Revisiting the Indian SEZ story

Tags: Opinion

Seen as a vibrant new chapter, SEZs have lost much of its sheen because of a number of inconsistencies in the storyline

While cashing in on international interest, various economic sectors have hailed special economic zones (SEZs) as the main driver that adds further impetus to growth. To give an impetus to exports and to promote investments and employment generation, the Indian government passed the Special Economic Zones Act in 2005. Numerous fiscal benefits and relaxations were offered in the Act made setting up an SEZ a lucrative proposition.

The benefits offered under the SEZ Act included exemption from income tax of units, no excise/customs duties on raw material and capital goods, unlimited domestic sales or direct tariff area (DTA) sales permitted on the basis of customs duty paid, 100 per cent FDI through automatic approval route, freedom to retain entire foreign exchange earnings, single-window clearing system, permission for inter-unit sales, special policy framework, in-house custom clearing and complete freedom for contracting and sub-contracting, even abroad.

The scheme was a huge success and received a good response from developers and investors. A large number of leading developers and corporates across the country joined the fray to get permissions for the development of SEZs. The success of the Chinese SEZs is a popular story — and to some extent, it drove the Indian SEZ dream.

Chinese vs Indian SEZs: In China, SEZs were developed along its southern coast. The areas of Shenzhen, Shantou, Zhuhai, Hainan and Xiamen were backward small villages lacking in basic infrastructure and industrial resou­rces. They also had lower populations compared with the developed areas of North China. These zones were developed as manufacturing hubs and the open access to international trade sea lanes led to their success. These SEZs attracted huge amou­nts of foreign capital, and optimised the use of management, advanced technology and equipment.

Apart from a few port locations, most of the existing and proposed zones in India are located inland. The bulk of the functioning, approved and proposed SEZs are related to information technology and information technology enabled services (IT/ITeS). Although the multi-product and textile SEZs have a higher share among the proposed zones, the IT/ITeS sector still has the major share.

To be fair, there was a valid argument for IT SEZs in India. The key requirements of the IT/ITeS sector are human resources and technical infrastructure. Geographical location hardly has any role to play in terms of proximity to ports and other physical infrastructure. Tax breaks provide a global competitive edge to IT/ITeS operations. These companies face competition with other cheaper outsourcing destinations such as the Philippines for certain low-end operations. The SEZ tax breaks would help the IT/ITeS industry as they reduce costs and maintain the bottomline.

Apprehensions regarding the loss that the government might incur due to the SEZs were placated on the basis of the tax incentives for exports. Also, it was pointed out that SEZs would generate massive revenues as well as employment across different levels — from daily workers to white-collar professionals. Implied therein was increased demand for a wide spectrum of professionals — from architects to civil engineers, project managers to legal advisors, town planners to interior designers and sales executives to accountants.

Even as these projections were made, there were certain questions being asked — is the wide geographical dispersal across the country a drawback?

Will the large number of SEZs be a sustainable and profitable model?

Where do the implications of the real estate industry fit into the overall model of growth?

After the global financial crisis, many of the companies, which had formal or in-principle approval for setting up SEZ started approaching the government to surrender their projects or to seek more time for developing the SEZs. The ensuing economic slowdown took much of the sheen away from ill-conceived, unviable and remotely located SEZs.

Projects that were close to the existing developme­nts were able to keep the occupier interest alive, while the ones situated away from catchment areas struggled to find both investors and occupiers. With benefits under STPI scheme coming to an end, many expected that SEZs would prove to be a viable alternative. However, lack of clarity on taxation in the DTC, proposal to levy MAT (minimum alternate tax) and DDT (dividend distribution tax) spooked investors and prevented any mass exodus of occupiers to SEZs.

Other roadblocks faced by SEZs in India include:

Land acquisition problems has been major issue in many of the large SEZs.

Inadequate infrastructure outside the notified SEZ areas.

Revenue loss to government, an issue, which is gaining momentum.

Cap on non-processing area: there are growing concerns over the fact that the non-processing areas in SEZs are utilised for real estate developments and not as ancillary facilities for the processing or manufacturing zones.

To summarise, the scripting of what was once seen as a vibrant new chapter in the Indian economy has lost much of its powers to enthral because of the number of inconsistencies in the storyline. As the debate rages on, the viability and ultimate fate of SEZs in India hangs in the balance.

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