While announcing major changes to the Foreign Trade Policy on April 18 this year, the commerce minister said the Special Economic Zone (SEZ) scheme had not been able to realise its full potential. To revive investor interest in it, he spelt out a number of decisions taken after a comprehensive review of the SEZ Policy and year-long consultations with stakeholders. Last week, the SEZ Rules, 2006 were amended to give effect to the announcements.
A new Rule 74A says an SEZ Unit may opt out of an SEZ by transferring its assets and liabilities by way of transfer of ownership, including sale, subject to certain conditions.
This will be allowed if the unit has a valid letter of approval, as well as lease of land, for not less than five years on the date of transfer and the unit has been operational for a minimum period of two years after the commencement of production as on the date of transfer.
Procedurally, such sale or transfer transactions shall be subject to the Approval Committee. Naturally, the transferee should fulfil all eligibility criteria applicable to a unit. The applicable duties and liabilities, as calculated under Rule 74, as well as export obligations, if any, shall stand transferred to the transferee unit, on the same terms and conditions.
Henceforth, a multi-product SEZ can be set up with a minimum area of 500 hectares (200 ha in specified areas) and a sector-specific SEZ can be set up with a minimum area of 50 ha. One more sector can be added with every addition of 50 ha (25 ha in specified areas). Sectoral broad-banding to encompass similar or related areas under the same sector has been allowed.
The minimum land requirement for setting up information technology or IT-enabled service SEZs has been abolished but the minimum built-up area criteria is stipulated at 100,000 sq metres for an SEZ at Mumbai, Delhi (NCR), Chennai, Hyderabad, Bangalore, Pune and Kolkata; 50,000 sq metres for specified class B-cities and 25,000 sq metres for other cities. Additions to pre-existing structures and activities being undertaken after the notification would be eligible for duty benefits similar to any other activity in an SEZ.
Even with all these changes, whether the SEZ scheme will revive is doubtful, as entrepreneurs find exporting from Domestic Tariff Area (DTA) units more profitable. The units in DTA get benefits under the Focus Product Scheme, Focus Market Scheme, etc, that give them two to seven per cent of the Freight on Board value of exports as duty credits. DTA units can import capital goods and inputs required for export production duty-free.
Even service providers can earn duty credits under the Served from India Scheme. DTA units not importing their inputs duty-free can earn duty drawback at notified rates.
These benefits for DTAs far outweigh the income-tax concessions that SEZ units get, especially after the imposition of Minimum Alternate Tax on the latter.
With entrepreneurs unwilling to move to an SEZ, the latter's developers find no takers for the infrastructure they create. This situation looks unlikely to change even after the recent changes.