The recent Budget mentions replacing the Special Economic Zones (SEZ) Act with a new "legislation that will enable the states to become partners in ‘Development of Enterprise and Service Hubs’". Life has come full circle for the SEZs which were when introduced in the Budget of 2004-05 touted as growth engines. All existing free trade zones /software technology parks came within the ambit of the then new SEZ law.
SEZs conceptually are a "geographical region within the nation state in which a distinct legal framework provides a more liberal economic policy than prevailing in the rest of the country". This geographical area is declared to be outside the normal customs territory of India. Thus, SEZs enjoy several tax benefits, both direct and indirect, apart from other facilities. Benefits extended to SEZ units are subject to earning net foreign exchange (NFE)--defined as the value of exports minus the value of imports. SEZs are tasked with the goal of generation of employment opportunities, encouraging investment (both domestic and foreign) and increasing India’s share in global market.
The fact sheet on SEZs (as on January 27, 2021) available on the official site would suggest that there are 268 operational SEZs as against 425 formally approved and that the operational SEZs are doing well in terms of the objectives of the scheme.
The Comptroller and Accountant General (CAG) has not shared this rosy perspective. The CAG performance audit report on the functioning of SEZs points out shortcoming in their performance. The report suggests that while the total quantum of exemptions availed by SEZs were about Rs 1.76 lakh crore, the performance of the sampled SEZs was not commensurate. Non-performance was observed in employment (ranging from 65.95-96.58 percent) investments (ranging from 23.98-74.92 percent) and exports (ranging from 46.16- 93.81 percent). The Report suggest that the achievements are contributed by a few SEZs which were mostly established before the enactment of the SEZ Act. The 83rd Report of the Parliamentary Standing Committee on Commerce on the functioning of SEZ, June 2007, has also frowned upon the misutilisation of land allotted to SEZ’s. The 40th Report of the Public Accounts Committee (PAC) on the performance of SEZs presented to the 17th Lok Sabha has similarly commented that the objectives had not been achieved and that overall performance was "far below projections". The PAC noted that only 39.78 percent of SEZs had become operational and that 52 percent of land was lying idle. The Committee noted substantial diversion of land acquired for public purpose. Against this backdrop, the Government had in 2018 constituted a committee under the chairmanship of Baba Kalyani to study the SEZ policy. The Committee was tasked to suggest a policy framework to adopt strategic policy measures which helps India to capitalize on global growth opportunities while developing its own highly competitive manufacturing and service base.
The Committee has since submitted its report. It has proposed to rename SEZs as 3Es--Employment and Economic Enclave, with the objective of moving from ‘island of exports to catalyst of economic and employment growth’. The 3Es would aim to bring together all categories of investors that enable economic activity or job creation and investment, targeted towards leveraging domestic demand. Separate recommendations have been made for stakeholders operating in the Manufacturing and Services sectors.
Another development which took place round about this time was in the World Trade Organization (WTO). The US had filed a dispute regarding export incentives being given by India to five schemes including to SEZs. The WTO held such benefits to SEZs as being violative of the provisions of WTO’s Subsidies and Countervailing Measures (SCM) since they linked benefits to earning foreign exchange. While India has appealed against the order, it is evident that we are taking these developments seriously. The announcement in the Budget was not unexpected.
Thus, while working out the contours of the new scheme, we would do well to look closely at the concerns raised by CAG and at the WTO. We would do well to look at the export schemes already in existence. The Customs department runs a trade-friendly and successful scheme--MOOVR (Manufacture and other Operations in Warehouse Regulations). In terms of these regulations, capital goods and raw materials can be imported without payment of duty to a bonded facility. Duty is deferred--and where the imported inputs are used for the manufacture of goods exported, the basic customs duty, and IGST are exempted and GST, zero-rated. A single point of approval, unlimited period of retaining the warehoused goods, no geographical restriction on opening the manufacturing warehouse, make it an attractive proposition.
We need to ensure we put in place a ‘smart’ export scheme. One that does not degenerate to a land-grabbing scheme. One that would help propel exports, help India achieve its ambitious target of reaching $ 1 trillion by 2025 and also be WTO compliant. The Budget speech also proposes to have the SEZs function on the very robust and time-tested customs national portal -this should further add to the ‘smartness ‘of the scheme.
-- The author is a former chairman of the Central Board of Indirect Taxes & Customs
