DESH Bill to Infuse Life in SEZs

Tax benefits and delinking of net positive foreign exchange are two of the most important proposals in the DESH Bill.

The Development of Enterprise and Service Hubs (DESH) Bill is aimed to revive relevance of existing Special Economic Zone (SEZ) in India. The new law to manage special economic zones is likely to recommend a single-window clearance mechanism.

The dispute settlement panel of the World Trade Organization (WTO) has pointed out that India’s SEZ law and rules are not compliant with WTO rules. The DESH Bill targets to increase the scope of SEZs from export advancement to infrastructure development. India needs to create and operationalise manufacturing hubs that can increase export competitiveness. In a major development, the SEZs will now also be able to supply to domestic tariff area at lower duties.

Necessity of SEZs

Most countries have passed laws to create industrial clusters that are built to cater exports. In India, the SEZ Act 2005 was passed to achieve the following objectives:

a) Promotion of exports of goods
b) Generating additional economic activity
c) Promoting investment from foreign and domestic entities
d) Development of infrastructure
e) Employment creation

To promote the concept of SEZ among investors, the government gave incentives to developers and income tax exemptions to the units when they earned foreign exchange in five years since starting operations.

Current Status of SEZs in India

As per data available, on June 30, 2022, there were 425 approved SEZs, in which 268 were operational. Exports from these SEZs have fallen to $102.3 billion in FY21, from $112.3 billion in FY20 and account for less than 20% of exports now.

SEZs have lost their shine due to the obligation of minimum alternate tax and sunset clause to remove tax incentives.

The dispute resolution board of WTO in its 2019 report, ruled that India’s export-related schemes (including SEZ Scheme) were forbidden grants under the Agreement on Subsidies and Countervailing Measures and were inconsistent with WTO norms.

Proposals in the DESH Bill

India has set a target of US$ 1 trillion exports each of goods and services by 2030. Among other schemes, the DESH Bill aims to position India among the top five exporting countries.

The improvements expected in the DESH Bill are summarised below:

a) Single-window clearance: Even after multiple policy changes at the central and state levels, the ease of doing business in India is not at expected levels. By ensuring coordination between all the levels of governments to procure necessary approvals, DESH Bill may improve the speed and efficiency of governance.

b) Receive money in Indian rupee: Under the current foreign exchange rules, the units in a SEZ are prohibited to make payment in Indian rupee. With the introduction of DESH Bill, units will be allowed to receive payment in Indian rupee and shall serve domestic tariff area after payment of applicable customs duty.

c) Removal of NFE criteria: As per the prevailing rules, units in a SEZ shall become net foreign exchange (NFE). The units are required to achieve positive net foreign exchange, to be calculated cumulatively, for a period of five years from the commencement of production.

SEZ: The Way Forward

On one hand the DESH Bill recommends several non-fiscal measures like allowing reverse job work for units in the SEZs, it falls short on giving a clear roadmap on the financial incentives.

Various fiscal incentives such as Remission of Duties and Taxes on Export Products (RoDTEP) and those under the Production Linked Incentives (PLI) Scheme, units may like to have clarity under the DESH Bill.

To avoid any further adverse action from the WTO, India’s export and manufacturing policies need to be compliant with Agreement on Subsidies and Countervailing Measures (ASCM).

Development Hubs Under DESH Bill

The DESH Bill has set two classifications for developmental hubs - enterprise and services. The service hubs shall be allowed only for service activities and have built-up area requirements, while enterprise hubs will have land-based area requirements and be permitted for both service and manufacturing activities.