Date: 13/12/2022

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Infrastructure development.

Key Phrases: Special Economic Zones(SEZ), SEZ Act 2005, Infrastructure, Ease of Doing Business, Baba Kalyani Committee, Development of Enterprises and Services Hub (DESH) Bill, 2022.

Context:

• The Government of India plans to bring in new business-friendly legislation through the introduction of the Development of Enterprises and Services Hub (DESH) Bill, 2022.

Background

• The GoI brought Special Economic Zones (SEZ) Act in 2005 which was aimed to
  • Provide for the establishment, development and management of the Special Economic Zones for the promotion of exports and for matters connected therewith.
  • The Act was a step in making Indian laws business and investment friendly and to fillip ease of doing business.
• After more than 15 years the government is bringing a new legislation called the Development of Enterprises and Services Hub (DESH) Bill, 2022.
  • As part of the negotiations before the bill is presented the commerce ministry is mulling a proposal for extension of concessional corporate tax of 15 per cent to new SEZ units under the proposed DESH bill.
  • However, the Finance ministry has agreed to only major demands such as allowing SEZ units to sell their goods in the domestic market without the imposition of Customs duties and getting payment for services rendered there in rupees instead of foreign exchange

What is a Special Economic Zone?

• A Special Economic Zone (SEZ) is a territory within a country that is typically duty-free (i.e. fiscal concessions are provided) and has different business and commercial laws chiefly to encourage investment and create employment.
• SEZs are created to better administer these areas, thereby increasing the ease of doing business.
• The history of SEZ dates back to the 1970s when Asia’s first EPZ (Export Processing Zones) was established in 1965 at Kandla, Gujarat.
  • Although these EPZs had a similar structure to the modern SEZs, the government began to establish modern SEZs in the early 2000s.
  • The government used the Foreign Trade Policy route to redress the infrastructural and bureaucratic challenges and limited success of the EPZs.
• Presently there are about 380 SEZs notified in India, out of which over 260 are operational.
  • About 60% of the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra.
• The government has taken many initiatives and policies to promote the SEZs-
  • Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
  • Exemption from Income Tax, minimum alternate tax, etc.
  • Single window clearance for Central and State level approvals.
  • Flexible regulation such as external commercial borrowing up to $ 500 million in a year without any maturity restriction.
• Performance of the SEZs-
  • Indian exports have increased to over ₹ 7.5 lakh Crores in 2020-21 vis-a-vis about ₹ 20000 crores in 2005-06.
  • Investment has increased to over ₹ 6 lakh Crores in 2020-21 compared to about ₹ 4000 crores in 2005-06.
  • Over 2 million people are getting employment in 2020-21.

Special Economic Zones Act, 2005

• About:
  • The Special Economic Zones Act was passed in 2005 and came into force along with the SEZ Rules in 2006.
  • However, SEZs were operational in India from 2000 to 2006 (under the Foreign Trade Policy).
• Objectives of the SEZ Act
  • To boost the export of goods and services.
  • To boost domestic and foreign investments.
  • To develop infrastructure facilities and employment generation.
• Approval Mechanism
  • The SEZ approval mechanism is a single-window process provided by a 19-member inter-ministerial SEZ Board of Approval (BoA).
  • The Board is constituted by the Central Government chaired by the Secretary of the Dept. of Commerce, Ministry of Commerce and Industry.
• Reforms
  • The Ministry of Commerce and Industry had constituted an SEZ review committee under the chairmanship of Baba Kalyani to study the existing SEZ policy of India.
  • The committee submitted its recommendations in November 2018 among which the notables are-
    • It recommended a framework shift from export growth to broad-based Employment and Economic Growth (Employment And Economic Enclaves- 3Es)
    • Separate rules and procedures for manufacturing and service SEZs.
    • Extension of Sunset clause and retaining tax or duty benefits.

What is the need for new legislation?

• Not attractive for the investors
  • Investors do not find the existing SEZ Act attractive as the sunset clause set in on income tax exemption for developers and units.
• Against the WTO rules
  • The criterion of units being net foreign exchange positive, to be eligible for benefits, has been ruled as being against multilateral trade rules at the WTO that does not allow incentives to be linked directly to exports.

What does the DESH bill propose?

• SEZs as development hubs
  • The DESH Bill proposes that SEZs may be recast as development hubs which are to be Custom-bonded areas outside Customs territory of India.
  • They will be fully integrated with the domestic market with access to expedited clearances and streamlined processes.
• De-linking benefits
  • To de-link benefits under DESH with export earnings to make the scheme WTO-compliant.
• It will also have other features such as
  • Strengthened single window mechanism.
  • Trade and risk-based compliance mechanisms.
  • Dynamic regulatory structure and
  • Alternative dispute resolution mechanisms.

Need of mutual cooperation among the concerned ministries

• The finance ministry is reluctant on allowing the concessional corporate tax rate of 15% to new SEZ units for an extended period, till 2032.
• Although the commerce ministry believes it will pull in more investments, its implementation could be problematic and thus the Finance ministry is opposing it.
• The Finance ministry is exploring avenues to implement the other suggestions
  • Allowing SEZ units to sell in the domestic market.
  • Domestic Tariff Area (DTA) without being subjected to Customs duties under the condition that all duties foregone on raw materials will be paid back.
  • Allowing SEZ units to get payment in rupees for supply of services to the DTA.

Conclusion

• The DESH bill is intended to benefit Indian trade and commerce through improving on the existing SEZ Act thus it is imperative that the Government should consult with all the stakeholders and bring them in confidence before introducing the bill to achieve the Bill’s intended objectives in the right spirit.

Source: The Hindu BL

Mains Question:

Q. Investments in the Indian economy can be enhanced through augmentation of the Indian business ecosystem with high speed connectivity, utility infrastructure and integrated and robust supply chains. Comment (250 words).