DESH – A Fresh Shot At Revamping SEZs In India?

Special Economic Zones are viewed as engines of industrial and economic growth worldwide as they have played critical roles in the regional development of economies across the globe. India was one of the first countries in Asia to recognise the effectiveness of the Export Processing Zone model in promoting exports, with Asia's first EPZ set up in Kandla in 1965.

The success of SEZs is dependent on multiple factors such as strategic focus, regulatory framework, governance and value proposition. As India targets becoming a $5 trillion economy by FY 2025, both manufacturing and services sectors must contribute to this growth in proportion to the total GDP as it stands today. One of the stated objectives of the SEZ Act enacted in 2005 was the encouragement of manufacturing. However, data suggests that the policy has not completely delivered the desired results.

India’s SEZ scheme also came under the World Trade Organization’s scanner for violating the WTO norms of restrictive trade practice. In order to overcome these challenges, the union budget mentioned that the SEZ Act of 2005 would be replaced by the Development (Enterprises and Services) Hubs Bill, 2022. The DESH Bill proposes to enable states to become partners in the development of enterprise and service hubs and will cover all large existing and new industrial enclaves to optimally utilise the available infrastructure and enhance the competitiveness of exports.

Many proposals in the draft are from the 2019 report of an expert committee headed by Bharat Forge Chairman Baba Kalyani. The committee had suggested SEZs be converted into ‘employment and economic enclaves’ (3Es) with an extension of tax sunset clauses, simplification of processes, tax benefits for the services sector, broadening the definition of services, allowing multiple services to come together, facility of sub-contracting for customers outside 3Es/SEZs.

The proposal is to change the focus from exports to economic activity, employment, investment, and global value chains interlinkage among others, apart from the greater involvement of the states.

Paradigm Shift From Export Focus To Economic Growth And Employment

The DESH bill proposes a far wider objective of boosting domestic manufacturing and job creation through development hubs than the SEZ Act did. DESH seeks to overcome the bottlenecks present under the existing SEZ laws by complying with the global trade rules of WTO, among other challenges. Here is a sneak peek of industry expectations on the key changes to the framework:

Thrust on optimum utilization of infrastructure: SEZ units are capital intensive and a lot of SEZ space has been created in India. However, a large portion of these areas has remained unoccupied.

It is expected that the DESH Bill will allow partial denotification of unutilised land spaces from the scheme even if the resultant built-up processing area does not hold contiguity, after such denotification. This ought to give a boost to large existing and new industrial enclaves to optimally utilise available infrastructure, particularly in the post-pandemic period and given the dynamic working approach of companies.

It is also hoped that in order to encourage better utilisation and development, the norms for the usage of non-processing areas for dual usage are made more flexible.

Indian Rupee billing and free flow of goods or services to the domestic market: Receipt of foreign currency has been a matter of contention in recent times under the SEZ scheme where authorities have been seeking to levy a penalty for domestic invoicing. This issue is likely to be addressed by DESH Bill, by doing away with barriers to domestic supplies and allowing the movement of goods and provision of services to the domestic market. In fact, it is also proposed to do away with the Net Foreign Exchange criteria in line with the stated objective of moving from an export focus to economic and employment generation.

Repayment of only duty foregone for domestic clearances: A key change expected in the DESH Bill is that the units making domestic supplies will only be required to pay back “duty foregone”. This will allow companies to make use of underutilised capacity to serve the domestic market and incur duties only on imported inputs and raw materials instead of on the final product. This change makes the proposed DESH Bill at par with the Manufacturing and Other Operations in Warehouses Regulation.

This should result in more “make in India” activities under the DESH Bill.

Broad-banding and push for multi-sector spaces: The proposed legislation also seeks to emphasise promoting not only manufacturing but trading and provisions of services too, by broad-banding the definition of services and allowing multiple services to come together. Further, units are currently required to have a separate earmarked area for trading and warehousing. This was necessary as the free trade warehousing zones were set up in sector-specific SEZs. It is expected that the legislation will allow all units to operate as multi-sectoral units in line with the change made to the SEZ legislation in 2019.

Continuation of indirect tax duty and GST benefits: It is expected that the DESH Bill will also continue to extend customs duty exemptions to the hubs/units, enabling them to remain competitive in the global space. The benefit of zero-rated supply (no tax) is also likely to be extended on supplies made to hubs/units. The hubs/units can continue to procure goods or services without any payment of GST under the new regulations as well.

One-stop-shop portal and ease of doing business: The new scheme is also expected to have increased automation through a single integrated portal for all compliances and approvals. The move is likely to encourage the integration of the customs portal with the platform for such hubs. The report of the Baba Kalyani-led committee also recommended clear guidelines for time-bound approvals and a larger role of development commissioners in facilitating approvals to reduce the role and dependency on the Board of Approval and the Unit Approval Committee. This is also critical given that one of the objectives of the scheme is to enable Centre-state partnership in the monitoring of these hubs.

Way Forward – Enhanced Industry Engagement And Effective Implementation

While the DESH Bill will certainly provide a much-needed impetus to SEZs and enable the utilisation of vacant spaces, it is also likely to provide adequate opportunities for companies to redesign their supply chains.

Specifically, companies will be able to plan their production and evaluate ways to adequately use the domestic market for increasing business. Lastly, the expected change in the framework will also hopefully give rise to the setting up of incubation centres in the hubs and allow startups and MSMEs to take advantage of the benefits that the DESH Bill will provide.

India is at a crucial juncture in its economic growth trajectory. This new policy, with its strengthened and forward-looking measures, is likely to play a very important role in the growth and development of sectors across manufacturing as well as services. The success of the scheme will depend on its implementation and it is expected that the government would, once the Bill is finalised, focus on this front with active engagement with industry. Quick redressal of any teething issues, especially from a procedural and rule-set standpoint, will serve as the litmus test for the success and adoption of the scheme by industry.

Mahesh Jaising is Partner at Deloitte India. With inputs from Sangita Prakash, Director at Deloitte India.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.