The global business ecosystem has witnessed a tectonic change over the preceding three years. The deadly Covid epidemic and the Russia-Ukraine war have activated extensive economic disorders, quickening international moves in supply chains and provoking countries to reconsider their development plans and policies.
India too is revamping its economic strategies to be in sync with the global growth dynamics. Investment-intensive manufacturing capabilities in new sectors are becoming crucial for the nation’s economic progress. This is why confidence zoomed high when Union finance minister Nirmala Sitharaman, proposed the notion of developing enterprise and service hubs in the country.
While presenting the Union Budget 2022, the Finance Minister of India, declared that Special Economic Zone (SEZ) Act 2005 will be overhauled to generate an environment for the states to collaborate in advancing businesses and services hubs. She further underscored that the intended statute will guarantee the finest deployment of infrastructure resources and augment the export effectiveness of Indian industries under SEZ. In this regard, the proposed inheritor of SEZ Act 2005 is the Development of Enterprise and Service Hub (DESH).
Special Economic Zones (SEZs) are stated as duty-free enclaves and deemed foreign territories for trade operations, duties, and tariffs. India recognized the potential of such an export-oriented model quite early and created Asia’s first Export Processing Zone (EPZ) in Kandla in 1965. However, to formalize the development of SEZs in India, SEZ Act was brought in 2005 and SEZ Rules in 2006.
Know your DESH Bill
The DESH Bill targets to enlarge the territory of SEZs to ensure World Trade Organisation (WTO) compliance and transmute them into all-inclusive economic hubs. It concentrates on wide-ranging parameters such as employment generation, expansion of economic activity, promoting investments, especially in research and development (R&D), and integration with many other industrial hubs and global supply and value chains.
Trouble in Paradise
Unfortunately, the execution of the Bill stays in the kingdom of uncertainty. Even ten months after its announcement, there is no hint when this vital piece of law will see the light of day. There were anticipations that the Bill would be introduced in the winter session of Parliament, which began on December 7, 2022.
But reports indicate that inter-ministerial fighting is likely to delay the implementation of the Bill. The Bill is trapped as the Finance Ministry is going slow in granting two chief proposals made by the Commerce Department.
The two key proposals are expecting a green sign from the Revenue Department include permitting SEZ units to sell in the domestic tariff area (an area within the nation that falls beyond the zones) on payment of duties foregone on raw materials and offering a concessional corporate tax rate of 15% for a lengthened phase until 2032 to all greenfield and some brownfield units in the ‘development hubs’ that are to come up as per the Bill.
North Block has rejected the Commerce Ministry’s suggestion to offer tax incentives to units established in SEZs as part of the Bill. The commerce ministry has openly said that it should do whatever it takes to make the scheme beneficial to motivate these units but tax incentives should be kept out of the scheme.
It now appears that unless the ministries of commerce and finance settle their disputes over the Bill, India’s legislative drive to augment manufacturing potentials and export capabilities will hang fire. According to the Ministry of Finance, tax concessions under the proposed outline may help one identified sector however, it will produce chaos for the other business units and therefore it has been recommended that one should not generate islands of no taxation within India.
Besides facilitating the creation of more employment opportunities and revenue, the enactment of the legislation can go a long way in curbing the relocation of key business functions to other nations.
With the new-found love for a China-plus strategy, many international companies are looking for hub opportunities outside the dragon nation. Numerous Asian countries are competing for this investment. Vietnam and the Philippines are blossoming as the biggest beneficiaries of the relocation of businesses from China because of advantageous tax regimes and incentive policies. Even Bangladesh, India’s smaller neighbour in the east, is providing relaxation in SEZs from 16 national regulations, 10-year tax incentives, and a well-framed single window structure within the Bangladesh Economic Zone Authority, an independent body. Therefore, quick execution of the Bill is warranted to ensure that India does not miss the China-plus opportunity.
SEZs are counting on the government to execute the Bill at the earliest to attend to the current challenges so that units can function more flexibly and foster growth. Therefore, there is little time to lose if India has to guarantee that potential investments do not float away to other shores in the absence of a clear-cut, efficient supervisory system.
(The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa)
