Recalibration of Special Economic Zone : Daily Current Affairs

Relevance: GS-3: Indian Economy, mobilization of resources, growth, development and employment.

GS-2: Government policies and interventions for development in various sectors

Key phrases: SEZs, Special Economic Zone Act, 2005, Foreign policy, WTO, Minimum Alternate Tax,

Why in News?

  • The Commerce & Industry Ministry is in hectic discussions with the Finance Ministry to get its nod for a new package for special economic zones (SEZs) with sops such as relaxation in the net foreign exchange (NFE) positive obligation and flexibilities for sale of goods and services in the domestic market.

Special Economic Zone

  • The Indian government had long used export processing zones (EPZs) to promote exports. In fact, Asia’s first EPZ was established in 1965 at Kandla, Gujarat state. While these EPZs had a similar structure to SEZs, the government began to establish SEZs in 2000 under the Foreign Trade Policy.
  • The Special Economic Zone Act, 2005 further amended the country’s SEZ policy. Many EPZs were converted to SEZs.
  • The SEZ Rules, 2006 lay down the complete procedure to develop a proposed SEZ or establish a unit in an SEZ
  • At present, India has 426 SEZs that have been given formal approval under the SEZ Act, 2005, and 33 SEZs with in-principle approval, according to the commerce department.
  • According to commerce ministry data, exports from these zones dipped to Rs 7.56 lakh crore in 2020-21 as against Rs 7.97 lakh crore in 2019-20.

Special Economic Zones

  • A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
  • SEZs are located within a country's national borders, and their aims include increasing trade balance, employment, increased investment, job creation and effective administration.
  • To encourage businesses to set up in the zone, financial policies are introduced. These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations.

What are the benefits of special economic zones for a country?

  • Special Economic Zones promote exports of goods and services
  • SEZs generate employment opportunities for the population
  • Special Economic Zones can develop infrastructure facilities
  • SEZs can provide, in a concentrated area, the necessary conditions external investors may require. Moreover, these may include a skilled labor force, adequate infrastructure, and local input suppliers. Additionally, they can facilitate investment from foreign sources
  • Additionally, a well-executed SEZ helps generate spill-overs for the economy of the rest of the country. This is because domestic firms and industries outside an SEZ tend to up skill and expand, to be able to supply the SEZ firms.
  • SEZs can play the role of ‘testing grounds’ for the Government for implementing liberal business policies in the future. Likewise, the Government can decide to implement ‘successful’ policies across the country and dump the ‘unsuccessful’ ones.

Benefits of a company registered in Special Economic Zones:

  • As per Section 10 AA of the Income Tax Act, company’s registration in an SEZ gives a corporate tax holiday on export income for 15 years- 100 % for the first 5 years, 50% for the next 5 years and 50% of the reinvested profit for the remaining 5 years.
  • Such companies offer exemptions from Service Tax and Central Sales Tax. Concerned State Governments may also offer exemptions from State Sales tax
  • An exemption provides from customs duty to import raw materials, capital goods, consumable spares and so on
  • An exemption is provided from Central Excise Duty for procuring raw materials, consumable spares, and capital goods, etc from the domestic market
  • Single-window clearance will extend to these companies for necessary approvals from the Central and State Governments.

Challenges faced by the industries in SEZs:

  • The first challenge is unutilised land (more than 25,000 hectares) in SEZs. Lack of flexibility to utilise land in SEZs for different sectors.
  • The second challenge is the existence of multiple models of economic zones such as SEZ, coastal economic zone, Delhi-Mumbai Industrial Corridor, National Investment and Manufacturing Zone, Food Park and Textile Park.
  • The third challenge has been the under-utilisation of existing capacity. Currently, SEZ units are not allowed to do “job work” for domestic tariff area (DTA) units. Any area that lies outside of SEZ or any other custom bonded zone in India is known as the DTA. Goods and services going into the SEZ from DTA is treated as exports and goods coming from the SEZ into DTA is treated as imports.
  • The fourth challenge, is that the domestic sales of SEZs face a disadvantage as “they have to pay full customs duty”, as compared to the lower rates with the Association of Southeast Asian Nations (ASEAN) countries due to free-trade agreement (FTA).
  • Imposition of Minimum Alternate Tax (MAT) on SEZs from April 1, 2012, as well as imposition of income tax on new SEZs and new units from April 1, 2017 and April 1, 2020, respectively, has been stated as the fifth challenge facing the SEZs currently.
  • The sixth challenge for the SEZs has been the lack of support from the state government when it comes to developing effective single-window system for clearances.
  • The seventh challenge has been the “requirement of payment in foreign exchange for services provided by SEZ units to DTA area.

MAT or Minimum Alternate Tax is a provision in Direct tax laws to limit tax exemptions availed by companies, so that they pay at least a minimum amount of corporate tax to the government. The key reason for introduction of MAT is to ensure minimum levels of taxation for all domestic and foreign companies in India.

Way forward:

  • The commerce and industry ministry has pushed for a new Act for SEZs to be able to sell goods in the domestic market at low duties, easier exit for loss-making units and units to be able to accept payment in Indian currency.
  • With the WTO ruling that the SEZ scheme was not compliant with multilateral trade norms as it gave incentives for exports, the Commerce Ministry’s proposal that the NFE criteria (which makes exports mandatory) be replaced with other conditions, such as minimum employment or R&D, is being seriously considered.
  • Allowing SEZ units to get payment in rupees for supply of services to DTA. “SEZs have argued that when two units in the country are transacting with each other there was no point in promoting the currency of another country. This requirement also puts the burden of buying foreign exchange on DTAs.
  • Relaxations and incentives for SEZs are important for the zones to stay attractive for investors and units despite the exhaustion of income tax sops.

Special Economic Zones (SEZs) and the WTO: The Case of India

In 2018, the United States (US) took India to the World Trade Organization's (WTO) Dispute Settlement Body over a number of subsidies given by India, including those given under the special economic zone (SEZ) policy. On October 31, 2019, India lost the case in the WTO and the Dispute Panel agreed that the subsidies given by India to the SEZs are prohibited subsidies under the provisions of the WTO's Agreement on Subsidies & Countervailing Measures (SCM). As a consequence, the Department of Commerce, Ministry of Commerce and Industry, has engaged in extensive consultation with multiple Stakeholder.

Source: The Hindu BL

Mains Question:

Q. To be a 5 trillion dollar economy by 2025, a Recalibration of Special Economic Zones and make SEZ scheme WTO compliant is important? Critically analyse.