With the right policy push and directive, SEZs can help the country develop at a much faster pace.
After several setbacks faced by the SEZs under previous governments, SEZs are getting a new lease of life under the Modi Raj. This article discusses the reasons for the setback while exploring ways in which the government can make the SEZ policy work.
The concept of SEZ in India has a checkered history. The SEZ Policy was first introduced in 2000 with great hype followed by the 2005 Act. The concept of SEZ was borrowed from China wherein the government was in favour of creating large-sized SEZs for cluster development of industries away from the towns which created an entirely new ecosystem for industries. However, many large SEZ projects got mired in controversy. Unfortunate instances like Nandigram led to political opposition which labeled SEZs as land-grab schemes. This opposition led to introduction of a slew of measures under the garb of curbing scams - introduction of Minimum Alternate Tax; converting exemption model of service tax to refund based model which was much less attractive; area available for non-industrial development and amenities was reduced; manner of development of this non-industrial area (Non Processing Area) was prescribed; and so on. These issues were blended with other problems. For instance, due to the large land requirements, multi-product SEZs and non-IT SEZs found it difficult to meet land requirements and hence could not get formal approvals. SEZs also found it difficult to get finance for their projects which delayed the establishment of infrastructure in SEZs even after getting formal approval and notification. These impediments hampered many SEZ projects making them unviable/unworkable. Some developers deferred their plans of creating SEZs. In other cases, Board of Approval cancelled the approvals of developers who failed to obtain land and other clearances despite several extensions. Again in certain cases, developers de-notified their SEZs. Thus, in the span of about eight years since the SEZ Act and Rules notified in February 2006, while 566 formal approvals were granted only 388 SEZ were notified. Of these, only around 184 SEZs became operational. More than 50 to 60 SEZs were de-notified.
Despite these bottlenecks, SEZs clocked robust numbers. Exports from SEZs rose from Rs 22,840 crore in 2005-06 to Rs 4.94 lakh crore in 2013-14, a growth of over 2000 per cent over the eight-year period. Had the remaining SEZs been notified, the increase in exports would have been spectacular.
SEZ is a good policy step, which is evident from the exports of China and Gulf countries. The present government does realise that SEZs can become India´s most important weapon in countering competition in world trade and help in breaking Chinese dominance.
In such infrastructure projects, political will remains a major driving force for the deployment and promulgation of appropriate policies for its economically profitable deployment. The Modi Raj is doing its bit to provide this confidence which is very essential to re-establish the lost faith in investors. The present government is best equipped to provide that confidence considering the track record of our PM. In the past, the Modi government in Gujarat had adequately demonstrated that investor-friendly policies made Gujarat one of the most preferred investment desti¡nations, housing some of the most successful and profitable SEZs.
The Modi government is seeking to replicate the Gujarat SEZ success story at the Union level. In the Union Budget, the government conveyed its support for developing SEZs in India. It has assured the investors to remove tax-related roadblocks in the development of SEZs. The government is promulgating the ´Sagarmala´ project for promoting port-based SEZs across India´s coastal States. Thus, the government is making every effort to convey its commitment to the investors to revive the SEZs and make them effective instruments of industrial production, economic growth, export promotion and employment generation.
With this end in mind, in August, our PM constituted a high-level committee to review the problems faced by promoters of stalled SEZ projects across the country. This committee ought to take a holistic view of the problems faced by SEZs. Some of the burning issues that ought to be addressed are set out below.
In the past, land acquisition was a major challenge faced by developers as an SEZ required as much as 1000 hectares of contiguous land. This issue was partly addressed in 2013 when the government reduced the land requirement for SEZs. However, this challenge is magnified by the new land acquisition law which is made applicable even for acquisition of land for SEZs. The new law on land acquisition should not be applied to SEZs as it will increase the time and cost of infrastructure development in SEZs.
Another problem that was noticed in the past was the law on indirect tax. While indirect tax reliefs are available to SEZs, the regulatory machinery to avail the said benefits became cumbersome and some developers were not able to take full benefit of the same, like refund of service tax. The law on indirect tax exemption should be clarified and stabilised. Frequent changes in the indirect tax legislations ought to be avoided.
Minimum Alternate Tax of 18.5 per cent was made applicable on SEZs since the Finance Act, 2011. This change was unsuccessfully challenged by developers who had invested several lakh crore rupees on infrastructure development of SEZs. This change had shaken the faith of investors. The tax benefit once granted/crystallised/clarified for SEZs should be continued and no retrospective or retroactive changes should be made therein.
The concept of Single Window Clearance envisaged for SEZs was a mere mirage in the past. This concept was to a certain extent brought into effect in Gujarat for local clearances. However, in all other cases, the SEZs were caught up due to land clearances, environmental clearances, local clearances and other regulatory clearances. Thus, it is very essential that the Committee consider alternatives for implementation of a simple mechanism for clearing SEZ projects.
SEZ Act and Rules provide the basic law governing the zones. However, the said legislation has not provided a comprehensive legislative framework for dealing with all aspect of SEZs which resulted in confusion in the past. For instance, a detailed regulatory policy regime for Free Trade Warehousing Zones (FTWZ) was not provided in the SEZ Act and rules which created difficulties in implementation of FTWZs. Even the law on de-notification/exit is not clear. Such policy gaps need to be identified and addressed by the committee.
These are just some of the many issues that need to be considered by the committee. Views and comments should be provided by all the stakeholders including the developers, co-developers, SEZ units, supplier and exporters to enable the committee provide a comprehensive report to the government. With right policy and political backing, SEZs can truly help India to jump to the next orbit.