SEZs - A BIG FLOP SHOW

By Ruma Dubey

A few years ago, Special Economic Zones or more popularly recognized as SEZs were the toast of India Inc.  One third of India’s export till date comes from SEZs. The then Commerce Minister, Kamal Nath was applauded for his efforts taken to boost SEZs. But times have changed and so have preferences. SEZs today seem like a bad word and the same Mr.KamalNath has a needle of suspicion now hovering over him.

A month ago when the ministry of commerce reviewed the SEZ policy, it was found that a mere 143 of the 583 approved SEZs had commenced operations. More importantly, out of the 104 approved SEZs in Maharashtra, only 18 have gone into production, against Gujarat's 45 approved and 13 in production. Infact 27 approved SEZs in Maharashtra have submitted applications for withdrawal as they find SEZs unviable due to current economic situation. About 202 of the 583 companies that held the rights to build an SEZ have withdrawn - Bata, Dr Reddy's Essar, DLF, Omaxe and Unitech are prominent few.

Given the failure of SEZs to take off, irrespective of the global turmoil and other issues, the moot question which has come to the fore is – why such a high rate of failure? This included the big ticket SEZs of Reliance, GMR, GVK, Adani, Unitech and DLF.

A quick list down of reasons why SEZs are currently a flop show:

·         Non availability of land

·         Ambiguity on tax exemptions to new SEZs, which under revised DTC draft states that tax exemptions for SEZs will be confined to the existing units.  So when DTC comes into effect, the status of new SEZs on tax angle remains in a blur.

·         Environmental protests

·         Lacklustre realty sector

·         Procedural delays

·         Lack of attractiveness in the SEZ in face of the changed fiscal regime

·         Absence of single window system

·         Large number of states not having an SEZ policy or Act to enable provision of the benefits envisaged under the SEZ act

Infact the tax angle gets murkier with the Union Budget of FY12 stating MAT of 18.5% will be charged on the book profits of SEZ developers and units, effective April 2012.  The Budget has also proposed to impose dividend distribution tax on SEZ developers. Earlier, SEZ developers and units were exempt from MAT under Section 115 JB of the Income Tax Act. Not that this alone is the reason but given the lack of demand in realty sector too, the developers just no longer see any lure of money in developing SEZs. At this juncture, all seem to be unanimous in their opinion that SEZs are simply not worth it.

Under the SEZ Act, units operating in SEZs get 100% tax exemption on profits earned for the first five years, while developers get exemption for ten years. There is also an additional 50% exemption for the next five years and another 50% exemption on re-invested profits in the following five years.

From being tax free, to suddenly now be taxed at around 20 to 21% would surely hurt the smaller SEZs. More importantly, what then remains the lure for SEZs? Maybe the Finance Ministry needs to issue a clarification, stating whether the MAT will be applicable to new SEZs? But right now, the confused tax angle has just added insult to injury.

Irrespective of the MAT, the irrefutable truth is that come April 1st 2012, the Direct Tax will usher in tax for new SEZs. So if it is MAT this fiscal, it will be Direct Tax Code in the next.