The government has recently done away with the minimum land requirement for IT/ITeS SEZs while also reducing specified minimum built-up areas. Land area requirements for other sector-specific SEZs have been reduced as well. Although SEZs in India have shown good revenue growth (USD 66 billion in 2012 –2013; 23.0% of India’s total exports), and are still in a nascent stage compared with China, this is a good time to take stock of the current ground situation.
There were certain decisions taken that, in hindsight, can be seen to have impacted the SEZ story. The imposition of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on SEZ entities has been much debated as worldwide SEZs are generally tax-free enclaves. Their imposition was contrary to the initial idea of promoting SEZs and a positive industrial policy change might have been more helpful. Financial incentives with proactive policy reforms go a long way in promoting new industry initiatives and one without the other causes below-par results. Benefits under reward schemes plus duty drawbacks on the FOB (Freight on Board) value of DTA (Domestic Tariff Area) exports far outweigh the attraction of Income Tax benefits under the SEZ scheme.
In 2005, when the SEZ Act was introduced, it was hailed as a progressive step towards creating infrastructure and employment enclaves which would put the economy on the fast-track to growth. The “China SEZ Model” and its success was considered the benchmark for improving export competitiveness, creating new jobs, increasing GDP and attracting more foreign investment. The idea was also to jump-start the development of secondary cities as engines of growth and employment. This would not only provide for a more inclusive development but also act as a buffer against the increasing pressure of population migration in the larger cities. In the past seven years the SEZ performance in India has produced a mixed bag of results.
The most visible fact is that of the 140-odd SEZs which became operational after promulgation of the SEZ Act of 2005 nearly 90 were for the IT/ITeS business and this shows that such SEZs were another step in providing incentives to an already growing industry. The number of manufacturing SEZs was much lower and represented a lost opportunity. Also, as many as 33 approved SEZs applied for denotification between 2008 and 2011 as they faced low demand amid the economic slowdown of this period.
The growing services sector contribution to GDP (over 62% in 2012) does argue in favour of promoting IT SEZs, but the idea behind tax-free enclaves is also to provide a push to domestic industry to improve its export competitiveness. The promotion of smaller SEZs compared to China was skewed in favour of plain real estate development rather than creating mega-industrial cities with excellent infrastructure. Recent policy developments, such as the Maharashtra Industrial Policy which allows cancelled SEZs to utilise 40.0% of their areas for residential and commercial purposes and the remainder for industrial use, look to create integrated industrial estates, which may yet offer some hope for the future.
About the author
Rohan Sharma is the Senior Manager for Jones Lang LaSalle in India, based in Gurgaon.