The government is targeting SEZs for increasing foreign investment into industrial hubs to boost domestic consumption and exports. Aiming at a much wider economic objective beyond promoting exports to manufacturing and employment, the revamped SEZs will be renamed development hubs, according to a draft bill set to be introduced in the monsoon session of parliament.
Renamed Development of Enterprise and Service Hubs (DESH), they will be freed from many of the rules that burden SEZs: for instance, they will no longer be required to benet foreign exchange positive and will be allowed to sell in the domestic market much more easily.
On the other hand, the units operating within the new hubs will no longer benefit from direct tax incentives, which will be scrapped — a move that will make the hubs compliant with World Trade Organization rules.
According to the draft DESH Bill reviewed by Mint, the development hubs will be allowed to sell outside the demarcated area or in the domestic market with duties only to be paid on the imported inputs and raw materials instead of the final product.
This acts as a big deterrent in the current SEZ regime, as duty on the final product sold in the domestic market is levied on the inputs, making them more expensive. Besides, there is no mandatory payment requirement in foreign exchange.
The fate of India’s 268 operational SEZs—as of 31 March—remains unclear, but in all likelihood, they will covert to DESHs as the DESH Act will replace the current SEZ Act of 2005.
As selling goods in the domestic market from development hubs will be much more lucrative now, the Bill proposes an equalization levy for clearance in the domestic market.
The draft Bill does not limit how long units can store goods, which is one year currently. Besides, there is no mandatory payment requirement in foreign exchange.
India’s SEZ regime came under the WTO scanner in 2019 when it ruled that its SEZ policy violated WTO rules as it gave direct tax benefits to net-foreign exchange positive entities (earned more forex than they spent) for five years.
However, all customs duty exemptions allowed in the earlier law will also be available under the new Act.
Pratik Jain, a partner at Price Waterhouse & Co. LLP, said the Bill marks a “fundamental shift” from linking SEZs with exports to possibly leveraging the hubs for domestic consumption and increased employment generation. “The fact that states will be more closely involved and even existing industrial parks may be converted into these development hubs would mean bigger scale and increased efficiencies. The industry needs to start assessing the impact and potentially rebook their existing supply chain models, systems and processes,” said Jain.
Once approved, the department of commerce will likely implement the DESH Act by October-November. In the SEZ regime, most decision-making is being taken by the commerce department at the Centre, but now states would be able to participate in the whole process. State Boards would be set up to oversee the functioning of the development hubs. These would approve the import or procurement of goods in the concerned development hub and monitor the utilization of goods or services or warehousing or trading in the development hub, according to the draft Bill.
