Budget may overhaul SEZ regulation

By Mahesh Jaising

The Special Economic Zones Act, 2005 (SEZ Act) was introduced with the aim of attracting foreign direct investment (FDI) and creating a competitive and hassle-free environment for companies engaged in exports of goods and services. Since then, the ‘export’ focussed policy has successfully offered various benefits. However, as time progressed and tax laws evolved, the policy now faces the prospect of a relook so as to bring back lost sheen, specifically after the sunset of income tax benefits. It is likely that Budget 2022 will include a proposal to overhaul the SEZ policy. Here is a sneak peak of the possible amendments

Selling in the domestic tariff area (DTA)

The government has specified that a SEZ unit facing domestic market will behave like a DTA entity whereas a SEZ unit facing international market will behave as a SEZ unit.

At present, domestic sale of goods from SEZ to a DTA buyer is treated on a par with imports and the DTA buyer needs to pay applicable customs duties. It is expected that SEZ units may see change in regulations, to align with how Export-Oriented Units or Units under the bonded manufacturing scheme treat domestic supplies, i.e., to apply GST on sales and repay the customs duty exemption claimed while procuring inputs. Alternatively, the government may even adopt lower custom duty rates as applicable under the FTAs with different countries.

This would be a business-friendly move as SEZ units may be required to sell the produce in DTA due to many reasons, such as cancellation of export order, over production, loss of foreign market, and shorter shelf life of the product.

For services supplied by service SEZ units to DTA buyers, the SEZ units are required to necessarily receive foreign exchange which is a process in itself for DTA customers. In fact, in the absence of a mandatory requirement of receipt in foreign exchange for manufactured goods cleared into DTA, the provision is looked at as being discriminatory for service provider units even when the criteria of earning net foreign exchange is duly met by such units. While the department of commerce has been looking at this change for quite some time now, the industry hopes to see this issue addressed in the upcoming Budget, which will aid in promoting the growth of the units.

Relaxed norms for work from home (WFH)

The Covid-19 pandemic has forced everyone to rethink about the way business is done and many companies have been exploring hybrid operation models, wherein employees can work both onsite and remotely. While the department of commerce has explicitly issued an advisory permitting WFH during the pandemic, the same is set to expire in March 2022.

The industry expects that the government would recognise the WFH model for SEZ units without any impact on the tax benefits claimed by the companies. In an increasingly remote working environment, there is a huge opportunity for India to be the ‘Service Hub’ of the world.

Thrust to service sector units

While we have seen the bonded manufacturing scheme being rolled out for manufacturers, service providers need a thrust too. In the press release issued by the commerce ministry on January 10, 2020, it has been stated that “If India is on the path to become a $5 trillion economy by 2025 then the present environment of manufacturing competitiveness and services have to undergo a basic paradigm shift. The success seen in services sector like IT and ITeS have to be promoted in other services sectors like health care, financial services, legal, repair and design services.”

The Baba Kalyani-led panel recommended shifting from export promotion to employment and economy promotion, by aiming the policy at broad-based employment and economic growth consistent with the government’s target of creating 100 million jobs. The report recommends transformation of SEZs into Employment and Economic Enclaves (3 Es) which could bring in significant changes in both approval requirements as well as operational guidelines for SEZ units, to shift the focus from exports towards employment.

Coupled with the concessions under the GST regime, incentivising SEZ units based on employment and economic promotion could be the much-needed push which the government may consider.

Support to zone developers

The SEZ units are capital intensive and a lot of SEZ space has been created in India, with 376 notified SEZs and 268 being operational. There are large areas across SEZs, specifically in the wake of the sunset clause on income tax benefits. It is expected that the government would consider allowing DTA units to set up facilities in SEZs minus the concessions that a SEZ unit enjoys. This will enable the developers to lease out vacant facilities and recoup their return on investment.

It is also expected that the exit procedures as well as the denotification of area would be simplified for the units as well as the developers, to assess the business interest and take a call on moving out of the scheme.

(The author is National leader & indirect tax partner, Deloitte Touche Tohmatsu India LLP. With inputs from Harsh Sankhlecha and Sangita Prakash, both senior managers, Deloitte Touche Tohmatsu India LLP. Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited).