Bindu D Menon When the Maharashtra government decided to turn Navi Mumbai Special Economic Zone (SEZ) into an industrial city, not many were surprised.
The SEZ, which was to be jointly developed by the Reliance Group, Jai Corp, SKIL Infrastructure and City and Industrial Development Corporation (Cidco), had failed to take off owing to mismatched policy expectations and taxation changes.
There are similar stories coming from across the country about SEZ developers either denotifying their projects or stalling work.
Modelled on China’s vast industrial corridor and touted as a self-contained industrial enclave to support manufacturing activity, SEZs as a policy have failed to achieve their desired purpose.
Players say SEZs became booming centres for IT/ITES to avail tax incentives by shifting them from domestic tariff areas. While the IT/ITES sector flourished, manufacturing floundered due to flawed taxation and execution issues. Additionally, Minimum Alternate Tax (MAT) levies made SEZs unattractive to prospective investors.
China model
“Indian SEZs were modelled on their Chinese counterparts. While the Chinese SEZs flourished, SEZs in India didn’t meet the desired objectives. Challenges like availability of large contiguous chunks of land, taxation related issues and lack of adequate talent were some of the key challenges,” says Neeru Ahuja, Partner, Deloitte.
Introduced as a policy in 2000 by the then NDA government, the SEZs Bill was approved by both Houses of Parliament in May 2005.
The aim was to create export-led categories with tax and duty concessions. The aim was to include key sectors such services, manufacturing, mining and agriculture. By April 2011, the Centre had ‘formally approved’ a whopping 584 SEZs (with 377 notified to begin operations).
As on September 30, 2017, there were about 222 operational SEZs, 356 notified SEZs plus seven Central SEZs and 11 State/PVT SEZs.
Close to 18 lakh persons are employed in the SEZs and it has generated exports worth ₹2,66,773 crore in 2017-18.
Former Commerce and Home Secretary GK Pillai notes: “SEZ as a policy has not worked because of lack of stability in government decisions. Taxation related issues and no clear guidelines on land acquisition were a challenge. The export numbers from SEZs would have been much higher if the government had given clear policy guidelines.”
In 2011, the Finance Ministry imposed a MAT which sought 18.5 per cent tax on booked profits. Under the original scheme, businesses in SEZs were exempted from MAT on book profits and developers were exempted from payment of dividend distribution tax (DDT).
Tax shock
This was a major blow to the industry, which raised a hue and cry over the policy reversal.
Additionally, contiguous land, which was a staple for large manufacturing parks, was unavailable.
Activists group and farmers began protesting the acquisition of land, which lead to project delays.
Ahuja of Deloitte notes: “With taxes being levied, the savings for companies on account of tax concessions were reduced, impacting interest in SEZs. In policies like these you cannot give with one hand and take with the other.”
Lack of clarity
Several developers such as DLF, Parsvnath and Shriram Properties, which acquired land for developing SEZs, de-notified them in 2013 owing to slow demand and lack of clarity on MAT.
A 2014 CAG report points out that 52 per cent of the land approved for allotment to SEZs remains idle and SEZs have not had any significant impact on economic growth, trade, infrastructure, investment or employment.
Ajay Sahai, DG and CEO, FIEO, says: “The SEZ profile is not diversified. Even if we look at the current exports from SEZ, a large chunk comes from IT/ITES and petroleum.
The concept of SEZ is good and in GST regime it will be beneficial to players as all inputs can be found in one place. The government needs to look at SEZs from a holistic perspective and remove deficiencies.”