1.5% drop in the country’s total exports in rupee terms.

The commerce secretary hinted that a major budgetary announcement on simplification is that “if there is a unit in an SEZ facing the domestic market, it will behave like a domestic tariff area entity. If it is facing the international market, it will behave like an SEZ unit. It will still be one unit. That’s going to be a breakthrough once we get it through the next session of Parliament.” As FE has reported, the government may allow such SEZ units to sell goods domestically, subject to a lower impost than the regular customs duties they are currently mandated to pay while supplying to the domestic tariff area. This levy is expected to neutralise the advantages that SEZs—being specifically delineated duty-free enclaves—enjoy vis-à-vis domestic manufacturers, to ensure a level-playing field for firms operating outside such zones.

The plan, which requires the concurrence of the finance ministry, is aimed at helping Covid-hit SEZs to better utilise their idle capacities. Similarly, the commerce ministry is working out a mechanism to enable partial de-recognition of existing SEZs so that areas that are no more in demand can be used for other purposes. In rewriting SEZ legislation, the commerce ministry will be guided by the recommendations of the expert committee headed by Bharat Forge chairman Baba Kalyani, which submitted its report in November 2018 to revitalise these zones and help realise India’s merchandise-export target of $1 trillion by 2027-28.

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