The legislation governing Special Economic Zones (SEZ), which has been in force since 2005, has been subject to intense debates for economic and political reasons. The SEZ policy intended to create world class infrastructure, boost foreign exchange earnings and create jobs . The response to the policy from the industry in the initial years was overwhelming, especially from sectors such as IT. The economic slowdown in 2009 followed by the indication that the tax policy could shift towards investment-linked incentives under the draft Direct Taxes Code Bill made the SEZ scheme less popular.

The government, backtracking from the initial promise of a complete tax holiday, by withdrawing the Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) for companies located in SEZs, also acted as a negative.

In this context, sensing the need to revive interest in the SEZ policy, the Government announced significant reforms in this year’s Foreign Trade Policy.

What’s new?

The revamped rules slash the area requirements for multi-sector SEZs to 50 per cent of the earlier requirement of 1,000 hectares of contiguous and vacant land. Added to the requirement of aggregation of large land tracts, the developers had to deal with spiralling land prices and, in most cases, litigation and local regulatory challenges connected with land acquisition. Since the revised area requirement is only 500 hectares, the multi-product SEZs may now be a relatively more feasible proposition.

The regulations also permit for a graded scaling, under which developers of existing sector-specific SEZs can create additional sector (or sectors) by adding land parcels of 50 acres or more to such SEZs. This would enable developers of sector-specific SEZs to de-risk the overall development by catering to more than one industry without necessarily undertaking the burden of owning and developing 500 hectares of land.

The amendment that is likely to have the greatest impact is the freeing up of minimum land area criterion for IT and ITeS SEZs. IT/ITeS SEZs are now only required to meet the condition of built-up area development of 1,00,000 sq. m. and the condition of the SEZ area being a minimum 10 hectares has been done away with. The norms are further relaxed for Category B and Category C cities (50,000 sq. m. and 25,000 sq. m. respectively).

At a built-up area requirement of 1,00,000 sq. m., the underlying land area, subject to FSI norms, would work out to 8-10 acres, and hence this amendment has the potential to open up the SEZ sector to a whole wider set of developments, particularly in Tier-1 cities where besides the lack of availability of land, the costs are prohibitively high. It is hoped that the relaxation in the requirements in Category B and C cities would act as a catalyst to spur some SEZ development in smaller cities, as currently the development of IT/ITeS SEZs is largely restricted to Tier-1 cities.

With the abundant availability of IT/ITeS office space, one can expect IT companies to start looking at shifting or consolidating their operations from the Domestic Tariff Area or STPI operations into SEZs to leverage on the indirect tax savings that such companies will derive by virtue of being located in SEZs.

Pertinently, SEZ regulations do not prevent existing units from relocating into SEZs, provided the income-tax holiday is foregone by such unit.

Duty benefits

The other interesting amendment is the extension of duty benefits on the value additions to land added to SEZs. This provision would enable developers that have already commenced construction of buildings or have unoccupied office space to consider notification of such buildings as IT/ITeS SEZs.

The sectoral broad-banding is another move that should be welcomed by the industry. The provision enables compatible and allied sectors, including related R&D activities for the sectors, to be clustered together in a SEZ.

This would provide SEZ developers with greater ability to market the development to businesses in allied sectors.

Further, exit rules for SEZ units have also been introduced to enable the transfer of SEZ units or assets, along with the attached duty obligations, from one entrepreneur to another. Hitherto, there was no mechanism provided for SEZ units to exit from a SEZ on account of sale or shut down of business.

In summary, the amendments are timely and should provide some relief to the SEZ sector. The changes however fall short of expectations on several counts, including providing exit options to developers/co-developers through a sale of completed buildings which would have provided the much-needed liquidity to the developers.

It would also have enabled a more sustainable business model, whereby the risks and rewards related to the development of an SEZ vis-à-vis ownership of a completed asset are segregated. Lastly, the silence on roll back of MAT and DDT will continue to be a sore point with the industry and it is hoped that these changes are not a case of too little too late!

(The author is Partner, BMR Advisors. The views are personal. With inputs from Gautham Lokhande, Associate Director, BMR Advisors.)

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