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Approach :

  1. Introduction on SEZs.
  2. Point out the limitations of the current SEZ framework.
  3. How DESH Bill is an improvement ?

Special Economic Zones are enclaves within a country, wherein business, trade and tax laws are different from other regions. In India, SEZs are governed by SEZ Act, 2005. The Union Government is likely to introduce the Development of Enterprise and Service Hubs (DESH) Bill in the ongoing Parliament session. Through this, the Government proposes to rebrand India’s 268 Special Economic Zones (SEZs) as ‘development hubs’.

Persistent issues with SEZs in India :

  • Indian SEZs are much smaller in size and performance compared to Chinese SEZs.
  • Shenzhen’s SEZ area (49,000 hectares) exceeds the combined area of Indian SEZs (47,000 hectares).
  • Small size prevents SEZs from becoming economies of scale which is crucial to realize cost effectiveness. As a result, SEZ attracted more units for the tax concession than for any other competitive consideration.
  • Many large-export oriented units (EOUs) were converted into SEZs. However, when tax exemptions ended, investments dried up. Due to this, today, less than half the land approved for SEZ purposes is used leading to gross underutilization of resources.
  • Under the SEZ Act, sale of goods manufactured in SEZs in domestic market attracts custom duties. However, the custom duties are levied on the entire finished good and not just on the imported raw materials (imported duty free). This acts as a big deterrent for current SEZ units.
  • In 2019, the WTO held that subsidies provided to SEZ units in India violated the rules of fair trade.
  • Many States did not sync State level laws with the Central SEZ Act, which created barriers in the single window clearance
  • There are multiple models for economic zones apart from SEZ like NIMZ, Coastal Economic Zones etc., which creates problems in integration of various models.
  • The tax provisions related to the SEZs was changed multiple times.
  • g., Minimum Alternate Tax (MAT) was introduced and exemption on Dividend Distribution Tax was withdrawn.
  • Another issue was introduction of sunset date for direct tax benefits.
  • These frequent tax changes negatively impacted investor sentiment leading to gradual drying up of investments.
  • In 2020, the capacity utilization of SEZs had fallen to 50%. East Asian economies like Philippines, Vietnam, Thailand etc. have tweaked their policies, attracting investments.

How DESH Bill seeks to plug the loopholes ? :

  • The developers of the zones, (to be called Development Hubs) will get infrastructure status, which will allow them to get easier credit at competitive rates.
  • The Bill removes the restriction that exports should be more than imports over 5 years. Now units can import any amount. They can also do invoicing in rupee to facilitate domestic transactions.
  • The DESH framework gives more concessions to SEZ units selling in the domestic market.
  • Units in the development hubs will be allowed to sell goods in the domestic market with customs duty to be paid only on the imported raw materials and not on the entire finished goods.
  • Under this, if raw materials are imported at zero duty from a free trade agreement partner country, no duty have to be paid when the final product is sold in the domestic market.
  • lt has reportedly dropped the net forex earnings criterion for SEZ units. It will be replaced with a set of growth criteria that could include investment & employment as qualifiers for benefits.
  • There might be an offer of a special corporate tax rate of 15% instead of 22% to new manufacturers that start operations by March 2024.
  • The revamped SEZs will be able to avail auto-renewal of licenses under the Development of Enterprise and Service Hubs (DESH) legislation, subject to conditions.
  • The Bill also proposes a framework to include the existing industrial parks in the DESH framework—including those of other departments like textile parks, food parks, pharma and power.

These hubs can address the challenges faced by the economy, especially in the aftermath of COVID-19. The proposed DESH legislation is a step in the right direction that can play a vital role in making India a US$ 5 trillion economy.

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