SEZ Amendment Bill 2023 may replace DESH Bill, focus on ease of doing business

SEZ Amendment Bill 2023
The government is considering replacing the DESH Bill with an SEZ Amendment Bill which would create a more favorable fiscal environment and integrate SEZs better with the domestic market.

SEZ Amendment Bill 2023: The DESH Bill is currently undergoing various revisions, with the government considering its replacement by an SEZ (Special Economic Zones) (Amendment) Bill, 2023. This proposed amendment could eliminate the need for new legislation by simply updating the existing one. Notably, the government has withdrawn the proposal of new direct tax incentives for units in SEZs and plans to bring the amended Bill to the Cabinet for approval shortly.

The Centre is also considering permitting the continuation of previous tax exemptions for these units as part of the proposed amendments to the SEZ Act, 2005. The aim of updating the SEZ Act is to create a level playing field in India, ensure compatibility with the World Trade Organisation (WTO) framework, and replicate the success of SEZs observed in other countries such as China.

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By replacing the DESH Bill with an SEZ (Amendment) Bill, 2023, the commerce department intends to establish a more favorable fiscal environment, adjust Customs regulations, and facilitate better integration of SEZs with the domestic market. Such integration is critical to prevent companies within these zones from being disadvantaged due to limited market access. Whether through the DESH Bill or the SEZ Amendment, the legislation will also respond to the longstanding call for SEZs to be permitted to sell domestically and for all duties waived on raw materials to be reimbursed.

Previously, the government had planned to introduce new direct tax incentives through the Development Enterprises and Services Hubs (DESH) Bill, 2023. However, this approach met with significant opposition from the Ministry of Finance. The revised plan will allow SEZ developers to continue benefiting from pre-existing direct tax benefits for their designated period without offering additional incentives.

The anticipated legislation envisages permitting the sale of SEZ-manufactured products in the domestic market without imposing import duties. This policy aims to put SEZ units on an equal footing with non-SEZ units that enjoy the benefits of zero or reduced import duties through free trade agreements.

The initial DESH Bill proposed a reduced corporate tax rate of 15% for new units in SEZs, as part of a strategy to promote these zones as India’s future manufacturing centers. SEZs in India operate with unique economic regulations, being considered foreign territories with an emphasis on export promotion. With the revised SEZ Act, the government plans to shift the focus from exports to a broader economic strategy that fosters manufacturing, investment, and integration into global value chains to stimulate growth.

Other proposed amendments include enhancing the single-window clearance system, establishing a uniform regulatory framework, and developing a contemporary dispute resolution process.

The DESH Bill, introduced last year, has encountered several hurdles, leaving its status uncertain. The finance ministry particularly objected to a clause that allowed sales in the domestic market, with duties applicable only to imported raw materials and not on the finished products. The ministries of finance, and commerce and industry have been deliberating over the DESH Bill for more than a year, grappling with issues such as the partial de-notification of zones and sales to the Domestic Tariff Area (DTA). The bill was initially announced by Finance Minister Nirmala Sitharaman during the Union Budget in February 2022.

The draft DESH Bill aimed to establish “development hubs” to stimulate economic activity, employment, global supply and value chain integration, competitive manufacturing and exports, infrastructure development, and investments, including in research and development (R&D). These hubs would encompass existing SEZs.

In October 2023, the government reinstated the positive net foreign exchange (NFE) requirement for SEZ units—a criterion omitted from the original DESH Bill. This requirement will also be maintained in the new legislation, as it aligns with the WTO framework, following a settlement of disputes between India and the US in June. Additionally, a proposal to fix concessional corporate tax rates until 2032 was withdrawn.

The current SEZ Act, implemented in 2006, has not fully met its objectives. While intended to establish export hubs and enhance manufacturing, SEZs have diminished in appeal due to the imposition of a minimum alternate tax and the introduction of a sunset clause for tax incentives. At present, there are 268 SEZs, employing approximately 2.3 million people, with a significant 64% concentration in states like Tamil Nadu, Telangana, Karnataka, Andhra Pradesh, and Maharashtra. When the SEZ Act of 2005 was enacted, it converted several existing Export Promotion Zones into SEZs. The government is now evaluating whether new legislation is necessary to revamp India’s SEZs, with a decision likely before the winter session of Parliament.