Special economic zones (SEZs) in India are losing sheen. Exports from these zones have

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been slowing down over last two years, primarily due to lack of enough incentives as well as the ongoing infrastructure related problems.

However, the decline in growth has been steeper last year after the imposition of minimum alternate tax (MAT) and dividend distribution tax (DDT) in the budget 2011-12 that has left the SEZ units with very little tax incentives vis-à-vis non-SEZ units.

As per data compiled by Export Promotion Council for SEZs, exports from SEZs went up by just 15.4 per cent in 2011-12 at Rs 3,64,478 core as against 43.1 per cent growth in 2010-11 (Rs 3,15,868 crore) and 121.4 per cent in 2009-10 (Rs 2,20,711 crore).

Export growth in 2009-10 had been exceptionally higher because of a very low base in 2008-09 after the financial meltdown in US virtually dried up demand for goods made in India. Even exports from SEZs have come down as a proportion of total merchandise exports from the country to 26.7 per cent in 2011-12 as compared to nearly 30 per cent in the preceding years.

“Government has been neglecting SEZs over last one-and-a-half years and this is being reflected in export numbers that are now in line with normal industry growth numbers. There are more benefits to units outside SEZs from where one can cater to both domestic as well as export markets unlike SEZ units that have to pay high duty if they are selling in domestic market,” Ajay Nijhawan, convenor of the SEZs panel with the export promotion council said.

Centre imposed MAT at 18.5 per cent on SEZ developers and units as a measure to ensure equal sharing of corporate tax liability in the budget 2011-12. Similarly, it had discontinued the exemption available from DDT in case of SEZ developers under the Income Tax Act as well as SEZ Act for dividends declared, distributed or paid on or after June 1, 2011. However, profits from SEZ units dedicated only to exports were exempted from deductions.

“With the imposition of new taxes, net income tax benefit is not much as compared to promotional benefits like focus market and focus product scheme available to units outside SEZs. Consequently, no new investment is happening and the units that have already got permission are reluctant to start operations because of lack of enough incentives,” Ajay Sahai, director general of the Federation of Indian Export Organisations said.

Rajesh K Sonthalia, managing director of the Sonthalia Group feels that apart from declining tax incentives, issues related to infrastructure development have also acted as a deterrent. “Long-term stability of the SEZ policy is in question. Besides, state-level infrastructure problem continues to exist.

Hence, unless the government takes some positive policy decisions for SEZs, it will be very difficult to arrive at the growth rates of pre-crisis levels,” he added.

Government has so far granted 589 approvals for setting up SEZs, out of which, seven are promoted by central government and 12 SEZs have been formulated by different states. However, up to March 31, 2012, only 389 SEZs have been notified while just 153 SEZs are in operation.