Development of Enterprise and Service Hubs (DESH) Bill 

  • August 15, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Development of Enterprise and Service Hubs (DESH) Bill 

Subject : Economy

Section: Fiscal Policy

Context: The Union Budget 2022, proposed to replace the existing law governing Special Economic Zones (SEZs) with a new legislation to enable states to become partners in ‘Development of Enterprise and Service Hubs’ (DESH).

Development of Enterprise and Service Hubs (DESH) Bill 

  • It proposed to create developmental hubs, whose focus is not limited to exports, but also to cater to the domestic markets,boosting additional economic activity, generating employment, and integrating various industrial hubs.
  • It will integrate existing industrial estates such as textiles and food parks by converting them into developmental hubs.
  • The DESH Bill classifies two types of developmental hubs — Enterprise and services hubs.
    • Enterprise hubs will have land-based area requirements and be allowed for both manufacturing and services activities,
    • Services hubs will have built-up area requirements and be allowed for only services-related activities.
      •  Currently, only specified services such as IT, ITeS are allowed in special economic zones.
    • These hubs, which will come up under the regional boards of states, could be created by Centre or states or jointly by both or by any goods and services provider.
  • It seeks to provide certain incentives such as:
    • Retention of zero-rating of IGST (integrated goods and services tax) on domestic procurement by a unit in an SEZ;
    • Continuation of indirect tax benefits to developers of these zones; and
    • Allowing depreciation on sale of used capital goods cleared to domestic tariff areas.
    • Extension of  the corporate tax rate to 15 per cent without any exemptions for units undertaking authorised operations in these development hubs.
    • States can also provide support measures to these zones to boost manufacturing and job creation.
    • The customs duty would only be paid on the inputs used and not on the expensive final goods.

Why?

  • SEZs are losing their importance after imposition of minimum alternate tax and introduction of sunset clauses for removal of tax incentives.
  • Units in SEZs used to enjoy:
    • 100 percent income tax exemption on export income for the first five years,
    • 50 per cent for the next five years and
    • 50 per cent of the ploughed back export profit for another five years.
      • In the Budget 2016-17, the government had announced that the income tax benefits to new SEZ units would be available to only those units which commence activity before March 31, 2020.
  • Exports from these SEZs have fallen to $102.3 billion in FY21, from $112.3 billion in FY20- They account for less than 20% of exports now.
  • Inconsistent with the WTO regime- A WTO panel in 2019 said that incentives given to entities located in SEZs violated the agreement on subsidies.

Concept:

Special Economic Zone:

  • An SEZ is a territory within a country that is typically duty-free and has different business and commercial laws chiefly to encourage investment and create employment.
  • Asia’s first EPZ (Export Processing Zones) was established in 1965 at Kandla, Gujarat.
  • While these EPZs had a similar structure to SEZs, the government began to establish SEZs in 2000 under the Foreign Trade Policy to redress the infrastructural and bureaucratic challenges that were seen to have limited the success of EPZs.
  • The Special Economic Zones Act was passed in 2005. The Act came into force along with the SEZ Rules in 2006.
    • Objectives of the SEZ Act:
      • To create additional economic activity.
      • To boost the export of goods and services.
      • To generate employment.
      • To boost domestic and foreign investments.
      • To develop infrastructure facilities.
  • India’s SEZs were structured closely with China’s successful model.
  • Presently, 379 SEZs are notified, out of which 265 are operational
  • There are eight functional SEZs in India at the moment including — Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal) and Noida (Uttar Pradesh).
  • About 64% of the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra.
  • The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce (Ministry of Commerce and Industry).
  • Major Incentives and Facilities Available to SEZ:
    • Duty-free import or domestic procurement of goods for developing, operating and maintaining SEZ units.
    • 100% Income tax exemption on export income for SEZ units under the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. (Sunset Clause for Units will become effective from 2020).
    • Units are exempted from Minimum Alternate Tax (MAT).
    • They were exempted from Central Sales Tax, Service Tax and State sales tax. These have now subsumed into GST and supplies to SEZs are zero-rated under the IGST Act, 2017.
    • Single window clearance for Central and State level approvals.
    • There is no need for a license for import.
    • In the manufacturing sector, barring a few segments, 100% FDI is allowed.
    • Profits earned are permitted to be repatriated freely with no need for any dividend balancing.
    • There is no need for separate documentation for customs and export-import policy.
    • Many SEZs offer developed plots and ready-to-use space.

Status:

  • As of June 30, 2022, the government has given formal approvals to 425 SEZ developers, out of which 268 are operational.
  • These zones have attracted about ₹ 6.5 lakh crore investments and employ about 27 lakh persons.
  • During April-June this fiscal, exports from these zones rose by 32 per cent.
Development of Enterprise and Service Hubs (DESH) Bill economy