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Freeing up the Special Export Zones


GoI’s move to overhaul special economic zones (SEZs) through the Development of Enterprise and Service Hubs (DESH) Bill is sound. The 268-odd zones, created by a separate law in 2005, to serve the export market failed to take off. Large companies made a beeline to milk tax breaks in these enclaves, resulting in a misallocation of resources and loss of revenue.

The fiscal package in the DESH Bill may include levying 15% corporate tax for units set up in these hubs until 2032. A lower rate, rather than a full tax holiday, is pragmatic. It could motivate global players to set up shop. Today, new domestic manufacturing companies are also charged 15% corporate tax, provided they eschew exemptions and minimum alternate tax.

Another change includes tweaking the eligibility criteria for SEZ units to link them to investments in R&D, innovation and employment generation rather than forex earnings. This, too, is sensible. The SEZ Act, 2005, made it mandatory for units to achieve positive net foreign exchange earnings.

Exports should be more than imports over five years from the start of production to be eligible for tax concessions and exemptions. This was challenged at the WTO, making the case for a policy overhaul compelling. More concessions for SEZ units to sell in the domestic tariff area (DTA) will undo the harm to the DTA industry by unequal competition from SEZ units. A policy framework that is non-discriminatory and minimises import tariffs would be a better bet.

Allowing partial denotification of these hubs to free up areas not in demand is a good idea. GoI must provide robust infrastructure and administration and improve the regulatory environment for investors. Global trade touched $28.5 trillion in 2021. India‘s share is still less than 2%.



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