Published Editorial

Need for a booster shot

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Financial Chronicle

By

Ritika Loganey Gupta
Associate Director - Tax & Regulatory Services, EY

The rapid rise of the Indian IT sector over the past decade has earned India a number of accolades for the scope and scale of work undertaken, high levels of service quality and sustained cost competitiveness. The special economic zone (SEZ) policy represents the latest thinking on India’s growth initiative and may even represent the future of industrial development strategy in the country.

The key objective of the SEZ policy is to enable creation of integrated world class infrastructure and generate economic activity in the country. SEZs contribute about one-third to the country’s total exports, provide employment to about 15 lakh people and exports from these zones have increased from Rs 22,840 crore in 2005-06 to Rs 4.94 lakh crore in 2013-14.

While SEZs were touted as future engines of growth by establishing excellence export zones, the ground realities narrate a different story. With the change in the global economic scenario, coupled with unstable policy, a wide gap has emerged in the number of new proposals getting approvals and that of SEZs becoming operational — of the 566 formally approved SEZs, only 185 are in operation.

New projects are hardly coming up; in fact several of the approved ones are not yet complete and companies are seeking multiple deadline extensions to complete their projects. SEZs, once a major attraction for investors, lost sheen following a combination of economic slowdown, acute difficulties in aggregating large tracts of uncultivable land lying vacant, and adverse tax changes such as imposition of minimum alternate tax (MAT) and dividend distribution tax (DDT) and threat of enactment of direct tax code (DTC) which provides for investment linked incentives for both developers and units instead of the current regime of profit based tax exemptions.

On the indirect tax side, the SEZ policy provides for exemption from service tax. However, as per service tax rules, exemption is available only for those services which are exclusively used by the developer/unit. Now, whether a particular service is exclusively used for authorized operations, may become a subject matter of debate; resulting in SEZ units paying service tax to service providers, thereby increasing cost of operations.

On the regulatory front, approvals for authorised operations are being given to developers in the non-processing area with the condition that it can be used only for the purposes of employees/persons working inside the SEZ. This has sent out discouraging signals to developers who intend to develop and lease out the non processing area to non SEZ entities/persons to earn revenues till such time when the processing area is sufficiently developed/occupied.

This would improve the cash flow of such developers in the interim, which in turn can be infused into developing the processing area. As per Rule 5(5) of SEZ rules, before recommending the proposal for setting up of SEZ, the state government shall endeavour that exemption from various State levies are made available to the proposed SEZ units & SEZ developer. In few states this provision is not implemented in principle and in some others implemented only partially. As a consequence, developers and units are unable to claim benefits under VAT Acts, state electricity Acts, stamp duty Acts which add up to a significant cost.

As a first booster shot to revive SEZs the authorities fine-tuned the SEZ policy in August 2013 by reducing the minimum area requirements for developing multi-product and sector-specific SEZs, allowing sector broad-banding, clarifying issues on vacancy of land and laying down an exit mechanism for SEZ units. Though this provided a breather to the beleaguered stakeholders, however much is left to be done for the revival of the policy.

The regulators need to also look at the operational issues including periodic convening of unit approval committee meetings, service tax refunds for SEZ units, clarity on use of social infrastructure beyond employees/workers inside the SEZ, extending indirect tax benefits to contractors/ sub-contractors on procurement of goods and services for SEZ developer/unit, clarity on guidelines relating to ECB for SEZ, financing for land acquisition and definition of infrastructure lending and enhanced commitment of state governments to SEZ policy implementation.

At this juncture, it important to highlight the words of finance minister Arun Jaitley while presenting the budget for 2014-15, “The government is committed to revive the special economic zones (SEZs) and make them effective instruments of industrial production, economic gr­owth, export promotion and employment gen­era­tion. For ach­ieving this, effective steps would be undertaken to operationalise the special economic zo­nes, to revive the investors’ interest to develop better infrastructure and to effectively and efficiently use the available unutilised land.”

These words represent a silver lining for the SEZ stakeholders and if all goes well, it is anticipated that the SEZ policy, will play a crucial role in the near future in placing India on the global map as a preferred destination of doing business.

(Views expressed are personal)