Expertspeak: The dire need to understand SEZs

Synefra owns three SEZs, and their parent company Suzlon is a big investor. Now, as SEZs brace up to bear the brunt of taxes and a headlong plunge in investor confidence, JR Tanti says the new imposition is insensitive to the humongous investments at stake.

SEZ as a concept has been running into bad weather at various crossroads since it was announced and minimum alternate tax (MAT) is one more to this list. While it is not the sole hindrance to the over 40 per cent growth rate, it is one of the major reasons that have affected the SEZ developers.

The imposition of MAT will affect companies and the impact will be very high for ours, Synefra. More than 25 per cent of planned developments on the infrastructure work have been put on hold. We are not sure whether the new unit holders for whom we were pitching will now be interested to set up their units in our SEZ. Banks are not cooperating as there is now a delay in repaying loans taken for developmental work. With the declaration of MAT, we are stuck in a lose scenario as a developer.

Shadow of MAT

The SEZ policy in the manner that it was defined had no such provision to add MAT and hence it is rude shock because, earlier both the developers as well as units in the tax-free enclaves were exempted from MAT under Section 115 JB of the Income Tax Act.

Exports from SEZs contribute about one-third of the country's total exports. Shipments from these zones during April-December 2011 grew by 47 per cent to Rs 223,132 crore over the same period last year. But the shadow of MAT has severely affected incoming investment plans, for example, proposals made in 2009 and 2011 Vibrant Gujarat investment summits, worth around Rs 1.25 lakh crore, have been adversely affected.

Such unpredicted policy modifications make investors apprehensive to set up their units in SEZ as they are not sure as to what changes would be announced in future and how it might impact their business.

While imposing the MAT on SEZs, the government has failed to consider the impending investments running into thousands of crores of rupees and the subsequent financial losses that will be suffered by stakeholders like debt funding banks and financial institutions besides small investors in the stock markets, which will majorly result in loss of exports. There is no bigger threat than adverse policy changes that are difficult to counter or make provisions for safe guard.

Understanding SEZs

There are various nuances that the government should consider taking if MAT is indeed imposed on SEZs:

• A clear understanding and division of rural and urban SEZs. There is a vast difference in the two types of SEZs and no similar law or policy can be imposed uniformly. This difference is in terms of land price, post-exit implications and also the type of trade.
• Reduction in the mandatory minimum size of land required for setting up a product specific SEZ.
• The present norms mandate that SEZs can take orders from Indian companies located outside the zones only if they are for exports. The proposed rules should allow SEZs to take up orders from any Indian firm located outside. The idea is to let SEZ units use their excess manufacturing capacity to process orders from companies located outside the zones.
• The government should allow SEZs to make available their excess installed capacities for the use of industrial consumers in the domestic tariff area (DTA).
• Granting permission to convert the single product SEZ to multi-product SEZ, if it benefits the developer in that region.  

Due to the MAT policies there are several SEZ developers planning to exit due to weak demand in overseas markets consequent to the economic crisis and again this has to be understood from the perspective of classifying the SEZs as Rural SEZ and Urban SEZ. The policies and benefits imposed cannot be uniformly affected. Today, all names in the media are Urban SEZ while nobody mentions the hardships that the rural SEZs which were set up with the intention of developing under-developed regions.

Now with MAT imposed, the Urban SEZ developer can ask for an exit route and use this same land for commercial purpose. The price that he would get in an urban setting will see him sail through. But at the same time the Rural SEZ will face losses if he were to offer the land to some one else. Because this land is already brought at a lesser price from the farmer and a top up infrastructure development cost is invested by the developer to make it conducive for industries.

Steadying the policy ship

Some solutions that would ensure both revenues for the government and benefit the developer, especially in the rural sector, could be:

• Flexibility in the imposition of MAT on the developer and probably in phased manner
• Different set of policy for rural and urban SEZ considering the respective situations that these developers are facing today
• Announce some policy benefits vis-a-vis the imposition of MAT which will support the developers in order to counter the hardships that MAT would bring in
• De-notification or exit route from SEZ is not a solution that the developers are seeking there is a purpose for setting up SEZs in chosen regions hence if the policy is conducive they would definitely like to continue the status of SEZ
• Financial leniency is expected from the government because this is a sudden and unexpected deviation hence developers need time to understand its impact and take measures accordingly in their business plans
• Assurance from government that they will support the developers in the issues that they face with the imposition of this additional tax.

The author is MD, Synefra Engineering and Construction.