Sunil Jain: Killing SEZs, making a killing

RATIONAL EXPECTATIONS

At the outset, let me make it clear I'm not in favour of SEZs as I think they're bad tax policy and a pure real estate play""while the focus is supposedly exports, a unit has to export just one dollar more than the total value of imports, over a period of five years! But the way the government is going around changing the rules is making them so messy that the very purpose of an SEZ, of not having to deal with a bureaucracy, has got defeated. The constantly changing rules, as in the case of the Delhi and Mumbai airport privatisation, also leave the government wide open to being hauled to the courts. Worse, as Commerce Minister Kamal Nath confirmed the other day, it was always clear that if there were any disputes between ministries on rules that had a revenue impact, these would be referred to an empowered Group of Ministers (eGoM)""so Parliament was asked to pass an Act, and developers to submit their plans based on this, while only the government knew fully well the rules could be changed at any point in time!

While there's a debate about the minimum threshold for IT SEZs (10 hectares is what the commerce ministry wanted, finance wanted 25, and the eGoM has waived even this in favour of the original built-up area criterion), this column focuses on just the multi-product SEZs, where there is no dispute on the minimum size of 1,000 hectares.

Under the rules as they stand today, an SEZ developer will have to use 250 hectares at least for what's called the processing area, which is sealed off from the rest of the SEZ and is a customs-bonded area. In the remaining 750 hectares, the developer can build shopping malls, commercial complexes, hospitals, housing areas, whatever.

This is where the real estate play comes in. The developer gets a tax break on all the buildings on the 750 hectares while, if he built a housing/shopping/hospital complex in a non-SEZ area, he wouldn't. But since the housing/hospitals, etc. can be used only for the SEZ, which is supposed to be to boost exports, where's the problem, right? Well, under the rules as they stand, the housing/offices can be leased (they can't be sold, but a 99-year lease is always possible) to non-SEZ people as well!

Presumably, after the Act got passed, someone in the government woke up to this, or maybe the tussle was going on and the government decided to get it passed in Parliament anyway""in the case of the Delhi and Mumbai airports also, the Planning Commission figured out the real estate play after the bids had been called for, and fought a huge inter-ministerial battle to get 250 acres or so of surplus real estate knocked off from the projects. In the case of the SEZs, this got passed on to the eGoM.

Though the recommendations of the eGoM are yet to be notified and various rules/regulations yet to be modified to reflect this, what the eGoM is reported to have recommended is hilarious, or horrifying, depending upon whether you're an SEZ developer. It was of the view that the 25 per cent processing area be increased to 50, so on the 1,000 hectare area, only 500 hectares can be used for building commercial complexes, townships, malls, and so on. From my point of view, that's a good thing as it reduces the real estate play in the SEZ, but just imagine what that does to developers who've based their profit streams on 750 hectares for this.

It gets worse. The eGoM is of the view, again rightly so but far too late, that allowing all commercial complexes/houses and so on to be leased to outsiders is unfair, given that the huge tax breaks were all justified in the name of exports, and so it has put a rider to this. It is of the view that at least 75 per cent of the commercial complexes/houses should be given to people working within the SEZ and the rest to outsiders""that is, the real estate play for the outside world gets reduced to a sixth of what it is right now. Since the SEZ lot will obviously go to court, claiming they'd bought the land and got bank finance under different profit projections, the government will either delay/put off the eGoM's suggestions or make them prospective. That is, the lucky few who've come in make a killing, and the rest have to actually work on exports to make some money.

There's more. It's also proposed facilities like hospitals and hotels be subject to a formula. So, for every one outsider that comes in, there must be one SEZ user""I'm sorry, you may be dying, but under the rules, we can attend to you only after we get one more patient who lives in the SEZ! Or maybe the hospital-to-hospitality chain will be divided into two parts, one for residents, the other for non-residents. Presumably, a Deputy Development Commissioner (Hospital and/or Hospitality) could administer this! If you lease a house to an SEZ staffer for 99 years, and he quits his job after three, how is he to be stopped from selling it to an outsider?

There's also a proposal to link the tax breaks the developer gets to this formula. So, he might get a tax break on the 1 million houses he builds right now, but under the eGoM formula, maybe this could be restricted to just 5 lakh houses. For the hotels, let's see, 60:40 or 50:50?

And we thought the concept behind SEZs was to simplify and de-bureaucratise things!