In the Union Budget 2022-23, the Central Government is likely to propose certain amendments to the Special Economic Zone (SEZ) Act to reduce the compliance burden and allow companies to sell their products in the domestic market without additional customs duty.
The proposed amendments in the SEZ law include relaxation in the Net Foreign Exchange (NFE) positive obligation, acceptance of payment in Indian Rupees, the continuation of operations within SEZs like any other place without having to comply with all the elaborate compliance requirements, etc.
The Government is considering relaxation of the NFE positive parameter, wherein an SEZ unit must earn more in foreign exchange through exports than the forex it spends for inputs and travel-related expenses.
The NFE positive criteria made it compulsory for an SEZ unit to have an overseas business or foreign client. Another proposal being considered is allowing SEZ units to get payment in rupees for the supply of services to Domestic Tariff Area (DTA). It has often been argued that when two units in the country are transacting with each other there was no valid reason in promoting the currency of another country. Moreover, this requirement also increases the burden on DTAs to buy foreign exchange.
The infrastructure within the SEZ is good for most companies, however, as tax holidays come to an end, many companies may move out of SEZs as there is a significant compliance burden on an SEZ unit. To overcome the same, the Government may allow entities to continue to operate from SEZs like any other area without having to comply with all the elaborate compliance requirements, i.e., the companies will be given an option to continue operations within SEZ and follow regulations at par with any other DTA unit.
The Commerce Ministry is also working out the modalities to allow companies to be partially de-recognised so that their areas can be used for other purposes. The changes could allow SEZs to offer additional commercial and residential holdings within their premises.
Other proposals being discussed include allowing domestic units to set up in the unutilised area of SEZs and co-exist with SEZ units with proper monitoring. The suggestion of allowing SEZ units to do job work for DTA units for better capacity utilisation is also under consideration before the Finance Ministry.
It is a general understanding that the SEZ policy has leveraged those in the services sector, while companies in the manufacturing segment have languished. In 2018, an expert committee led by Bharat Forge chairman Baba Kalyani recommended significant changes in the SEZ policy, calling for separate rules and procedures for manufacturing and service SEZs. Many changes in SEZ legislation are expected to be based on recommendations of the expert committee, whose report was submitted in November 2018.
The Commerce and the Finance ministries are often at loggerheads over the SEZ policy on tax incentives to SEZ units. The Department of Commerce has been looking to make changes in the SEZ norms for some time now, and it appears to have recently received an in-principle approval from the Finance Ministry.
While the Commerce Ministry rewrites the legislation, the Finance Ministry is likely to announce a simplification of SEZs in the upcoming Union Budget 2022-23, showing better collaboration between the two wings.
The decision of the government to relax SEZ norms stems from the fact that a number of them operate at sub-par levels and have suspended operations also. Companies are looking to move out of SEZs as there are no additional tax benefits available now. The changes in the norms will help COVID-hit SEZs to better utilise their idle capacities and operate with a reduced compliance burden.
Relaxations and incentives for SEZs are important for the zones to stay attractive for investors and units despite the exhaustion of income tax incentives. The proposed amendments in SEZ laws are expected to revitalise these zones and realise India’s export targets in the coming years, increase job opportunities and overall momentum.
(Prabhakaran is Partner and Leader - Indirect Tax; and Shah, Director - Indirect Tax, BDO India)