DESH Bill likely to be reworked after finance ministry raises concern

The Bill, which will replace the SEZ law, is facing hurdles due to lack of consensus between the commerce and finance ministries

The Centre may have to revamp the Development of Enterprises and Services Hub (DESH) Bill since the finance ministry has raised concerns on some of the fiscal incentives proposed under it.

The DESH Bill will replace the existing special economic zone (SEZ) law.

At stakeholder consultations with the Department of Commerce, the finance ministry had expressed reservations about allowing greater flexibility for the integration of development hubs with the domestic market without major obligation or focus on exports, said people in the know.

Unlike current SEZs, the development hubs — revamped SEZs — will not be export-oriented under the new Bill.

According to the proposed fiscal framework, units operating in these hubs will be allowed to make sales in the domestic market with duties to be paid only on imported raw material and inputs instead of final products. The Customs duty on capital goods, such as machinery, computer equipment, and raw materials, will also be deferred.

While the bigger idea was to increase production from such units, implementing the clause could be tricky. 

“If these hubs are fully integrated with the domestic market, the revenue department’s concern is that even domestic tariff area (DTA) units would want these benefits and relocate to these hubs due to the working capital advantage they would get from deferment of taxes (under the DESH Bill). In that case, goods could then be transferred/sold primarily to the domestic market rather than exporting (since there is no net foreign exchange criteria),” said a person privy to the discussions.

“There could be situations where units may even declare them as SEZs/hubs and defer their duty payments since there is no export obligation anymore,” said the person quoted earlier.

There are also concerns around the clauses on allowing greater integration of these hubs with DTA, deferment of Customs duty on raw material, as well as freezing the current corporate tax rate of 15 per cent for units and hubs until 2032 for greenfield and brownfield units.

Offering such concessions for development hubs may lead to a situation where other departments may also seek such concessions for schemes they may devise and perhaps stir a debate on extending the incentive to all companies.

The finance ministry is yet to send written comments to the Department of Commerce, but the views were shared at stakeholder meetings, said another official. The Department of Commerce has not made the draft public yet.

Supposed to be tabled in Parliament’s monsoon session, the Bill is in a quandary due to lack of consensus between these two ministries.

Arpita Mukerjee, professor at Indian Council for Research on International Economic Relations, said in the DESH Bill there is a need for a measurable performance indicator for the fiscal incentives that will be provided to SEZs.

“Many of the indicators mentioned in the objective, such as additional economic activities, cannot be measured. It is also important to understand what incentives can be given and to whom,” she said. 

Queries sent to the finance and commerce and industry ministries remained unanswered until the time of going to press.