Recalibrating SEZs in DESH Bill: Net foreign exchange criterion may return

The commerce department is set to make changes in some of the earlier proposals under the Development of Enterprises and Services Hubs (DESH) Bill, which have been major stumbling blocks in the passage of the new legislation overhauling the existing special economic zones (SEZs).

The new legislation might reintroduce the ‘positive net foreign exchange (NFE)’ criterion, a primary requirement for SEZ units, and remove the proposal of a ‘freezing concessional corporation tax rate until 2032’, people aware of the matter told Business Standard.

This move assumes significance as it will put an end to the long-drawn-out differences with the revenue department, paving the way for revamping SEZs through new legislation.

The commerce department has circulated a revised proposal for the Cabinet on the DESH Bill. Once finalised, it will go to Cabinet for consideration, they said.

During inter-ministerial consultations of the draft Bill prepared by the commerce department last year, the finance ministry’s revenue department raised objections regarding some of the proposed fiscal incentives. 

Besides, it believed that the Bill was being overly flexible in integrating development hubs with the domestic market, without any major export obligation for them.

“Upon the revenue department’s insistence, the commerce department is ready to remove some of the earlier proposed clauses, such as the exclusion of the concessional corporate tax provision, and the continuation of the NFE criterion (among others),” one of the persons cited above said.

For instance, the commerce department wanted to do away with the controversial NFE earnings as a criterion for the evaluation of such units since the government wanted to make the new law for SEZs compliant with the World Trade Organization (WTO) norms.

The finance ministry, on the other hand, believed that in the absence of the NFE criterion, there would be no push for these units to focus on exports. Moreover, one of the key ideas behind setting up SEZs was to enhance exports.

Under the existing SEZ Act, 2005, units in SEZs had to achieve positive NFE earnings, which means that the value of exports has to be more than the value of imports. Such units received certain subsidies and tax exemptions from the government for having a positive NFE, which resulted in a dispute at the WTO with the US four years ago. Now that the dispute has been resolved, there is no risk of continuing with the NFE criterion.

The Bill had proposed freezing the concessional corporate tax rate of 15 per cent until 2032 for all greenfield and brownfield units, subject to certain conditions, in these hubs. However, the finance ministry was not in favour of offering any tax concessions fearing it could kick-start a debate of extending the incentive for companies outside SEZs.

The finance ministry was also against the clause of allowing units to sell in the domestic market with duties to be paid only on imported raw materials and inputs instead of final products.

“One of the key demands of the industry was that they should be allowed to sell to domestic tariff areas/domestic markets on payment of import duties on inputs consumed and not on finished goods. The revenue department was against this idea. They are on board now on this,” the person said.

The DESH Bill seeks to set up ‘development hubs’ for promoting economic activity, generating employment, integrating with global supply and value chains, and maintaining manufacturing and export competitiveness, developing infrastructure facilities, and promoting investments, including in research and development.

Such hubs will also include existing SEZs. These development hubs will be further classified into enterprise and services hubs. While enterprise hubs will permit both manufacturing and services activities, services hubs will permit only services activities.

The announcement of the DESH Bill was made by Finance Minister Nirmala Sitharaman in the Union Budget in February 2022.

REMOVING STUMBLING BLOCKS
 

- Finance ministry has no objection to the clause of allowing units to sell in the domestic market by paying import duties on inputs consumed and not on finished goods
 

- Revised proposal for Cabinet on DESH Bill has now been circulated

- Announcement of DESH Bill was made by Finance Minister Nirmala Sitharaman in the Union Budget in February 2022