A Special Economic Zone (SEZ) refers to a limited geographical region set up by the government to incentivize fresh foreign direct investment (FDI) and enjoys relaxed economic laws. In the year 2000, the government had set a target of creating 100 million jobs and of achieving 25% of the country’s GDP from manufacturing by the year end 2022. Thus, the government had set forth a SEZ policy as a part of it s EXIM policy.
These economic zones are governed and regulated by the Special Economic Zones Act, 2005 which
essentially converted pre-existing Export Processing Zones (EPZ) to now ident
ify as SEZ’s. They are vital for employment generation in the country as well
as increasing balance of trade is foreseeable. Exports generated from these
zones in the last half a decade has reflected an exponential growth. In India
there are 423 formally approved zones, attracting a total investment of approx.
Rs. 5,37,657,67 Crore.
TYPES
OF SEZs
SEZ covers
a broad range of specific zone types which include:
1) Free-Trade
Zones (FTZ)
This is an area usually organized around major seaports,
airports and national frontiers within which goods are landed, handled,
manufactured and re-exported but are not subjected to custom dut ies unless the
goods are moved to consumers within the same country. These areas are deemed
foreign territory.
The Government of India introduced a Free Trade and
Warehousing Zones (FTWZ) Policy as a part of it s Free Trade Policy 2004-2009,
to increase infrastructure and attract employment in underdev eloped parts of
the country. Arshiya International Ltd was India's first fully functional FTWZ,
set up in 2011.
2) Export
Processing Zones (EPZ)
The concept of EPZs in India has been since the early
1970's, the first one being Kandla Free Trade Zone (KAFTZ), in Kandla, Gujarat.
They are clusters of aggressive economic activity, specially designed for the
growth of Exports by way of tax rebates, fiscal incentives etc.
In addit ion to the upgradat ion of labour, advancement
of technology and infrastructural development , EPZ promote FDI and channel
foreign exchange for the country.
There exists three t
ier-management system wherein the first tier is headed by the Commerce
Secret ary, Ministry of Commerce. Second tier is headed by Addit ional Secret ary,
Board of Approvals, responsible for examination
of proposals
and new enterprises.
The three
t iers are monitored by the Development Commissioner.
3) Free
Zones (FZ)
Free zone is an area adjoining a port that permits
the dut y-free entry of foreign
goods intended for re-export. There are 12 major free
ports in India.
4) Industrial
Estates (IE)
It is developed over an area unto 1500 acres at a
particular place for the growth of small scale sector wherein infrastructure
such as roads, power and other utility services are provided to facilitate the
growth of indust ries and to minimize adverse impact of economic development on
the environment.
5) Urban
Enterprise Zones
They are similar to FTZ when it comes to tax incentives,
except they are located closer to urban areas and attract skilled labour.
ISSUES SURROUNDING THE SUNSET
CLAUSE
Some crucial benefits available to SEZ’s include relaxed
taxation laws, both indirect and direct tax exemptions; relaxed labour regulations i.e. no labour unionization is allowed and relaxed custom
dut ies. Thus, SEZ’s have proved to be an attractive
policy to foreign
investors bringing
FDI in the country.
However recurrent uncertainty
in government policies, especially tax has been
a burden. There has been a push towards establishing a Direct
Tax Code (DTC) which is meant to replace the Income Tax Act (ITA),
1961 and all tax rebates granted under the umbrella
of the existing
taxation regime.
Under Section 10AA of the ITA,
100% income tax exemption is
provided on export income for SEZ
units for the first 5 years, 50% income tax exemption is provided for the next 5 years and 50% income
tax exemption is provided for the ploughed back export profit for the subsequent
5 years if the unit has commenced
operations from 1st
April, 2006 onwards and this tax holiday expires on 31st March, 2020.
Central Board of Direct Taxes (CBDT) in an effort to
phase out corporate tax exemptions had introduced sunset clauses to terminate
Direct Tax benefits including weighted deduct ions on capital expendit ure.
For example, laying and operating petroleum product
pipelines, constructing hotels, warehousing facilities and even affordable
housing starting March, 2017 for SEZ developers and April, 2020 for SEZ units
but this move result into considerable loss of business for the country in
terms of reduced forex earnings and create unutilized assets within SEZs unless
the dat e of the Sunset Clause is extended.
BABA
KALYANI REPORT ON SUNSET DATE
In June 2018, the Ministry of Commerce and Industry
constituted a committee to study the existing SEZs in India and prepare a
policy framework to adopt strategic policy measures which comply with WTO
requirements and could help the country take advant age of global growth
opportunities and simultaneously develop it s own highly competitive
manufacturing and service base.
The committee
has proposed a
shift in SEZs philosophy from trade- competitiveness
to manufacturing-competitiveness,
from being export-oriented to tilting
towards broad-based Employment
and Economic Growth orientation.
Thus, the objective would no longer be focused
on exports rather it should
be a catalyst of economic and employment
growth, with the aid of quality infrastructure, ease of doing business and most notably
t he 3E’s namely; Employment and Economic Enclaves.
The aforesaid objective aims to bring together all
classes of investors that support economic activity for job creation and have
investments targeted towards supporting the domest ic demand.
RECOMMENDATIONS
BY THE COMMITTEE
1.
The Committee has pushed for a change in objectives; however it has
maintained that in order to revitalize
SEZ projects, wherein investors have
agreed to undertake long
term risks keeping in mind the original SEZ Policy, it is important to extend the
Sunset Date.
An extension would not only help in fully utilizing the existing
assets of SEZs but also in securing the investments made by developers as it
will provide more time for revenue generation.
2.
Compliance with WTO has
been extensively discussed in the report and it has been noted that
an extension of direct tax
benefit to “services" have neither been objected to by WTO member countries nor violate international agreements.
Hence, continuation of
income tax benefit on export revenue of
“Services SEZs” need to be considered in line with those extended for
International Financial Service Centre (IFSC).
3.
The report
has maintained that Sunset clause
ought to be extended and greater flexibility needs to be provided to investors on the minimum
numbers of years for lease.
The
SEZ Act was notified by Central Government in 2005 and its Rules were framed in
2006 which stipulates that minimum period of lease of plot for setting-up SEZ
should be 20 years.
If not for the Sunset
Clause, an investor would reasonably expect tax
exemptions to continue t ill 2026, thus for the sake
of maintaining certainty for
foreign investors looking forward to avail Direct Tax
benefit on export proceeds and were relying on the SEZ Policy,
an extension ought to be considered.
4.
Currently, Minimum Alternate Tax
(MAT) is levied at 20% and the Corporate Tax slab has been reduced
to 24% for MSMEs. Thus, effectively
there
is a marginal benefit of approximately 4% being given
to SEZs.
Addit ionally, the government
has decided that a special IT levy of
15% for new manufacturing units, is to be
instituted. Thus, since revenue depart ment is not losing a substantial
revenue for new manufacturing units, the sunset dat e for IT/ITES SEZs can easily be extended.
5.
Unified regulator for IFSC.
6.
Utilizing
Multi Services
SEZ IFSC for all the in-bound
and out-bound investment of the country.
POST COVID – 19 IMPACT
The impact
of Covid-19 on Special Economic Zones
has been immense. Due to restrictions on movement and other services,
applications for new SEZs have been delayed
and heavy investment on designat ed new zones may yield results
only in 2021 due to disrupt ed and halted operations.
By virtue of an Ordinance dat ed 31.03.2020, the initial extension was from 31st March, 2020
to 30th June,
2020.
Further, the Ministry of Commerce vide Notification dat ed 24.06.2020 direct ed the CBDT to extend the income tax holiday for
new units up to 3 additional months, i.e. till 30th September, 2020.
For
all the
new units that begin operations in
2020-21, to receive the benefit of the sunset clause, a
longer extension period will
motivate heavy investment flow, employment and competitive
foreign funds.
The Export Promotion Council for EoUs &
SEZs along with the Commerce Ministry had pondered upon and discussed the
possibility of extending the applicability of the sunset clause for SEZs for a
period of another 5 years.
INTRODUCTION TO INTERNATIONAL
FINANCIAL SERVICES CENTRE
An Int ernational Financial Services
Cent re (“IFSC”) deals with the flow of finance and financial product s to serve it s customers outside the jurisdict ion of the country in the
area where it is operational. In usual
course, IFSC is an unlisted company operating in a Special Economic Zone and serves persons
outside it s economic original
jurisdict ion to extend the world economy
to non-resident s in the form of
export services.
An
IFSC can be set up in a SEZ as per Section
18(1) of the Special Economic Zones Act, 2005 which st ipulates as
hereunder:
“The Cent ral Government mayapprove t he setting up of an Int ernat
ional Financial Service Cent re
in a Special Economic Zone and may prescribe t he requirement s for set t ing up and operat ion of such cent re.
Provided
that t he Cent ral Government
shall approve only
one Int ernat ional Financial
Services Cent re in a Special
Economic Zone.”
IFSC provides varied services like fund-raising for
companies and governments, asset and wealth management, global portfolio growth
in terms of exports and foreign exchange, optimizing business opportunity
across borders for intermediaries, facilitating mergers and acquisitions and
other risk management functions.
India’s first IFSC, Gujarat International Finance Tec-City (GIFT City) was
inaugurated in April, 2015 to promote infrastructure projects, technology,
foreign investment, employment among other services. The Global Financial
Centre in London and Singapore are the most successful t ill dat e.
SCOPE & POTENTIAL OF IFSC
DEVELOPMENT
There has been a keen
academic interest in the recent years towards developing IFSCs and in
the event that the government does not extend the dat e for applicability of
sunset clause for SEZs relating to tax holiday, there is a high probability
that such interest may be transformed into a need-of-t he-hour endeavor.
The massive scope
for IFSCs can be attributed to the benefits it receives from different
sectors. While it is remarked that overlapping regulatory norms have hindered
growth so far, competitiveness on an international scale can st ill be
achieved.
A.
2015 RBI Notification under Foreign Exchange Management Act, 1999
i.
Any financial institution set up will be treated as a non-resident Indian;
ii.
Any financial institution set up shall conduct business in foreign currency
with both
resident s & non-resident s, as prescribed; and
iii.
Any financial
institution set up will not be subject to other regulations
applicable to a “unit” located in the IFSC.
B.
Income-Tax Act, 1961
benefits
i.
IFSC is
subject to the same benefits and
tax exemptions under the Sunset Clause Section 10AA, if it is set up within
a SEZ before the expiry of such clauses; and
ii.
Under Section 80LA, an IFSC is granted
100% tax deduct ion for
a period of 10 consecutive years within a block of 15 years if it is a Banking Unit.
C.
Indirect tax benefits
i.
High relaxation of Securit ies Transactions
Tax (STT) & Commodit ies Transactions
Tax (CTT);
ii.
Exemption from custom
duties; if import of goods
is to set up a Banking
Unit; and
iii.
Exemption
from GST; if
there are services imported from other branches located in other parts
of the world.
While the aforesaid do not appear to look
like they can be leveraged
against the high scale advant
ages of the income
tax holiday provided
currently to SEZs,
the potential for expansion of IFSC is slowly being recognized.
CHALLENGES TO THE INDUSTRY AND
THE RECOMMENDATIONS
The extension on the applicability of direct tax holiday
granted to SEZs has made the indust ry hopeful of a longer sunset period,
perhaps until the end of the financial year if the government and CBDT are
convinced.
However, in case the Sunset Clause expires next year and
the effects of the Covid-19 pandemic do not ripple down, challenges and tough t
imes lie ahead. They can be countered
with solutions, albeit time consuming.
RECOMMENDATIONS
1. The first and foremost recommendat ion to the biggest hurdle of making operational already designat ed SEZs is to give them an opportunity
to make good the heavy investment by extending the date of Sunset Clause for the SEZ units.
A longer period, in terms of extension, counted in years would be preferable for the Indian sector to grow enormously.
2. All the suggestions
provided in the Baba Kalyani Committee
Report need to be given due attention, particularly the ones relating to reducing MAT & CTT need
to be implemented in
concurrence with creating a dispute resolution structure for notified
offences to create transparency and faith in the system.
3. The problem of long
term risk taken by SEZs
can also be countered by utilizing existing assets and securing
developers investment through optimal revenue generation in case the
tax holiday is extended t ill the end
of this
year. The recent CBDT notification
seems to be leaning towards this mindset
as well and the same needs to be continued.
4. The construction and development
of IFSCs
in India has to be given due notice by constituting an Expert Committee under the SEZ Act to look into the exact t imeline and
cost planning to benefit.
These special zones with regulations from different
sectors and huge tax and banking relaxations prove that IFSCs will also succeed
in raising the financial services export competitiveness of India in the global
context.
CONCLUSION
Since it is the general consensus that the major reason
for the export income generated by Indian SEZs is the tax holiday given to all
such units, it is reasonable that the indust ry as well as the government is
pushing for an extension of the Sunset Clause as provided in the Income Tax
Act, 1961.
Indirect tax benefits also seem to have an effect on
their growth and the designat ion of more than a hundred SEZs within one year
is test imony to that fact. Nonetheless, with foreign investors looking at
India for financial services
export and fund management, IFSCs can be the new hotspot
for the country to place it self on the global competitive index.
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