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Challenges to Special Economic Zones (SEZ) in Indian Real Estate Market

Posted by iremn on January 2, 2018
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In Indian Real Estate Market, India’s special economic zones (SEZs) have been a key element of the country’s industrial and export promotion policy over the past couple of decades. Though these Special Economic Zones are faced with numerous challenges, including over 25,000 hectares of land lying unutilised in these preferential treatment industrial enclaves, lack of flexibility to utilise land for different sectors, multiple modes of operation, domestic sales by the SEZs facing a disadvantage due to payment of full customs duty, and lack of support from state governments for an effective single-window system.

India’s SEZ experience has been disappointing to date. On November 28, 2014, the Comptroller and Auditor General stated in its report on SEZs: “Considering the significant shortfalls in the achievement of the intended socio-economic objectives by all the sectors of SEZs, there is an urgent need for the government to review the factors hindering the growth of non-operational and under-performing zones.”

SEZ is an enclave area that is deemed to be a territory outside the customs territory of India for its authorised operations. The Centre’s Foreign Trade Policy 2004-2009 stated: “SEZs are growth engines that can boost manufacturing, augment exports and generate employment. The private sector has been actively associated with the development of SEZs. The SEZs require special fiscal and regulatory regime in order to impart a hassle-free operational regime encompassing the state-of-the-art infrastructure and support services.”

Here are the challenges faced by the SEZs and the possible solutions for them:


1. Unutilised land (more than 25,000 hectares) in SEZs :

There is more than 25,000 hectares of unutilized land in SEZ and its due to the lack of flexibility to utilise land in SEZs for different sectors. The solution to this challenge can be “Optimal utilisation of vacant land in SEZ. Allowing flexibility of land use and removing sector-specific constraints.”

On the request of the SEZ developers, the Board of Approval (BoA) on SEZs has approved 81 cases of de-notification of SEZs as on June 30 this year. “The reasons given (by developers) for these request for de-notification include economic slowdown, poor market response, lack of demand for SEZ space and change in the fiscal incentive regime for SEZs, etc,” Nirmala Sitharaman, then Minister of State for Commerce and Industry (Independent Charge), told Rajya Sabha on July 26.


Problems of Special Economic Zone (SEZ) in India


N Gokulakrishnan, AIADMK Rajya Sabha MP, asked a written question in Parliament this year if “it is a fact that misuse of SEZ lands is rampant in the country” and whether “any estimation has been made up to what extent the (land of) SEZs are being misused”. Sitharaman replied to Rajya Sabha on April 12: “Land is a state subject. The BoA approves a proposal for the establishment of an SEZ subject to the terms and conditions prescribed in the SEZ Act and Rules. The approval is granted only after the concerned state government recommends the setting up of the SEZ. The implementation of SEZ projects by developers is monitored by the development commissioners as per SEZ Act and Rules on a regular basis. No rampant misuse of SEZ lands has been reported.”


2. Multiple models of Special Economic Zones in India: 

There are 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 in India. Though the group of secretaries of various central government’s departments have recommended “rationalisation” of these models. Moreover, the Department of Industrial Policy and Promotion (DIPP) and the Niti Aayog is going to “develop and master plan for industrial clusters” in order to deal with this challenge.


3. 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 are treated as exports and goods coming from the SEZ into DTA is treated as imports. A suggested solution can be “optimal utilisation of existing capacity in SEZ units” should be done by “allowing job work for DTA”.

As on September 9 this year, the number of SEZs that have been notified in India are 372. Out of these, 222 SEZs are operational and 150 SEZs are non-operational, according to the Ministry of Commerce and Industry. Currently, the SEZs employ about 17.8 lakh persons across the country. In 2016-17, exports from SEZs were of around Rs 5.23 lakh crore — 53.89 percent of the exports were from “computer and electronic software” sector.


4. The disadvantage of paying full customs duty compared to lower rates of ASEAN countries due to FTA :

The 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 the free-trade agreement (FTA). It is suggested that the “best FTA rates” should be allowed for domestic sales, too.


5. Imposition of Minimum Alternate Tax (MAT) as well as the imposition of income tax on new SEZs :

Imposition of Minimum Alternate Tax (MAT) on SEZs from April 1, 2012, as well as the imposition of income tax on new SEZs and new units from April 1, 2017, and April 1, 2020, respectively, are another challenge, SEZs are facing in India currently. A restoration of income tax benefit, as well as MAT exemption, could be helpful here.


6. Lack of support from the state government :

The lack of support from the state government when it comes to developing an effective single-window system for clearances has always been a challenge. It is suggested for state governments of India to be more supportive of SEZs.


7. Requirement of payment in foreign exchange for services provided by SEZ units to DTA area

The requirement of payment in foreign exchange for services provided by SEZ units to DTA area is another major challenge being faced by SEZs in Indian Real Estate Market. To deal with this problem, an amendment in the definition of “services” in the SEZ Act, 2005 is suggested.

There are other various SEZ issues raised by the Confederation of Indian Industry (CII). The CII stated that there should b the simplification of the process of granting environment clearance by the Union environment ministry and repeal of certain sections of the Urban Land Ceiling Act, 2007. The CII also raised four SEZ issues that fall in the domain of the finance ministry or the Reserve Bank of India — grant infrastructure status to buildings of SEZs and industrial parks, permit external commercial borrowing (ECB) for entire SEZ infrastructure, allow a refinancing option through ECB; relax the “risk weightage norms” for the real estate sector.


Source: Based on the presentation by SEZ division of the ministry o Suresh Prabhu, Minister of Commerce and Industry, and C R Chaudhary, Minister of State for Commerce and Industry.
Image Source: Indian Express

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