Context
The Centre intends to introduce the Development of Enterprise and Service Hubs (DESH) Bill in the Parliament’s monsoon session, which will overhaul the special economic zones (SEZ) legislation.
Relevance:
Mains Paper 3: Effects of Liberalization on The Economy, Changes in Industrial Policy and their effects on Industrial Growth
Mains Question:
What are the current challenges to SEZs in India? What are the issues these zones have with WTO, comment? How does the new proposed DESH bill can enhance the working and productivity of SEZs?
Special Economic Zones
- An SEZ is a territory within a country that is typically duty-free (Fiscal Concession) and has distinct business and commercial laws, with the primary goal of encouraging investment and job creation.
- SEZs are also established to improve the administration of these areas, thereby increasing the ease of doing business.
India’s Special Economic Zones:
- Kandla, Gujarat, became Asia’s first EPZ (Export Processing Zone) in 1965.
- While these EPZs had a similar structure to SEZs, the government began to establish SEZs under the Foreign Trade Policy in 2000 to address the infrastructural and bureaucratic challenges that were seen as limiting the success of EPZs.
- In 2005, the Special Economic Zones Act was passed. The Act, along with the SEZ Rules, went into effect in 2006.
- SEZs were, however, operational in India from 2000 to 2006. (under the Foreign Trade Policy).
- India’s SEZs were designed to closely resemble China’s successful model.
- Currently, 379 SEZs have been notified, with 265 of them operational. SEZs are concentrated in five states: Tamil Nadu, Telangana, Karnataka, Andhra Pradesh, and Maharashtra.
- The apex body is the Board of Approval, which is led by the Secretary of Commerce (Ministry of Commerce and Industry).
- The Ministry of Commerce and Industry formed the Baba Kalyani-led committee to study India’s existing SEZ policy, and it submitted its recommendations in November 2018.
- It was established with the broad goal of evaluating SEZ policy in order to make it WTO (World Trade Organization) compatible, as well as bringing in global best practises to maximise capacity utilisation and potential output of SEZs.
Challenges to SEZs
- Unutilized Land in SEZs: Due to a lack of demand for SEZ space as well as disruptions caused by the pandemic.
- Existence of Several Models: There are numerous economic zone models, including SEZs, coastal economic zones, the Delhi-Mumbai Industrial Corridor, the National Investment and Manufacturing Zone, food parks, and textile parks, all of which present challenges in integrating the various models.
- ASEAN Countries Competitors: Many ASEAN countries have tweaked their policies in recent years in order to attract global players to invest in their SEZs, and they have also worked on a set of skill development initiatives.
- As a result, Indian SEZs have lost some of their global competitive advantages and require new policies.
Why should the existing SEZ Act be replaced?
- The World Trade Organization’s dispute settlement panel ruled that India’s export-related programmes, including the SEZ Scheme, were in violation of WTO rules.
- India has been accused of providing tax breaks to exports via SEZs.
- Countries are not permitted to directly subsidise exports because it distorts market prices.
- SEZs also began to lose their allure following the implementation of a minimum alternate tax and a sunset clause to eliminate tax breaks.
What distinguishes the DESH Bill?
- The DESH legislation goes beyond simply encouraging exports.
- It has a much broader goal of increasing domestic manufacturing and job creation through ‘development hubs.’
- As mandated by the SEZ regime, these hubs will no longer be required to be net foreign exchange positive cumulatively in five years (i.e., export more than they import).
- They will be able to sell more easily in the domestic market. As a result, the hubs will be WTO-compliant.
- The DESH legislation also includes an online single-window portal for granting time-bound approvals for the establishment and operation of the hubs.
Will these hubs provide any tax breaks?
- It’s still unclear yet The Draft Bill does state, however, that states and the Centre will be permitted to provide additional incentives in the form of tax rebates, incentives, exemptions, and duty drawbacks.
- Subsidy schemes for goods and services may be offered at these hubs.
- States and the federal government may take new steps to expedite clearances and simplify compliance.
Will selling in the domestic market be easier?
- Companies can sell in the domestic market with duties only on imported inputs and raw materials rather than the finished product.
- In the current SEZ regime, duty is paid on the final product when a product is sold in the domestic market; additionally, unlike in the case of SEZs, there is no mandatory payment requirement in forex.
- However, the government may levy an equalisation tax on goods or services supplied to the domestic market in order to bring taxes in line with those provided by units outside the country.
How will states participate in DESH?
- DESH will undoubtedly play a larger role.
- The commerce department at the Centre made the majority of decisions during the SEZ regime.
- States can now participate and even send recommendations for development hubs directly to a central board for approval.
- Furthermore, state boards would be established to oversee the operation of the hubs.
- They would be able to approve imports or procure goods, as well as monitor the use of goods or services, warehousing, and trading in the development hub.
The way forward
- If India truly requires special hubs, the government must address critical gaps in existing SEZ law through the DESH bill, which must be thoroughly considered before being introduced to Parliament.
- The law’s effective implementation could act as a growth driver in India.
