SEZ Policy and issues in India

  • November 9, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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SEZ Policy and issues in India

Subject: Economy

Section: External sector

  • Government’s Focus on SEZs:
    • Commerce Minister Piyush Goyal is exploring ways to relax certain restrictions for Special Economic Zone (SEZ) units to promote growth.
    • There is a proposal to allow SEZ units to sell products in the domestic market without import duties.
    • This proposal aims to align SEZ practices with those of India’s Free Trade Agreement (FTA) partner countries.
  • WTO Compliance Considerations:
    • Benefits of input duty remission schemes for exports to SEZs are subject to ensuring adherence to World Trade Organization (WTO) regulations.
    • Emphasized the cautious examination needed to avoid potential violations of WTO rules.
  • SEZs and Export Dynamics:
    • SEZs are majorly engaged in exporting petroleum products and software, which are currently not covered under the Remission of Duties or Taxes on Export Products (RoDTEP) Scheme.
    • The proposed liberalization for SEZs aims to bring them in line with industry practices in India’s FTA partner countries.
  • Industry-Government Collaboration:
    • Minister Goyal highlighted the collaborative approach between the government and the industry to elevate the national initiative for ease of doing business to the next level.
    • Continuous feedback from businesses through the National Single Window System is encouraged to identify gaps and suggest measures for improvement.
  • Special Economic Zones (SEZs):
    • SEZs are delineated ‘enclaves’ with unique regulations and trade practices compared to the rest of the country, providing special privileges to the units operating within them.
    • They serve as efficient zones to address infrastructural and business environment issues in a shorter timeframe.
    • Special Economic Zones Act was passed in 2005. However, SEZs were operational in India from 2000 to 2006 (under the Foreign Trade Policy).
  • Objectives of the SEZ Act:
    • Creation of additional economic activity.
    • Promotion of goods and services export.
    • Generation of employment.
    • Facilitation of domestic and foreign investments.
    • Development of infrastructure facilities.
  • Facilities and Incentives for SEZs:
    • Duty-free import/domestic procurement of goods for SEZ unit development and operation.
    • 100% Income tax exemption for the initial 5 years, 50% for the subsequent 5 years, and 50% of the ploughed back export profit for the following 5 years.
    • Exemption from Minimum Alternate Tax (MAT).
    • Exemption from Central Sales Tax, Service Tax, and State sales tax (subsumed into GST, supplies to SEZs are zero-rated under IGST Act, 2017).
    • Single window clearance for central and state-level approvals.
  • Concerns with Present SEZs:
    • India’s SEZs have not been as successful as those in several other countries, such as China, Korea, Malaysia, and Singapore.
    • Many SEZs in India were established to avoid taxes rather than for export purposes.
    • Weak linkages with the rest of the economy have limited the performance of most manufacturing SEZs in India.
    • Ineffective coordination between the central SEZ Act and state-level legislation has undermined the effectiveness of the single window system.
    • Inadequate policy design, implementation, and monitoring have hindered India’s industrialization efforts through SEZs.

 Revamp of SEZ Policy to Meet Export Challenges:

  • Review the recommendations of the Baba Kalyani committee on the SEZ policy of India.
  • Discussions focused on addressing global challenges faced by Indian exporters and facilitating the ease of doing business in the current global market scenario.
  • Completed Recommendations:
    • Review of specific exclusions proposed in NFE computation in light of the Make in India initiative.
    • Sharing of duty-exempted assets/infrastructure between units allowed with specific approval.
    • Formalization of the de-notification process for enclaves and delinking its present mandatory usage for SEZs purpose only.
  • Other Implemented Recommendations:
    • Support to servicification of manufacturing zone.
    • Allowing manufacturing enabling services companies.
    • Flexibility to enter into a long-term lease agreement with stakeholders in Zones in line with the State policies.
  • Additional Changes and Initiatives for SEZs:
    • Delegation of powers to Development Commissioner for shifting of SEZ unit from one zone to another.
    • Supplies of services in DTA against foreign exchange or Indian Rupees to be counted towards NFE.
    • Setting up cafeteria, gymnasium, creche, and other similar facilities/amenities.
  • Objectives of the Committee:
    • Evaluation of the SEZ policy and making it WTO compatible.
    • Suggesting measures for maximizing utilization of vacant land in SEZs.
    • Merging the SEZ policy with other Government schemes like coastal economic zones and national industrial manufacturing zones.
  • India’s target of becoming a USD 5 trillion economy by 2025 necessitates a paradigm shift in manufacturing competitiveness and services, requiring policy evaluation and compliance with WTO regulations.
economy SEZ Policy and issues in India