Let’s Reposition Our SEZs Without Tilting Markets : Daily Current Affairs

Relevance: GS-3: Effects of Liberalisation on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.

Key Phrases: Export Promotion, Special Economic Zones (SEZs), Duty-Free Enclave, World Trade Organisation, Development of Enterprise and Service Hubs (DESH) Bill.

Why in News?

The Government plans to table the Development of Enterprise and Service Hubs (DESH) Bill in the ongoing monsoon session of the Parliament, which will overhaul the Special Economic Zones (SEZ) legislation.

What are SEZs?

Special Economic Zone (SEZ) is a specifically delineated duty-free enclave and are deemed to be foreign territory for the purpose of trade operations and duties and tariffs.
In order words, SEZ is a geographical region that has economic laws different from a country's typical economic laws. Usually, the goal is to increase foreign investments.
So long as businesses earn more foreign exchange than spend over each five-year stretch, units located in SEZ can freely import what they need (i.e., sans permit, duties, and customs checks) and also enjoy a clutch of tax exemptions, such as zero GST on domestic supplies.
As SEZs operate like offshore zones, any sales of their products and services in the Indian market face regular import tariffs.

What were the Shortcomings of the SEZ act?

According to the World Trade Organisation’s dispute settlement panel, India’s export-related schemes, including the SEZ Scheme, were inconsistent with WTO rules since they directly linked tax benefits to exports.
The SEZ Act, 2005 was implemented in 2006 in a bid to create export hubs and boost manufacturing in the country.
These zones started losing their sheen after the imposition of a Minimum Alternate Tax and the introduction of a sunset clause for the removal of tax incentives.
Several direct tax benefits provided to SEZs were withdrawn gradually and this resulted in lower investments due to a lack of policy stability.
The dispute settlement panel of Geneva-based WTO in its report on October 31, 2019, ruled that India’s export-related schemes (including SEZ Scheme) were in the nature of prohibited subsidies under the Agreement on Subsidies and Countervailing Measures and were inconsistent with WTO norms.
In response, the government now plans to enact a law that will restructure and reposition SEZs.

Development of Enterprise and Service Hubs (DESH) bill:

The Centre proposes to rebrand Indian SEZs as ‘development hubs’ under the Development of Enterprise and Service Hubs (DESH) bill.
It will overhaul the existing Special Economic Zone law of 2005, aiming to revive interest in SEZs and develop more inclusive economic hubs.

KEY PROVISIONS:

Net Positive Growth Criteria:
- Since this legislative proposal has been drafted for WTO compliance, it has reportedly dropped the net forex earnings criterion for SEZ units, to be replaced with a set of growth criteria that could include investment and employment ramp-ups as qualifiers for benefits.
Tax benefits:
- Apart from an expected holiday on customs duty and GST for machinery imports and raw inputs, the main benefit might be an offer of a special corporate tax rate of 15% instead of 22%, as available to new manufacturers that start operations by March, 2024, except that this window will be open for a decade, with existing units allowed to avail of it if they increase capacity by 50% or reinvest half their net worth.
- A 15-year sliding scale of income-tax relief under India’s current SEZ law looks likely to be retained.
- With easy clearances thrown in, the development hubs would thus be attractive to investors.
Single window portal:
- DESH legislation also provides for an online single-window portal for the grant of time-bound approvals for establishing and operating the hubs.
Tariffs and duties for the domestic market:
- In the current SEZ regime, duty is paid on the final product when a product is sold in the domestic market.
- In order to ease sales made by hub units within the country but outside hubs, the Centre envisages tariffs levied on just imported inputs rather than finished products.
- Also, in the case of domestic sales, the DESH Bill wants space left for case-by-case easing of retrospective duties that currently get slapped on imports of capital goods.
Equalisation levy:
- According to reports, the idea of an ‘equalisation levy’ to counter hub privileges has been rejected.
- This would leave hub players with an advantage over others, with special treatment justified only by their fast pace of expansion.
Optimal use of their idle infrastructure:
- A key differentiator between the new and the old law is that under DESH, hubs will allow units to make optimal use of their idle infrastructure by delivering services to customers in India instead of just focusing on exports, as was the case earlier.

Concerns:

While the redefinition of SEZs could help us get around WTO restrictions on export subsidisation, it should not distort the playing fields within India.
Spurring private investment is a worthy goal but the blurring of target markets will complicate taxation and raise the question of why non-hub enterprises can’t be treated at par.

Conclusion:

If indeed India needs the special hubs, the government must address the critical gaps in existing SEZ law through the DESH bill and it must be thought through before bringing it to the Parliament.
The law's rationale and potential application may serve as an engine for India's development.

Source: Live-Mint

Mains Question:

Q. The Special Economic Zones (SEZs) in India are expected to be rejuvenated by the proposed Development of Enterprise and Service Hubs (DESH) bill. Discuss.