Structure

• Introduction- briefly about SEZs
• Body – briefly describe the reasons for failure
• Conclusion- way ahead or suggestions can be included in the conclusion

Content

Special economic zones (SEZ)

• Setup under the SEZ Act,
• To boost exports manifold and thereby will generate foreign exchange, increase employment, increase in infrastructural development and to attract foreign investment (FDI).
• This is being done through sops like no taxes, availability of land, skilled labour
• Currently over 170 SEZs in India give employment to 10 lakh people and accounts for 40% of all export

Importance of SEZ policy

• A surge in manufacturing and export base would contribute to creation of jobs in
• attracting investments primarily for infrastructure
• The policy continues to be relevant from a Make in India perspective

Reasons for the failure of SEZ policy

1. The introduction of Minimum alternate tax and Dividend distribution tax have neutralized income tax benefits
   • Under the original scheme, businesses in SEZs were exempted from the minimum alternate tax (MAT) on book profits and developers were exempted from payment of the dividend distribution tax (DDT). But with indications that companies were misusing the policy for real estate arbitrage and that information technology companies were using the policy to recoup tax benefits that they lost when the Software Technology Parks of India (STPI) scheme ended, these exemptions were withdrawn. MAT was levied on book profits at the rate of 20 per cent, while DDT was levied at 20 per cent on dividends distributed to shareholders.
2. Predictability in taxation policies is a sine qua non for making the environment conducive for investment, whether foreign or domestic, so the withdrawal of direct tax benefits has been a setback for the SEZ programme and has affected its future prospects
   • Despite offering over 300 incentives and schemes for promotion of manufacturing at the Centre and state levels, manufacturing growth has not risen substantially. Therefore, incentives need to be carefully evaluated and studied. Incentives should not be the only reason for units to be located in SEZs. Success depends on the business facilitation measures Location, infrastructure, logistics and professional zone management are four key factors determining success of SEZ
   • The lack of proactive assistance from development officials
   • Another major reason for the SEZs languishing is the absence of external infrastructure The SEZs have to be connected with ports and airports with world-class roads and rail; ports and airports, too, have to be world-class, with Customs authorities adopting international best practices in trade facilitation.
   • The export incentives like Focus goods and Focus services scheme only for trade in DTA (Domestic Tariff Area). It neutralises the edge SEZs have over others
   • India has signed a number of free trade agreements (FTAs), with countries such as Sri Lanka, Japan and the Association of Southeast Asian Nations (Asean), under which import duties have been slashed to zero for several product This impacts local sales of SEZ units, which are taxed at higher rates.
   • Already existing IT industries moving to SEZ to enjoy tax benefits post tax holiday
   • Location- away from ports discouraging manufacturing units to
   • Small size of The largest size in India is about 14000 hectares, whereas the Shenzen SEZ in China is 50000 hectares. The smallest size is 10 hectares.
   • The situation further aggravated with the global economic downturn of 2008-09 when demand for Indian goods fell drastically and duty-free sale of SEZ products within the country was not allowed,
   • Tax incentives granted to SEZs are seen as breaching World Trade Organization rules that bar financial contributions by a government or public body. Units in SEZs still enjoy income-tax benefits. Other countries impose countervailing duties to negate direct tax subsidies, which reduces the competitiveness of exports from such enclaves. So far, 33 countervailing duty measures have been slapped on against India, second only behind China (42).

They haven’t been able to perform to the fullest

• Only 1/3rd of the approved SEZs are actually functioning and 52% of the land is idle(CAG)
• SEZs have only generated 1 million jobs in nine years while 9 million people require jobs every year(PC)
• Very few firms were engaged in multi-product manufacturing
• Preference for urban agglomeration by industries, preventing balanced regional growth
• Sectoral imbalance in SEZ : IT/ITES sector dominates
• Regional imalance : only 6 states accounts for approximately 90% of the export from
• Fall in share of exportable high value manufactured
• Fall in exports after 4% rise in 2013-14

A major reason for the success of SEZs in China was the creation of complementary infrastructure, power, roads and ports; these are lacking in India.

Inspite of these drawbacks, there have been certain positives such as –

1. Exports from SEZs account for about 1/4th of India’s exports
2. Indian exports from SEZs accelerated during the economic crisis
3. Development of peripheral infrastructure and growth of small-scale services around them
4. Helped in the growth of India’s IT sector through various tax exemptions and holidays

Way forward

• Rather than withdrawing MAT and DDT, discussions must be made on the level at which they can be
• A more predictable taxation policy for making the environment conducive for