SEZs - REMAINS A BIG FLOP SHOW

By Ruma Dubey

The woes for SEZ continues. A few years ago, Special Economic Zones or more popularly recognized as SEZs were the toast of India Inc. 30% of India’s export till date comes from SEZs and 166 SEZs are currently operational. 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.

The latest report shows that they are not yet back in flavor. Four developers, including L&T Chennai Projects and Welspun Anjar have approached the Commerce Ministry for surrendering their proejcts, which in technical parlance is known as “seeking de-notification” of the SEZ. Apart from the global and domestic economic slowdown, it has blamed it also on the introduction of minimum alternate tax and dividend distribution tax. This apart, 16 developers have sought more time from the government for implementing their projects. And if one may recollect, in early Jan’13, Commerce Ministry approved Reliance Industries’ proposal to de-notify its SEZ in Gujarat. Over the years, many like Bata, Dr Reddy's, Parsvnath, Videocon, Essar, DLF, Omaxe and Unitech are prominent few who have exited SEZs.  

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 is one angle which is a big deterrent. The Govt in the FY12 Budget had stated that MAT of 18.5% will be charged on the book profits of SEZ developers and units, effective April 2012. The Budget 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.