BackGovt allows dual use in non-processing areas of SEZs
So far, such facilities have been open only to units located within the SEZ premises and their employees
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New Delhi: The government has allowed developers of special economic zones (SEZs) to build housing and commercial premises in the non-processing area that they will be able to rent out to entities from outside the zones, offering a potentially lucrative incentive to developers of the industrial enclaves.
So far, such facilities have been open only to units located within the SEZ premises and their employees.
In a gazette notification dated 2 January to amend the SEZ Rules, 2006, the commerce ministry allowed dual use of social and institutional infrastructure including schools, colleges, socio-cultural centres, training institutes, banks and post offices within the non-processing area.
While core commercial activity of the SEZ units is undertaken in the processing area, the rest of the land within the SEZ is termed non-processing area.
Housing and commercial facilities for dual use cannot be more than 25% and 10% of the non-processing area, while an open area of not less than 45% has to be maintained within an SEZ. In the remaining 20% area, social and institutional infrastructure can be built. None of these facilities can be sold to third parties.
The commerce ministry said the non-processing area will be divided into two separate zones—one where the social or commercial infrastructure and other facilities are permitted to be used by both the SEZ and the domestic tariff area entities, and the other that will be exclusively used by the SEZ units.
While the first category of establishments will not enjoy any tax incentives, the second category of facilities will be eligible for tax concessions. The developer has to return all the customs duty, central excise duty, service tax, and such other central levies and tax benefits already availed of for the creation of infrastructure that will now be put to dual use, in full, without interest.
In case the developer fails to return the duties upfront, interest will have to be paid at the rate of 15% per annum from the day the amount becomes payable to the date of actual payment.
The SEZ developer will also need to take permission from the state government and return all local taxes availed of for such commercial use of its land.
The portion where the social or commercial infrastructure and other facilities are permitted to be used only by SEZ entities will be bonded and physically segregated from the rest of the non-processing area to benefit from the concessions.
Allowing dual use of social and institutional infrastructure may help rekindle developers’ interest in SEZs, which dwindled significantly after the government imposed minimum alternate tax (MAT) and dividend distribution tax (DDT) in 2011. Many developers sought to have their SEZs denotified.
While the commerce ministry has been demanding reversal of MAT and DDT on SEZs, the potential loss of revenue in a tight fiscal situation has prevented the finance ministry from doing so.
Answering a parliamentary question, commerce minister Nirmala Sitharaman in November said the finance ministry had rejected such proposals by her ministry. This is despite finance minister Arun Jaitley promising in his maiden budget in July that the government is committed to reviving SEZs and making them effective instruments of industrial production, economic growth, export promotion and employment generation.
“For achieving this, effective steps would be undertaken to operationalize the SEZs, to revive investor interest to develop better infrastructure and to effectively and efficiently use the available unutilized land," he said during that speech.
In a study commissioned by the commerce ministry to review the policy on SEZs, Delhi-based think tank Indian Council for Research on International Economic Relations recommended a more liberal sale of manufactured items from such zones in the domestic tariff area and restoration of the promised tax concessions to ensure certainty in tax principles and revival of investor sentiment.
However, it also maintained that such tax incentives may go against World Trade Organization principles and, hence, fiscal incentives need to be carefully designed.
According to latest data, 564 SEZs have been approved, of which 388 have been notified and 192 are operational. Statistics provided by the Export Promotion Council for export-oriented units and SEZs (EPCES) show that as of 31 March, SEZs have contributed an investment of ₹ 3.02 trillion and generated 12.8 million jobs.
Exports from SEZs increased from ₹ 22,840 crore in 2005-06 to ₹ 4.94 trillion in 2013-14, registering a compounded annual growth rate of 47%. Job creation in SEZs grew at an average annual growth rate of 35% between 2005-06 and 2011-12, against the national employment growth rate of 1.6%.
The change in guidelines will only be beneficial to SEZs which have already created the infrastructure in the non-processing area, but will not benefit the ones willing to build it, said P.C. Nambiar, chairman of EPCES.
“If somebody has to pay duties on the inputs used, it is as good as building anywhere in India. They can denotify the unused non-processing area land and build houses and malls. There is no reason to keep the SEZ tag and build these facilities without any tax benefit," he said.
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