Budget FY23 to give SEZs a leg up

The government is weighing a raft of steps to give a new lease of life to special economic zones (SEZs), including freedom to sell goods in the domestic market at low duties, easier exit for loss-making units and a relaxation of extant norms, sources told FE. Some of these proposals will likely feature in the Budget for 2022-23.

Once considered to be drivers of future export growth, SEZs have been losing sheen after the government last year adopted a sunset clause, suggesting that only those units that started production on or before June 30, 2020, would be granted a phased income-tax holiday for 15 years. As such, the corporation tax has been trimmed to as low as 15% for setting up new manufacturing units anywhere. So, the Centre intends to make these zones engines of export growth again, conscious of their potential to help the country realise the lofty merchandise export target of $1 trillion by 2027-28, against $291 billion in 2020-21.

As part of an “SEZ-plus” initiative, the government may allow such units to sell goods in the domestic market. As FE has reported, the units could be subject to a lower impost than the regular customs duties that they are currently mandated to pay while supplying to the domestic tariff area (DTA). However, this levy is expected to neutralise the advantages that SEZs, being specifically delineated duty-free enclaves, enjoy vis-à-vis domestic manufacturers to ensure a level-playing field for firms operating outside such zones.

The plan, which requires the concurrence of the finance ministry, is aimed at helping Covid-hit SEZs to better utilise their idle capacities and improve sales.
Similarly, the commerce ministry is working out a mechanism to enable partial de-recognition of existing SEZs so that areas that are no more in demand can be used for other purposes. A space transfer policy for SEZs is also in the works. Under this, a loss-making unit will not just find it easy to exit but recoup part of the losses by selling the infrastructure already set up by it to another investor.

SEZs sold manufactured goods worth Rs 50,033 crore in the domestic market last fiscal, down from Rs 53,831 crore in FY20. Their domestic sales would soar substantially if the tax incidence drops, industry executives have said.

Calls for extending succour to the SEZs gained traction after the pandemic hit their operations as well as cash flow hard. As many as 427 SEZs were granted formal approval under the SEZ Act, 2005, and 34 in-principle clearance until September 27. But only 267 of them remained operational. As of March, SEZs across the country employed as many as 2.36 million people.

Data collated by the Export Promotion Council for EoUs and SEZs show, in rupee terms, outbound shipments of manufactured products and trading services from SEZs crashed by 21% from a year before to Rs 2.46 lakh crore in FY21, while the country’s overall merchandise exports dropped by only 3% to Rs 21.54 lakh crore. Of course, services units, the dominant segment in SEZs, seemed to have coped with the pandemic impact better. Still, overall exports (both goods and services) from SEZs recorded an almost 5% decline in FY21, against a 1.5% drop in the country’s total exports in rupee term.

Mahesh Jaising, partner at Deloitte India, said the recommendations made by the Baba Kalyani committee on renewed thrust to the services sector should also be implemented. “Explicit clarity on permissibility of work from home is the need of the hour, as many companies are resorting to a hybrid model where employees will work both onsite and remotely. Additionally, billing in rupee by SEZs for domestic service supplies has been an issue for quite some time now, which needs quick redressal. Lastly, easing denotification processes will also ensure that companies continue to operate out of existing SEZ premises even if the tax holidays have expired,” Jaising said.