Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Key Phrases: Special Economic Zones, Foreign investment, Exports, Industrial hubs, Domestic market, Special Economic Zone Act, 2005, Net Foreign Exchange, Customs duty, Tax benefits, Economic zones, Industrial Corridor, National Investment and Manufacturing Zone.

Why in News?

• India plans to fundamentally reorient its Special Economic Zones (SEZs)—one-stop vehicles to increase foreign investment and exports— into industrial hubs that will focus on boosting manufacturing for the domestic market rather than only selling abroad.

Special Economic Zones:

• A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
• SEZs are located within a country's national borders, and their aims include
  • Increasing trade balance
  • Employment
  • Increased investment
  • Job creation
  • Effective administration.
• To encourage businesses to set up in the zone, financial policies are introduced. These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations.

Salient features of the SEZ scheme:-

• Designated duty free enclave to be treated as a territory outside the customs territory of India for the purpose of authorised operations in the SEZ.
• No license required for import.
• Manufacturing or service activities allowed.
• The Unit shall achieve Positive Net Foreign Exchange to be calculated cumulatively for a period of five years from the commencement of production.
• Domestic sales subject to full customs duty and import policy in force.
• SEZ units will have freedom for subcontracting.
• No routine examination by customs authorities of export/import cargo.
• SEZ Developers /Co-Developers and Units enjoy tax benefits as prescribed in the SEZs Act, 2005.

Challenges faced by the industries in SEZs:

• Unutilised land (more than 25,000 hectares) in SEZs. Lack of flexibility to utilise land in SEZs for different sectors.
• Existence of multiple models of economic zones such as SEZ, coastal economic zone, Delhi-Mumbai Industrial Corridor, National Investment and Manufacturing Zone, Food Park and Textile Park.
• Under-utilisation of existing capacity:
  • Currently, SEZ units are not allowed to do “job work” for domestic tariff area (DTA) units.
  • Any area that lies outside of SEZ or any other custom bonded zone in India is known as the DTA.
  • Goods and services going into the SEZ from DTA is treated as exports and goods coming from the SEZ into DTA is treated as imports.
• Domestic sales of SEZs face a disadvantage as “they have to pay full customs duty”, as compared to the lower rates with the Association of Southeast Asian Nations (ASEAN) countries due to free-trade agreement(FTA).
• Minimum Alternate Tax:
  • Imposition of Minimum Alternate Tax (MAT) on SEZs from April 1, 2012, as well as imposition of income tax on new SEZs and new units from April 1, 2017 and April 1, 2020, respectively, has been stated as the fifth challenge facing the SEZs currently.
• Lack of support:
  • SEZs has been the lack of support from the state government when it comes to developing effective single-window system for clearances.
• Foreign Exchange:
  • Requirement of payment in foreign exchange for services provided by SEZ units to DTA area.

Draft Development of Enterprise and Service Hubs (DESH) Bill, 2022

• Freed from strict rules: By this bill, SEZs will be freed from many of the rules that burden SEZs:
  • They will no longer be required to benet foreign exchange positive.
  • They will be allowed to sell in the domestic market much more easily.
• SEZs, the units operating within the new hubs will no longer benefit from direct tax incentives, which will be scrapped — a move that will make the hubs compliant with World Trade Organization rules.
• SEZs, The development hubs will be allowed to sell outside the demarcated area or in the domestic market with duties only to be paid on the imported inputs and raw materials instead of the final product.
• The Bill proposes an equalization levy for clearance in the domestic market.
• The Bill does not limit how long units can store goods, which is one year currently. Besides, there is no mandatory payment requirement in foreign exchange.
• The Bill marks a “fundamental shift" from linking SEZs with exports to possibly leveraging the hubs for domestic consumption and increased employment generation.

Way forward:

• In the SEZ regime, most decision-making is being taken by the commerce department at the Centre, but now states would be able to participate in the whole process.
• State Boards would be set up to oversee the functioning of the development hubs. These would approve the import or procurement of goods in the concerned development hub and monitor the utilization of goods or services or warehousing or trading in the development hub.
• The commerce and industry ministry has pushed for a new Act for SEZs to be able to sell goods in the domestic market at low duties, easier exit for loss-making units and units to be able to accept payment in Indian currency.
• With the WTO ruling that the SEZ scheme was not compliant with multilateral trade norms as it gave incentives for exports, the Commerce Ministry’s proposal that the NFE criteria (which makes exports mandatory) be replaced with other conditions, such as minimum employment or R&D, is being seriously considered.
• Relaxations and incentives for SEZs are important for the zones to stay attractive for investors and units despite the exhaustion of income tax sops.

Source: Live-Mint

Mains Question:

Q. Discuss the challenges faced by the industries in Special Economic Zone in India and suggest measures to overcome these challenges.