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SEZs: Reviving Hope For Survival

Published on Fri, Aug 16,2013 | 23:01, Updated at Fri, Aug 16 at 23:23Source : Moneycontrol.com 

By: Abhishek Goenka- Partner & Gautham Lokande-Associate Director, BMR Advisors

The SEZ policy has been in the news lately for various reasons. In June, news reports indicated that the Commerce Ministry was contemplating to scrap the SEZ scheme since the actual performance had fallen short of the objectives for which the SEZ scheme itself was implemented. While this news had left the SEZ stakeholders worried, the bigger surprise was that it was reported soon after the reforms package for SEZs was announced as part of the Annual Supplement to the Foreign Trade Policy (2009-14) in April 2013. Now, as what should be a definite breather to the SEZ sector, the Commerce Ministry notified the amended SEZ Rules to implement the reforms package announced earlier.

The notification of the Special Economic Zones (Amendment) Rules, 2013 is by far the most significant change to the SEZ legislation since it was enacted in 2005. The revamped rules slash the area requirements for multi-sector SEZs to fifty percent of the earlier requirement. Setting up of a multi-sector SEZ required the developer to be in possession of a minimum land area of 1000 hectares which was contiguous and vacant and hence this found few takers. Further, acquiring large land tracts itself was a challenge in light of spiraling land prices, contiguity requirements and the other typical challenges connected with land acquisition. With the revised area requirement now being 500 hectares, the multi-product SEZs should now be an attractive proposition. The regulations now also permit for a graded scaling under which developers can create an additional sector/s for land parcels of 50 acres or more which forms part of a SEZ or in case of contiguous land added to a SEZ.

For sector-specific SEZs, the biggest windfall is to the IT/ITeS SEZs in respect of which the minimum land area norms have been done away with. Under the revised policy, IT/ITeS SEZs are only required to meet the built-up area requirement of 100,000 square meters and the provision requiring a minimum land area of 10 hectares has been eliminated. The norms are further relaxed for Category B and Category C cities in respect of which the built-up area restrictions specified is 50,000 square meters and 25,000 square meters respectively. Subject to the floor space index sanctions, land tracts of 8-10 acre parcels (and much lesser in Category B and C cities) would now have the potential to be developed as IT/ITeS SEZs. Not only will this relaxation result in decongestion of the metros but this should promote employment creation and development of ancillary sectors. Ideally, these reforms should increase the supply of quality office spaces to the IT/ITeS sector which itself has started performing brightly in this fiscal year.

Also, with the abundant availability of quality IT/ITeS office space, it will not be surprising if companies choose to consolidate their operations from the Domestic Tariff Area or STPI operations into SEZs. The SEZ regulations do not restrict existing business to relocate to SEZs as long as the income-tax benefits are foregone and more importantly there would be a significant incremental indirect tax savings that such companies will derive on account of the consolidation. 

The other important change is to extend duty benefits on the value additions to developments on land with pre-existing structures to be included within the SEZ. This should encourage developers who have already commenced construction of buildings or have unoccupied office space that would meet the policy criteria in their possession, to notify such buildings as IT/ITeS SEZs.  Sectoral broad-banding has also been introduced to encompass compatible and allied sectors and activities and this has been enabled by amending the definition of “Sector” in the SEZ Rules.  Further, exit rules for SEZ units have also been introduced to enable the transfer of SEZ units or assets forming part of SEZ units along with the attached duty obligations from one entrepreneur to another. .

If all goes well, the reforms should have the potential of increasing the number of SEZs manifold and one could hope that the sector would incrementally contribute its bit to the country’s deficit position by boosting exports.

 
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