Draft DESH Bill seeks to bail out SEZ units

In her Budget speech this year, Finance Minister Nirmala Sitharaman had said the Special Economic Zones (SEZ) Act will be replaced with a new legislation that will enable the states to become partners in ‘Development of Enterprise and Service Hubs’ (DESH) and that this will cover all large existing and new industrial enclaves to optimally utilise available infrastructure and enhance competitiveness of exports. Now, the commerce ministry has sent the draft DESH Bill to the SEZ units and SEZ developers asking for their comments. The DESH Bill may be presented to the Parliament in the upcoming winter session.

Essentially, the draft DESH Bill seeks to bail out the SEZ developers and the SEZ units from the consequences of their commercial decisions that have gone wrong and delink the tax concessions from export performance. There is nothing in the said Bill to suggest that it will contribute to enhancement of export competitiveness.

Some SEZ developers, especially those creating facilities suitable for units in the Information Technology (IT) sector, built infrastructure far in excess of demand from entrepreneurs setting up SEZ units. Not only did the demand estimated by them not materialise but some established SEZ units opted to leave the SEZ and go to Domestic Tariff Area (DTA). That has left such SEZ developers with unutilised space — land as well as built up area. The SEZ developers blame the withdrawal of income tax concessions to SEZ units for the idle space in the notified SEZ areas. So, the government has decided to help them by allowing partial de-notification of even non-contiguous spaces in the SEZ. This can lead to a situation where adjacent units or even adjacent flats in the same SEZ premises or building attract different tax dispensations. The finance ministry should carefully examine whether this kind of arrangement will lead to a chaotic situation.

At present, SEZ units are deemed to be located outside the country for the purpose of certain tax laws. So, they are allowed to import whatever they need without payment of Customs duty or goods and service tax (GST). Supplies of goods and services from DTA to SEZ are zero-rated on par with exports under the GST laws and are eligible for export incentives like duty drawback. Conversely, the supplies from SEZ to DTA are treated as imports and attract customs duties and GST on par with physical or nonphysical imports. The draft DESH Bill envisages that the units located in the notified areas can supply goods to DTA on payment of duty only on the inputs used for making the goods. Thus, the DTA units in similar lines of business as the units in DESH will face competition in DTA from DESH units that have built their infrastructure with taxfree money.

A dispute resolution panel at the World Trade Organization (WTO) had ruled the SEZ scheme as inconsistent with the disciplines of certain multilateral agreements, as the tax concessions are linked to export performance. So, the new DESH laws intend to remove the requirement of positive net foreign exchange earnings by the DESH units.

There are many other changes proposed in the draft DESH Bill, mainly for using different nomenclature. For example, the development commissioner will be re-designated as hub director. Such changes are unlikely to be of any meaningful consequence.