Makeover of the SEZ Act… for Export Competitiveness….

[SOWMYA CA]

Summary of the Article:

The Finance Minister Mrs. Nirmala Sitharaman presented the much-awaited finance budget 2022 on 1^st Feb 2022. Certain promising changes are set to be brought in in this budget and the most sought-after announcement relating to exporters is the revamping of the SEZ Act. With the ongoing Covid pandemic and work from home being the norm of the day, private developers who have invested heavily in SEZ infrastructure are left high and dry as many units have given up space and there are no new takers. A lot has changed since the implementation of the Act in June 2005 and with phasing out of direct tax exemptions in March 2020, SEZ is not attracting new investments. The burden of procedures and compliance under SEZ rules outweigh the benefits available under the scheme vis-à-vis other schemes such as EOU / MOOWR. Some of the rules in the present SEZ Act are not viable in the current post pandemic condition. Also, there is a need to make SEZ policy WTO compatible. The new legislation to replace the SEZ Act, 2005 is said to be brought in by the second half of FY 2022-23.

Brief background of the history of SEZ in India:

India is the first ever country in Asia to recognize export promotion Zone Model (EPZ) and the first EPZ was set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances the Government of India initiated the Special Economic Zone policy in the year 2000. SEZs being the key to economic growth, further got into a firm footing, by way of implementation of The Special Economic Zones Act, 2005 and it got the president assent in June 2005. The SEZ Rules were notified in Feb-2006. The main objective of the SEZ Act, was inflow of foreign direct investment into India, development of infrastructure facilities, generation of additional economic activity and creation of employment opportunities. The SEZ Rules provided for simplified procedures for setting up, operation and maintenance for conduct of business within SEZ.

SEZ is a specifically delineated duty-free enclave deemed to be foreign territory for the purposes of trade operations and duties and tariffs in India. SEZs are allowed to be set- up by both Public/Private developers. The major conditions for availing the benefits under SEZ are new investment and employment and achieving positive Net Foreign Exchange (Foreign Exchange Inflow should be higher than Foreign Exchange Outflow). Till March-2020, SEZ units enjoyed direct tax incentives subject to some pre-defined conditions. Currently, the SEZ units enjoy Zero rating on Customs duty & GST on Input and output including services which are meant for authorised operations of the Unit, and exemption from stamp duty and electricity duty. As on date the government has approved 425 SEZ developers out of which 268 zones are operational as on 31 Dec 2021.

Key issues / challenges faced by SEZ Units / Developers in the present SEZ Act / Rules.

One of the basic objectives of the SEZ policy of the Central Government was to provide an impetus to exports. The SEZ law being a very important legislation for India to boost exports, increase competitiveness in the world market is in operation for 15+ years is overlooked as there are anomalies, rules that are not relevant in the current scenario and complicated to comply. The exporters are already under pressure of identification of suitable export markets, product segmentation, creating regional competitive advantage while mapping the sustainability of these businesses given the changing global value chains accelerated by the pandemic. Some of the key areas which needs addressal in the new policy are discussed in the ensuing paragraphs.

1. Full Utilisation of vacant land and buildings in the SEZs and Industrial parks:

Currently, there are number of vacant zones which are not fully taken as developers are not able to find takers for SEZ space who are engaged in export of goods or services alone. Many units have surrendered space on account of work from home given on account of COVID pandemic. Now, they are not able to allot this space to DTA units as they need to be de-notified / de-bonded first which is a lengthy process, carries tax implications & a costly affair.  However, this is currently very complex and should be made possible by simplifying the existing procedures which would lead to full utilisation of infrastructure.

Condition of Net Foreign Exchange:

The condition stipulated for entities to function from SEZ is to have ‘Net Foreign Exchange’ (NFE) positive over the licensing period. Simply put, it denoted that the forex inflow (revenues earned from exports) should exceed the forex outflow. The NFE criterion neither restricted the domestic business of occupants nor prescribed the quantum of forex as surplus earnings necessary to operate from the SEZ premises. However, having an overseas client was essential for a local unit to seek accommodation in the SEZ.

A progressive business environment does not discriminate with customers – whether local or overseas; and caters to both with equal measure. The driving factors for sales being – 1) demand of product or service in a particular market & 2) client acquisition. DTA business is undertaken if local demand is huge; and owing to easement in logistics. Also, lack of marketing support & out-reach to overseas customers, competition from other players in the market may reduce export potential. Units in SEZ would focus on the domestic market when business conditions deteriorate such as seasonality of demand, pandemic, economic slowdown, war situations etc. Though exports are down, the business sustains with the operations in the DTA and this would only boost the local economy.  This would also ensure level of business activity remains intact of the unit in question. Under the aforesaid circumstances, it would be prudent to accord freedom to business to operate as per the demand-supply cycle. It would be imperative to remove the revenue criterion of “NFE positive” for SEZ units. The units can then leverage key strengths of a large Indian domestic market with population of 1.3 billion and as well as grow exports within SEZ.

2. Sale of goods from SEZ to DTA on duty foregone or equalisation duty concept:

Currently SEZ need to pay full duty on the final manufactured product on sales to DTA. However, this is not so in the case of EOU or under Manufacturing & Other operation in Warehouse Regulation’ (MOOWR) scheme where only duty on Inputs for the DTA supplies are reversed and paid back to the government. SEZ units should be extended such facility of payment of duty foregone on the raw material used in the manufacture of finished goods on sales to DTA or be levied such equalisation duty to neutralise the advantages of SEZ vis-à-vis DTA units instead of collection of full duty on the final product. This will promote manufacturing and contribute to ‘Atmanirbhar Bharat’ where DTA units can be permitted to import from SEZ at concessional rates instead of actually importing them from a foreign country. This will also accomplish optimal utilisation of the SEZ manufacturing capacity post exports.

3. Payment in INR to SEZ units selling services in DTA:

As per SEZ Policy, when SEZ unit sell services to a unit in India, they have to accept payment in foreign currency only. There is not much logic of having a domestic transaction in forex when two transacting units are in India and are not enjoying any tax benefits. The supply of service to DTA is with applicable taxes. The additional procedure of having to make forex payment for local transaction is cumbersome and unnecessary. This causes avoidable wastage of time and money. Allowing the DTA units to pay for the service in INR will make SEZ units more viable and allow them to take up more work.

4. SEZ units may be allowed to do job work for DTA units

SEZ units should be allowed to do job work for DTA units for better capacity utilisation. Presently Rule 43, subcontracting for DTA unit is allowed only for export on behalf of a DTA exporter. Due to seasonal nature of some exports, the capacity of units remains unutilised for certain period of the year. Therefore, EOU’s and SEZs should be allowed to do job work for DTA up to certain level of their annual capacity or any such restriction to ensure that units in SEZ and EOU’s are able to utilise their idle capacities and provide round the year employment.

5. Co-existence of DTA units in SEZs Partial debonding of SEZ units

In case of IT/ITES SEZs, where software services are the item of export, it is possible to have coexistence of SEZ and DTA units. However, the SEZ policy does not have provision for unit-wise/ floorwise/building-wise debonding system where DTA units can operate.

6. Exemption to units from payment of charges for SEZ Online:

SEZ units need to pay for all transactions in SEZ Online System for export/

import/DTA to SEZ/SEZ to DTA etc., whereas for DTA exporters and importers, no charges are levied by ICEGATE. Hence, on the pattern of ICEGATE, SEZ Online charges should be borne by the Government.

7. ‘Integrated Online Portal’ - The current existing SEZ online system is a robust software developed by the Ministry of Commerce & Industry to be used for capturing transactions by SEZ Developer /units. The system brings in transparency, efficiency, reduces paperwork, provides real time data, and also used in applicable compliances as per SEZ rules. The system is already integrated with DGFT, GSTN, EDI portals to a large extent.

The Government constituted the Baba Kalyani committee in 2018 to study and suggest reforms in the SEZ Policy/Rules/Online portal. The committee among other aspects recommended for set-up of an ‘Integrated Online Portal’ for the operations and management of the Units and Developers within the SEZ for time bound approvals, day to day compliances and reducing physical interface. Single window clearances are already in operation in Andhra Pradesh, Telengana, Odisha and Tamilnadu.  In Andhra Pradesh, for example approvals are granted within 21 working days through implementation of a single desk portal. Similar such systems of ‘GO SWIFT’ is in use in ODISHA and ‘TS-iPass’ ‘Telangana State Industrial Project Approval and Self Certification System’ in Telangana and ‘Easybusiness’ single window portal of Tamilnadu. Currently the SEZ online system is not fully integrated with ICEGATE (EGM details are not automatically flowing back), DGFT, GSTN, portals of other ministries and the State government portals. Such integration will ensure a single application for approvals from multiple ministries and the development commissioner will be able to monitor the status of the application and can intervene and act as a catalyst and engage with the nodal officers for speedy disposal of the applications where approvals are getting delayed. Complete integration will make SEZ a ‘one-stop-shop’ for a plethora of services.

      A New Roadmap for exports in 2022……

Considering the hardships faced by the export community and recognizing the pivotal role played by SEZs in pushing the country’s exports, the new SEZ legislation is envisaged. The foreign trade Policy 2015-20 is also going for a revision and the new policy is expected soon. Some very important and significant changes are expected both in the SEZ law/FTP and it is expected to be towards promotion and growth of the manufacturing and service Industries and ease of doing business.  Both the commerce minister and the finance minister have given some insights on the proposed new legislation on SEZ to be introduced later this year. Key highlights were as below.

• The new SEZ legislation will enable States to become partners in the development of enterprise and service hubs which are set-up as SEZ. The New SEZ Act will cover all existing and new industrial enclaves to optimally utilize available infrastructure and enhance competitiveness of exports.

• Secondly, reforms would be undertaken in the customs administration of SEZs. Going forward the SEZ administration will be fully IT-driven and function on the Customs National Portal of ‘ICEGATE’ for enhanced automation and faceless mechanisms. Risk based verification approach instead of the existing comprehensive checking approach to improve ease of doing business by SEZ units.

• The new SEZ law will incorporate separate rules and procedures for manufacturing and service SEZs, enabling framework for ease of doing business, procedural relaxations for developers and tenants to improve operational and exit issues.

• The new SEZ Law may let DTA transaction on payment of an equalization levy or a  tax as may be envisaged as a part of the legislation to ensure a level playing field for manufacturers outside SEZs in case of domestic supplies instead of full customs duty.

• The proposed legislation will be drafted with a view to promote SEZ as readymade land banks that offer plug-and-play industrial ecosystem in a step to make India a global manufacturing hub and to make India a promising investment destination.

Conclusion:

Several reforms have been planned in the new law and these include digitization of processes, participation of the State govt. There is a shift in the focus from only exports and Net foreign exchange -- to having a focus on Industrial and Service Sector Development. With current trends of re-shoring as well as exporting companies and foreign investors relocating and moving away from China, SEZ’s in India will gain from new opportunities in the manufacturing sector. The proposed new legislation coupled with the emphasis on the seven engines under the PM Gati Shakti initiative should pave the way for India’s export competitiveness going forward…