Special economic zones: not so special, after all!
The recent budget mentions the replacement of the Special Economic Zones (SEZ) Act with new “legislation that will enable states to become partners in the ‘development of business and service centers'”. The circle is complete for the SEZs which, when they were introduced in the 2004-2005 budget, were presented as engines of growth. All existing Free Trade Zones/Software Technology Parks fell within the scope of the new SEZ Act.
SEZs are conceptually a “geographical region within the nation-state in which a distinct legal framework provides a more liberal economic policy than that prevailing in the rest of the country”. This geographical area is declared outside the normal customs territory of India. Thus, SEZs benefit from several tax advantages, both direct and indirect, apart from other facilities. Benefits granted to SEZ units are conditional on obtaining Net Foreign Exchange (NFE) – defined as the value of exports minus the value of imports. SEZs are tasked with the objective creating job opportunities, encouraging investment (both domestic and foreign) and increasing India’s share in the global market.
In this context, the government had in 2018 set up a committee under the chairmanship of Baba Kalyani to study the policy of SEZs. The Committee has been tasked with proposing a policy framework for adopting strategic policy measures that help India capitalize on global growth opportunities while developing its own highly competitive manufacturing and services base.
The Committee has since submitted its report. He proposed renaming the SEZs as 3E – Employment and Economic Enclave, with the aim of moving from an “island of exports to a catalyst for economic growth and employment”. The 3Es would aim to bring together all categories of investors who enable economic activity or the creation of jobs and investments, targeted at domestic demand. Separate recommendations have been made for stakeholders operating in the manufacturing and service sectors.
Another development that took place around this time was at the World Trade Organization (WTO). The United States had filed a dispute regarding India’s export incentives for five programs, including the SEZs. The WTO considered these SEZ benefits to be contrary to the WTO’s Subsidies and Countervailing Measures (SCM) provisions since they tied the benefits to the earning of foreign exchange. Although India has appealed the order, it is clear that we take these developments seriously. The announcement in the budget was not unexpected.
So, when shaping the contours of the new regime, we would do well to look closely at the concerns raised by the CAG and at the WTO. We would do well to look at existing export programs. Customs Department Runs Efficient and Trade-Friendly Program – MOOVR (Manufacturing and Other Warehouse Operations Regulations). Under these regulations, capital goods and raw materials can be imported duty-free into a bonded facility. Duties are deferred – and where imported inputs are used in the manufacture of exported goods, basic customs duties and IGST are exempt and GST zero-rated. A single point of approval, an unlimited shelf life of the stored goods, no geographical restriction on the opening of the manufacturing warehouse make it an attractive proposition.
We must ensure that we have a “smart” export program in place. One that does not degenerate into a land grabbing scheme. One that would help boost exports, help India reach its ambitious goal of reaching $1 trillion by 2025 and would also be WTO compliant. The Budget Speech also proposes to run the SEZs on the very robust and proven National Customs Portal – this should further add to the “smartness” of the system.
— The author is a former president of the Central Commission for Indirect Taxes and Customs