Monday, March 19, 2007

`Uncertainties on SEZs must be removed'

G. Srinivasan

After enactment of the SEZ Act, investors gained confidence in the
policy's stability and continuity, and the response has been

The troubles at Nandigram in West Bengal over the acquisition of land
for a Special Economic Zone (SEZ), the process of rapid
industrialisation through exclusive export manufacturing locations, with
a single-window clearance for projects, has suffered a distinct jolt. An
empowered Group Of Ministers (eGoM), headed by the Union External
Affairs Minister, Mr Pranab Mukherjee, is in limbo after its last
inconclusive meeting on January 22. Yet, the Commerce Ministry
mandarins, including Minister Mr Kamal Nath, have been pitching for
operationalising all SEZs, accorded formal approval and where land is in
the possession of the developers. They contend that the 234 SEZs that
have got formal approval involve 33,807 hectares of which roughly 17,800
hectares is owned/possessed by State Industrial Development
Corporations. The rest of the land is already with the developers, which
means no fresh acquisition would be involved.

Winding up the debate on the motion of thanks to the President's address
in Parliament on March 8, the Prime Minister, Dr Manmohan Singh,
expressed the concern of the House whether "a particular process of
industrialisation is leading to loss of availability of land at a pace
which has undesired consequences and those concerns have to be taken on
board." Not only did he say that the concerns arising out of land
acquisition must be addressed but emphasised that, "if we have made a
mistake in enacting the particular Act, we do not stand on any
formality; we will make necessary corrections."

It must be remembered that the Special Economic Zones Act, 2005 and the
Special Economic Zone Rules 2006 became operational only effective
February 10, 2006 and within just one year, the SEZ concept is being

For answers to the understandable agonies and uncertainties plaguing the
SEZ units, Business Line spoke to Mr L. B. Singhal, Director-General,
Export Promotion Council for SEZs and 100 per cent Export-Oriented Units

Excerpts from the interview:

What is the status of SEZs that were unveiled with much fanfare a year
ago only that threatens to be a flash in the pan?

Logically, legally and rationally we must notify all SEZs that have been
approved by the inter-ministerial body — the Board of Approval (BoA).
Based on such approvals, people have gone and acquired the land and
documents filed with the Commerce Ministry for notification. Similarly
cases approved by BoA and where land has been acquired hassle-free by
the developer in collaboration with the State government should also be
notified immediately.

The important message that was intended to be conveyed by the enactment
of the SEZ Act was stability and continuity of policy. Though the SEZ
policy was announced in the Exim Policy 2000, till the SEZ Act was
promulgated, there was no enthusiastic response from the global
investors in the SEZ scheme. Even in cases approved, financial closure
was not achieved. It was only after enactment of the SEZ Act that
investors got the confidence in the stability and continuity of the
policy and the response has been enthusiastic. Hence we must remove all
uncertainties immediately.

What of the freeze on further SEZ notification and its fallout?

Yes, certainly by putting on hold notifications of SEZs that have been
approved by BoA, there is a feeling of uncertainty in the minds of
global investors. Developers such as Brandix from Sri Lanka, Ascsendas
from Singapore, Taiwanese investors, and others are becoming a bit
jittery because such formalities as notification, after due approval,
are completed in days in other countries.

BoA comprises representatives from the Ministries of Commerce, Finance,
Home Affairs, Law and others and these decisions have been taken by
consensus, as required by the SEZ Act. International investors are
naturally saying one thing: "No surprises". Unfortunately, we have been
springing up one surprise after another creating uncertainties in their
business calculations.

Can you explain the imposing of export obligation (EO) on the SEZ units,
as proposed by the Finance Ministry at the last eGoM?

One needs to look at the background of the formulation of the SEZ policy
and the enactment of SEZ Act. When it was an Export Processing Zone
(EPZ) policy, then the EPZ units were getting the benefit of duty-free
import of raw material, capital goods and exemption from 100 per cent
income-tax for 10 years.

At that time they were subject to the value addition and EO norms. EPZ
units were also entitled to sell in the domestic market at concessional
duty of 50 per cent. The SEZ policy sought to simplify the procedures
and make the life of SEZ units easier.

SEZ units are basically getting the same benefits that they were as EPZ
units — such as duty-free import and IT exemption. On the contrary, the
benefits have been curtailed. They could sell in the domestic market at
a concessional duty of 50 per cent but, now, in the SEZ scheme, they
have to pay 100 per cent duty on the finished products.

Earlier, they were entitled for 100 per cent IT exemption for 10 years.
Now they get 100 per cent exemption for five years, then 50 per cent for
the next five years, and 50 per cent exemption for another five years on

Hence, while devising the SEZ package, the main consideration was to
simplify the procedures and, accordingly, the value addition and EO
requirements have been done away with. Hence we must not bring
regulations applicable to the EPZ.

If that were the case then SEZ units would certainly be asking for
allowing sale in the domestic tariff area (DTA) at 50 per of duty. It is
imperative that the provisions of the SEZ Act and Rules must be allowed
prevail without any interruption and the scheme provided stability and

What are your views on SEZs making ITA-1 (International
Telecommunication Agreement) items and selling substantial portion of
production in the domestic market?

ITA-1 items are allowed to be imported into the country without any
duty, as per international agreement. If we do not encourage
manufacturing of these products, they would continue to be imported
without any duty.

By encouraging manufacturing of these products in the SEZs, we are
creating employment in the country, bringing new technologies and
managerial practices. The experience in SEZ world over is that the new
technology and managerial practices brought in these enclaves percolate
to other areas, leading to all-round development.

In any case, domestic sales by SEZ units are subject to income-tax,
leading to revenues for the country besides employment creation. The
individuals working in these SEZs are also subjected to personal
income-tax. If we impose any export obligation, I am sure these
investors have the option of taking their investments to other countries.

The success in bringing these investors into India, through the SEZ
policy, would, by the stroke of imposition of export obligation, be
lost; we would be driving them away and killing the goose that lays the
golden eggs.


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