Desh Bill : Manufacturing Needs Cohesive Policies : Daily Current Affairs

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

Key Phrases: Development of Enterprise and Service Hubs (DESH) Bill, Special Economic Zones, Export-Oriented units, Manufacturing & Other Operation in Warehouse Regulation, Domestic Tariff Area (DTA) units, Merchandise Exports, Scheme-wise concessions, Customs Duty, Development hubs, foreign exchange positive, Direct tax incentives, Industrial parks.

Why in News?

The Development of Enterprise and Service Hubs (DESH) Bill, seeking to revamp the existing SEZs, proposes a new set of concessions. DESH will be an addition to four existing schemes promoting manufacturing.

Background:

There are four major schemes for promoting manufacturing in India. i.e.

Special Economic Zones (SEZs):
- 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
  - Effective administration.
- 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.
100 per cent export-oriented units (EOU):
- The export-oriented unit (EOU) Scheme was introduced in 1981 and is covered under the Foreign Trade Policy.
- The Export Oriented Units (EOU) scheme was introduced to boost exports, increase foreign earnings and created employment in India.
- The EOU scheme is complementary to the scheme for Free Trade Zone, and Export Processing Zone. Units that are undertaking to export their entire production of goods are allowed to set up as an EOU.
Manufacturing & Other Operation in Warehouse Regulation (MOOWR):
- The scheme allows for import of inputs and capital goods into bonded warehouses without payment of customs duty for manufacturing and other operations.
- This scheme is available to ‘units’ (warehouses that meet the requirements of the regulation) that are allowed to manufacture or undertake other operations in warehouses or special warehouses, as permitted under the Customs Act, 1962.
- This initiative is aimed at liberalising manufacturing and other activities in customs bonded warehouses.
Domestic Tariff Area (DTA) units:
- Domestic Tariff Area (DTA) means an area within India that is outside SEZs and Export Oriented Undertaking (EOU) / Electronic Hardware Technology Park (EHTP) / Software Technology Park (STP) Biotechnology Park (BTP).
- Any area which is not under the jurisdiction of a custom bonded area is called a Domestic Tariff Area.
- The Domestic Tariff Area enables companies to set up manufacturing units that cater to the needs of the domestic market.
SEZ units are located within a physical wall. Any unit can opt for the EOU or MOOWR scheme irrespective of location. A unit outside the SEZ, EOU or MOOWR framework can be considered a DTA unit.

Do you Know?

Lakhs of small and thousands of medium/large units functioning in the DTA contribute to 80 percent of merchandise exports and much of the domestic manufacturing turnover.
The 10,000 units under the SEZ, EOU and MOOWR regimes contribute to an estimated 20 percent of merchandise exports from India. DTA units are thus the bedrock of manufacturing and exports.

Comparison of schemes for manufacturing in India

Most schemes differ in the parameters like location choice, tax benefits, and payment of import duty, GST on imports, exports, domestic sales, and purchases.
The Table below highlights the scheme-wise concessions.
The Table shows that SEZs offered more incentives than EPZs and EOUs. A MOOWR provides more than what SEZs or EOUs offer.
Now DESH proposes to offer more than everyone else.

Case study (Why EOU units become less competitive)

Introduced in 1981, the EOU scheme produced thousands of export-focused units across the country.
In 2009, exports under EOUs at $39 billion were higher than SEZ exports, at $22 billion. The EOUs faced discrimination as the government offered more incentives to new schemes since 2011.
For example, direct tax exemptions were withdrawn from the EOU scheme in 2011 even though they continued for 10 more years for the SEZ scheme. To benefit from tax exemption, a few large EOUs were converted into SEZs. Many EOUs shut shop as relocation was not easy.
The EOUs faced the next shock in 2017 when the GST regime refused to allow the continuation of exemption of taxes on domestic procurement of inputs and capital goods. It, however, allowed such exemptions to the SEZ and subsequently to the MOOWR schemes.
Also, sale in the domestic market was conditional for EOUs, while SEZ or MOOWR units have no such restrictions. More incentives to other schemes made the EOU units less competitive and maimed them.

Challenges faced by Domestic Tariff Area units:

Compared to other schemes, the DTA units get the lowest concessions. A few examples:

A DTA unit pays both the Basic Customs Duty and IGST on the import of machinery for making products for domestic sale. But a unit under MOOWR or SEZ can import machinery duty-free. This affects the DTA units and machinery makers.
A DTA unit must use government-approved raw materials to make an export product. No such limitation under SEZ or MOOWR.
No GST exemption for domestic sourcing of raw materials for the export product. Such a facility is available to MOOWR and SEZ units.

Draft Development of Enterprise and Service Hubs (DESH) Bill, 2022

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.
By this bill, SEZs will be freed from many of the rules that burden SEZs. Like.
- They will no longer be required to be net foreign exchange positive.
- They will be allowed to sell in the domestic market much more easily.
- SEZs, the unit’s operating within the new hubs will no longer benefit from direct tax incentives, which will be scrapped — a move that will make the hubs compliant with World Trade Organization rules.
- SEZs, The development hubs will be allowed to sell outside the demarcated area or in the domestic market with duties only to be paid on the imported inputs and raw materials instead of the final product.
- The Bill proposes an equalization levy for clearance in the domestic market.
- The Bill marks a “fundamental shift" from linking SEZs with exports to possibly leveraging the hubs for domestic consumption and increased employment generation.

Way forward:

A three-step plan will harmonise the concessions under various schemes and strengthen the manufacturing framework:
- DESH must subsume only large SEZs/industrial parks, so the zone becomes competitive and self-contained.
- MOOWR is EOU plus more concessions. The two may be merged or the government should allow the EOUs to get all MOOWR features.
- Create a cohesive policy framework for the DTA units. DTA units must not be getting lower concessions than SEZ or MOOWR units as they are India’s best hope of becoming a manufacturing powerhouse and job creator.
If indeed India needs the special hubs, the government must address the critical gaps in the existing scheme through the DESH bill and it must be thought through before bringing it to Parliament.
The law's rationale and potential application may serve as an engine for India's development.

Source: The Hindu BL

Mains Question:

Q. Discuss the major schemes for promoting manufacturing in India. Suggest measures to address the critical gaps in existing scheme through the DESH bill. (250 words).