The Future OF SEZ: A 2020 Forecast
Since the year 2000, India has been introduced to the concept of an SEZ after seeing the model used in China. Before which, India adhered to the policies of EPZs which were adversely impacting foreign investments.
It is safe to say that SEZs have proven to be a crucial part of India's domestic, industrial and foreign policy and further the idea of the Government's initiatives including such as Make in India, Digital India and Skill India.
So what does the future of SEZs look like and why is it a topic of discussion? According to a conference at the World Trade Center, Kochi, this is what the future of SEZs look like.
What is a Special Economic Zone (SEZ)?
SEZs are an important economic zone to promote trade & investment, create infrastructure & job opportunities, promote growth in foreign exchange and transfer of skills and technologies. Currently, there are 232 operational SEZs with about 5000 approved units (until December 2018) across India.
An Overview of SEZs
- SEZs are deemed to be a foreign territory for the main purpose of trade operations, duties and tariffs.
- The economic laws of SEZs are more flexible than the rest of the country’s generic laws.
- They were created to attract foreign investment into the country, in order to encourage more exports from India and bring in foreign exchange.
- SEZs are also deemed to be airports, port, land custom stations and Inland container depots under the Customs act.
- They also come with fiscal and non-fiscal benefits.
The future of SEZs after 2020 and its impact on units
According to the Union Budget of 2016-17, the Indian Government amended Section 10AA of Income-tax to set a sunset date or deadline of 31st March 2020 for “Commencement of activity of manufacture or production of any article or thing or providing service by a unit located in an SEZ.''
Any Unit will be able to avail and enjoy tax benefits/deductions as per Section 10AA for a set time period of 15 years as long as the operations commence before the deadline of 31st March 2020. These companies will also not be required to pay MAT.
Implications of the sunset clause on occupiers
The uncertainty regarding the continuity of fiscal incentives is an area of growing concern among various stakeholders in special economic zones. According to a collier’s report, more than 40 million sq. ft. of new supply is scheduled for completion before the mandatory deadline of 2020 to qualify for income tax benefits. However, it seems unlikely that all the SEZ projects will be completed by then. As per this, new entrants are advised to pre-commit spaces only in projects that are in advance stages of construction to avoid last-minute delays in starting operations which may lead to disqualification for direct tax benefits.
A Quick Comparison of SEZs, STPI/EOU & Domestic Exporters
Should one continue with STPI/EOU or shift to SEZ?
STPIs are restricted only to exports related to the software industry unlike SEZs that have the liberty to venture further. While STPI is quite beneficial as compared to the normal scheme, for large-scale companies, it is always advisable to opt for SEZ.
It is said that with the new SEZs, emerging human capital formation and technological upgrades will widen and affect the economy positively.