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MAT will inhibit export growth

MAT will inhibit export growth

GMR Group is one of the few developers that is gung ho on SEZs. Their Rs 26,000 crore SEZ, coming up in Kakinada, Andhra Pradesh, is being constructed at full pace in the face of scepticism and uncertainty regarding SEZs in the country. SGK Kishore, CEO – SEZ Business, GMR Group, responds to an emailed questionnaire from Shashidhar Nanjundaiah.

What activities are envisaged in your Kakinada SEZ, where you have a majority ownership?  
The Kakinada SEZ is being positioned as logistics and port based large industrial city along the strategic coastal location. It has been identified as the anchor pro­ject of Vishakhapatnam-Kakinada Petroleum, Chem­i­cal, Petrochemical Investment Region (PCPIR), that will tap oil and natural gas reserves in the Krishna-Godavari Basin. The proposed target sectors for the SEZ include refinery and petrochemical industries, power pla­nts, heavy manufacturing and metals, as well as any other industry that can derive value from the location and facilities.

How will imposition of MAT impact your activity?
Imposition of the MAT is detrimental for the SEZ concept in India. The benefits to SEZ developers will get reduced impacting the financial viability of the projects. This will also result in higher prices for SEZ land. The units will also lose the benefits resulting in lower financial returns. Overall, such a decision in the formative phase of SEZ development in India is likely to put a question mark over the long-term viability of SEZ industry in India.

Imposition of MAT will be one of the key inhibiting factors for continued and further growth in exports from SEZ, as it will impact the cash flows of units and dev­elopers, requiring more borrowing.

However, apart from MAT there are several other factors that are currently limiting the pace of export growth from the SEZ:

  • Some tax benefits promised in SEZ Act, 2005 are being withdrawn
  • Land acquisition and rehabilitation and resettlement (R&R) challenges
  • Delay in government support in providing external infrastructure and connectivity
  • Delay in obtaining approval and clearances
  • Withdrawal of profit-based tax benefits to SEZ units, rendering the setting up of units in SEZ unviable 

Do you believe it is better for the private developer to be in charge of
all infrastructure development, including hinterland connectivity, for
an SEZ?

The need for infrast­ructure and connect­ivity is more significant for large­-format or multi-product SEZ as the scale of develop­ment requires significant upgrad­ation of infrastructure. Most of the required elements like land, Right of Way, ownership and supply of utilities are in control of the government rather that the SEZ developer. So it is imperative that the government should provide all ext­ernal infrastructure, including connectivity, for large for­mat industrial development (multi-product SEZs). Private developers in such SEZs should focus on pro­viding internal infrastructure.

What is the best solution to ensure revenues for the government as well as incentives for the industry?
The government should take a long term (10-15 year) view on the development of SEZs in light of the long gestation period for development and the common problems facing the SEZs. Frequent changes in the SEZ policy send a negative message to investors and acts as a dampener to the overall objective.

The government should either continue or extend some of direct tax benefits for large format SEZs like multi-product SEZs (as these have longer gestation pe­riods of 6-8 years before generating revenues). For exa­mple, the investment linked exemption for SEZ deve­loper can be increased to twice the investment made including the land cost. This will to some extent rati­onalise the impact of MAT over a period of time.

What infrastructure is needed for SEZs that they do not enjoy currently?
Large format SEZs cannot operate without a dedi­ca­ted connecting road, water and power network. A stre­amlined government process for approvals and clearances with respect to provisioning of physical infrastructure is not yet in place.

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