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Developers keep options open on regaining tax-free status for land

Developers keep options open on regaining tax-free status for land
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First Published: Sun, Sep 20 2009. 11 25 PM IST

 Time of uncertainty: DLF group executive director Rajeev Talwar says it’s too early for a decision as demand for IT and SEZ space is down. Harikrishna Katragadda / Mint
Time of uncertainty: DLF group executive director Rajeev Talwar says it’s too early for a decision as demand for IT and SEZ space is down. Harikrishna Katragadda / Mint
Updated: Sun, Sep 20 2009. 11 25 PM IST
New Delhi: Although the government may allow developers who have scrapped plans to build special economic zones (SEZs) to again notify the land in their possession as tax-free enclaves, there are no takers for it so far.
Time of uncertainty: DLF group executive director Rajeev Talwar says it’s too early for a decision as demand for IT and SEZ space is down. Harikrishna Katragadda / Mint
“I don’t think there is any problem in that,” a commerce ministry official told Mint. There had been no clarity regarding this as the government’s SEZ regulations are silent on the issue.
A notification is required for SEZ developers to claim tax benefits offered for such enclaves, aimed at promoting investment and exports.
On the back of a liquidity crunch last year and slump in demand for space in SEZs, some realty firms including DLF Ltd and K Raheja Universal Pvt. Ltd had approached the board of approval (BoA) for SEZs to denotify their SEZs.
The BoA, an arm of the commerce ministry, approved denotification of the SEZs provided the companies paid back tax benefits they availed of while developing the SEZs.
DLF has denotified five of its proposed SEZs at New Delhi, Gandhinagar, Sonepat, Kolkata and Bhubaneswar. Raheja has denotified its 13ha IT zone in Navi Mumbai. The company has also surrendered about half of the 20.65ha of another SEZ in the same area.
Ten other developers have approached the BoA seeking denotification of their tax-free enclaves. The board will consider these applications in a meeting on 5 October.
Raheja and DLF said that although they are not looking at again notifying the land in the immediate future, they are keeping their options open.
“We cannot say whether we would again notify our SEZs,” said a Raheja official who didn’t want to be named. “It is a bit too early for that. This is a quarter in which we are mainly working on securing approvals for our residential projects. We will review our SEZ plans after a quarter.”
“It is too early to say,” said Rajeev Talwar, group executive director, DLF. “Because the decision to develop an SEZ does not depend on the financing part. It depends more on (the) demand for IT and SEZ space. Just because laws allow us to notify again does not mean that we will go back to it. Right now, demand for IT and SEZ space is down. We will keep our options open since real estate is a long-term business. But right now we are not looking at notification.”
PricewaterhouseCoopers executive director Vikram Bapat said: “The BoA would look into the change in the background under which the renotification is sought. If they find sufficient reasons, then they may renotify the SEZ. But it has to be on a case-to-case basis.”
L.B. Singhal, director general of the Export Promotion Council of EOUs (export-oriented units) and SEZs, said the law does not stop anybody to apply afresh, including those who have denotified their SEZs. “The only condition is the land should be vacant. However, it is upto the BoA to take a final call,” he said.
Meanwhile, the commerce ministry introduced a definition of vacant land for SEZs as land where “there are no functional ports, manufacturing units, industrial activities or structures in which any commercial or economic activity is in progress.” This would allow a developer who had denotified the land to construct buildings and get it renotified as an SEZ at a later stage.
When asked whether developers can use the denotified land for other commercial purposes, the commerce ministry official cited earlier said the ministry was not involved in it. “It is for the agencies who have allocated the land to decide. We have nothing to do with it.”
However, Sebastian Morris, professor at the Indian Institute of Management, Ahmedabad, said SEZs should not be denotified in the first place if the state government is involved in acquiring the land. “If the developer fails to use the land for the purpose for which it had been acquired, the land should go back to the original owners,” Morris said.
The issue of denotification was disputed till last year. Initially, the commerce ministry had maintained there were no provisions for denotification in the SEZ Act of 2005. The law ministry later clarified that the BoA had power to scrap the zones. The finance ministry has maintained that the tax benefits enjoyed by the developer of a notified zone had to be refunded before it was scrapped.
India was among the first countries in Asia to recognize the effectiveness of export processing zones in promoting external trade. Asia’s first such zone was set up in Kandla, Gujarat, in 1965.
With a view to overcoming shortcomings seen in that format, an SEZ policy was announced in April 2000 and a comprehensive SEZ legislation was enacted June 2005, which came into effect on 10 February 2006.
The country’s tax-free enclaves have seen investment of Rs1.08 trillion so far. Total exports from SEZs during 2008-09 were Rs99,689 crore, a 50% increase over the previous year.
Shabana Hussain contributed to this story.
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First Published: Sun, Sep 20 2009. 11 25 PM IST