Sez Legislation And Policy Paper
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SEZs - Legislation & Policy Discussion Material
Discussion Backdrop (1/2) SEZ is a geographical region that has economic laws that are more liberal than a country's typical economic laws and is typically created to serve one or more of the following purposes To enhance foreign investment To promote exports from the country To create a level playing field for the domestic enterprises and manufacturers to be competitive globally
Since the end of WW – II, SEZs / EPZs / FTZs have been handed over as solutions to the developing nations to jumpstart economic development
China, which started experimenting with SEZs from 1980 onwards, has shown great success in integrating its economy to the world’s through these zones
India, which had earlier followed the EOU / EPZ route for export promotions, came out with a SEZ policy in 2000 followed by an act in 2005 on the lines of the Chinese model
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Infrastructure Advisory
Discussion Backdrop (2/2) Though controversial both inside and outside the government, the act has been a runaway success with the developer community – With more than 600 applications Over 2200 sq. km. of promised development Over USD 500 billion (Rs 22,00,000 crore) in annual revenues targeted More than USD 120 billion in development investments (Rs 5,50,000 crore)
Today, the debate on SEZ’s is reaching a crescendo and the entire SEZ landscape is in a state of flux. The major issues of the SEZ debate are: Policy and macroeconomic debate Direction, consistency and impact of policy Policy objective Public good Resource grabbing Creation of private oligopolies Microeconomic debate SEZ formats Economics inherent in the SEZ concept for the various stakeholders Land acquisition and R&R Drain on public exchequer Administration and regulation debate Debate on alternatives 4
Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
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Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
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Infrastructure Advisory
Constitutional Backdrop Section 1: India shall be a “Union of States” Executive and legislative powers across all matters in the country have been divided between the Union and states
Section 73: The Executive Power of the Union shall extend to matters which respect to which the Parliament has the right to make laws… provided that it shall not, except as provided in the Constitution, extend in any State to matters with respect to which the Legislature of the State has also power to make laws
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Schedule 7 of the Constitution defines the distribution of legislative and executive powers between the Central and State Governments
The 74th Constitutional Amendment Act provides for devolution by the State Legislature of powers and responsibilities upon Municipalities with respect to preparation of plans for economic development and social justice, and for the implementation of development schemes
Infrastructure Advisory
Distribution of Responsibilities STATE LIST • Public order & police • Local government • Public health & sanitation • Roads, bridges, etc. • Water • Land, incl. Colonisation • Industries • Gas & gas works • Taxes on: • Land & buildings • Entry of goods into a local area • Consumption / sale of electricity • Sale / purchase of goods • Professions, trades, etc. • Luxuries & entertainments • Stamp duties
CONCURRENT LIST • Registration of births & deaths • Ports, other than major ports • Factories • Boilers • Electricity 8
UNION LIST • Railways, National Highways • Foreign exchange and foreign loans • Trade and commerce with foreign countries • Definition of customs frontiers • Income taxes, excise duties, customs duties
• • • • • • • • •
12th SCHEDULE – FUNCTIONS OF MUNICIPALITIES Urban planning Regulation of land use and construction of buildings Planning for economic and social development Water supply for domestic, industrial and commercial purposes Public health, sanitation & solid waste Fire services Provision of urban services & amenities – parks, street lighting, parking lots, … Burial / cremation grounds Registration of births & deaths
Infrastructure Advisory
Regulatory Framework: Central Central SEZ Act: The Special Economic Zone Act, 2005 defines regulation for SEZs within the domain of union subjects: Stipulations regarding size and scope of SEZs Approval and notification of Special Economic Zones Institutional framework for the same
Institutional framework for the discharge of various regulatory functions at zone level – Development Commissioner, Approval Committee Delegation of powers under the Union list of subjects
Fiscal regime applicable to SEZ developers and units, under various subjects within the Union list FDI approvals, establishment of units subject to industrial licensing Definition of customs procedures, establishment of zone level customs facilities
Environmental laws and local rules regarding land planning etc apply on SEZ’s 9
Infrastructure Advisory
Regulatory Framework: State State Legislations: Institutional facilitation mechanisms – e.g., Empowered Committee in Maharashtra Project Evaluation Committee; and Project Approval Committee
Zone-level administration mechanisms – e.g., Industrial Township Authority in Maharashtra – constitution, functions
Empowerment of developer for the discharge of various planning and infrastructure services within the zone: Urban planning Delivery of infrastructure services, including electricity generation and distribution, water supply, waste water treatment and solid waste, ports, roads / bridges and transportation services, gas distribution, telecommunication and data distribution Recovery of user charges for services above
Fiscal benefits to developer and units under various state legislations Delegation of powers on various subjects within the state list to the Development Commissioner at zone level Relaxation of the applicability of various state legislations to the zone
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Infrastructure Advisory
SEZ: Physical Concept The DC of the SEZ is responsible for demarcating processing/non-processing areas
To be fully secured by taking such measures as approved by the Board of Approval
Notified Area of SEZ
•
Land / built-up space in the processing area to be leased:
•
To entrepreneurs holding valid letters of approval, with lease period co-terminus with LOA
•
For facilities for exclusive use of the Units such as canteens, public telephone booths, first aid centres, creches, etc.
•
To a person desiring to create infrastructure facilities for use by prospective Units
•
Developer may allot the land in the nonprocessing area for business and social purposes such as:
Entry / Exit Point(s)
FTWZ Non-Processing Area
IFSC
Facilities such as Free Trade & Warehousing Zones, International Financial Services Centre may be approved for establishment within the Processing Area • 11
•
Educational institutions
•
Hospitals
•
Hotels
•
Recreation and entertainment facilities
•
Residential and business complexes
DTA units not allowed to set up
Infrastructure Advisory
Flavors of SEZs – Indian Context Special Economic Zone for Multi-Product
• • •
Minimum size = 1,000 hectares; Maximum size = 5000 hectares Contiguous area required Minimum size of ‘processing area’ = 50% •
•
Special Economic Zone for Multi-Services
• • •
Minimum size = 10 hectares • Contiguous area required • Minimum size of ‘processing area’ = 50% Minimum built-up space (for IT SEZ) = 1 mn sq feet.
Minimum size = 100 hectares Contiguous area required Minimum size of ‘processing area’ = 50% •
•
Special Economic Zone in port / airport
• • •
Special Economic Zone for IT, Biotech, Nonconventional Energy or Gems & Jewellery
Minimum size = 100 hectares • Contiguous area required Minimum size of ‘processing area’ = 50%
Special Economic Zone for Specific Sector
Minimum size = 100 hectares Contiguous area required Minimum size of ‘processing area’ = 50% •
•
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Minimum size = 40 hectares • Contiguous area required • Minimum size of ‘processing area’ = 50% • Minimum built-up space of 100,000 sq. m. • May be set up as part of an SEZ for multi-products May be set up as part of an SEZ for specific sector, with area not exceeding 20% the zone area
Special Economic Zone for Free Trade & Warehousing
Infrastructure Advisory
SEZ – Entity Landscape Board of Approvals
Central Govt. Single Window
State Govt.
Unit Approvals Committee
Development Commissioner DC’s Office
Oversight and facilitation committees
Dispute settlement tribunal Industrial Township Authority
Utility & Infrastructure
Customs
Township Management
Urban Planning & design
Regulatory body
Developer
Project Execution
BD, Mktg. & Sales
SPA
Service delivery
Business Support functions
Outsourced service delivery Co-developers
Providers
Residents
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Residential
Industrial
Commercial
Infrastructure Advisory
SEZ Institutional Framework - Overview Grant all local and state level clearances, etc. delegated by the Central / State Government. Monitor such approvals, licenses, registrations, etc. Make town planning regulations Board of Approval Approve imports of goods and services into the SEZ Approve proposals for establishment of SEZ units Allow foreign collaborations / FDI proposals duly cleared by the Board of Approval Monitor compliance by SEZ Developer, units State oversight & facilitation committees Coordinates between the DC’s office single window and the state administration Evaluates and approves SEZ proposals at the state level
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Approving proposals to set up SEZs Approval of “authorized” operations in an SEZ FDI Approvals to Developers, Units Approvals for infrastructure provision (through co-developers, etc.) Monitoring of infrastructure services and O&M of the SEZ
Regulator Development Commissioner Approval Committee
Planned development of SEZ • Prepare development plan • Demarcate and develop sites • Allocate and transfer plots, buildings • Regulate the erection of buildings in accordance with the plan • Develop, operate, maintain infra • Demarcate Zone boundary
SEZ Development Authority
Governing body in the case of state run SEZ’s (Equivalent to the developer) “Proper Officer”
Developer Customs administration
Co-Developer
Entity
Provider of infrastructure facilities
SPV for delivery of Developer / CoDeveloper Services
Infrastructure Advisory
Central Government – SEZ Legislative landscape Acts & Policies
Entities
Central SEZ Act
Board of Approvals
Rules accompanying the Central SEZ Act
Development Commissioner
Electricity Act
Unit Approval Committee
Model Municipal Law
Regulatory Bodies
73rd & 74th Amendments
SEZ Development Authority
EOU / EHTP / STP Acts
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Infrastructure Advisory
States – Typical SEZ Legislative landscape Acts & Policies State SEZ Act
Entities State oversight & Facilitation Committee
State Municipal Policy
State Land Policy State Labour Policy State Town Planning Policy
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Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
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Infrastructure Advisory
State SEZ Policies (1/3)
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Infrastructure Advisory
State SEZ Policies (2/3)
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Infrastructure Advisory
State SEZ Policies (3/3) Model Provisions (1/2)
Municipal Powers
Industrial Township Authority should be constituted Developer should be the given control over the ITA
Planning Powers
Single Window
Developer should be given the power of a Special Planning Authority
The state government should constitute an organization to facilitate between the SEZ’s and the state government machinery in a transparent manner Process Re-engineering at the state government department level is a must
Public Utility Service
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Special Economic Zones should be declared “Public Utility Service” to ensure continuity of seamless operations
Infrastructure Advisory
State SEZ Policies (3/3) Model Provisions (2/2)
Labor Policy
State Labor union acts should be abrogated Hire & fire
Environmental Policy Deemed Clearance Route
Self certification should be allowed for non-polluting industries
The state government should allow for deemed clearance route for approvals from state government bodies
Model land acquisition policy should be formulated at the central level
Land Acquisition
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R&R should be handled by a dedicated government body that collects user charges
Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
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Infrastructure Advisory
SEZ Policy Topical Issues (1/8) Issues
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1
Policy exploitation by real estate developers who have no track record in economic activity / export promotion and associated infrastructure creation / development scale
2
Tax exemptions to drive significant revenue losses to state and central governments
3
Over-built SEZ capacity leading to under-performance
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Diversion of large volumes of land from agriculture and other productive uses into potentially under-utilised SEZ capacity
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Constitutional and moral tenability of large-population industrial-urban townships with non-elected, privately-run local governments with monopoly over utility and infrastructure provision
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Under-served domestic markets, as industrial capacity is diverted to export use
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The fate of STP units, EOUs, etc., post March 31, 2010
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Undefined exit for units
Infrastructure Advisory
SEZ Policy Topical Issues (1/8) Issue I: Policy Exploitation by Real Estate Developers (1/3) Policy Highlights “at least fifty percent of the area shall be earmarked for developing processing area” “A … Developer may import or procure from the DTA without payment of duty, taxes or cess … all type of goods … required for authorized operations” “import of duty free material for setting up … residential and / or business complex … or any other facilities in the non-processing area of the SEZ shall be as approved by the Board”
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Infrastructure Advisory
SEZ Policy Topical Issues (1/8) Issue I: Policy Exploitation by Real Estate Developers (2/3) Policy Analysis – Quantum of Non-Processing Area Is a 50% area for non-processing activities justifiable? UDPFI* Guidelines, issued by the MoUD, GOI, recommend the following area allocations for large-scale projects Land Use
% Area Allocation
Residential
35-40%
Commercial
4-5%
Industrial
10-12%
Recreational
18-20%
Public & Semi-Public
Empirical evidence: Greater NOIDA “Land use breakup of Outline Development Plan year 2021 for Projected urban population of 12 Lakhs…As a model of smart town planning, land has been appropriated for various activities as under:
Recreational
25%
Transportation
13%
12-14%
Public and semi utilities
12%
Transportation
12-14%
Residential
25%
Agriculture & Water Bodies
Balance
Commercial
6%
Industrial
19%
Total
100%
* Urban Development Plan Formulation & Implementation
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Infrastructure Advisory
SEZ Policy Topical Issues (1/8) Issue I: Policy Exploitation by Real Estate Developers (3/3) Developer Incentive Structures • Value addition – 600-1000% on land cost
• Low value addition – 20-50% on land cost • Limited price appreciation – 3-5% p.a. – including over the long term
Industrial Estate
Real Estate
• Limited project returns – 1015%
• Attractive long-term price trends – e.g., 27% p.a. in Gurgaon over a 22 year period • Project returns of 45%+ are common
Developer incentives – predominantly impelled by market forces – have driven the view of SEZs as real estate opportunities A combination of regulation, competitive forces and reduction in tax breaks for real estate activity required to reinforce policy objectives of export promotion The solution is not to reduce the quantum of non-processing areas 26
Infrastructure Advisory
SEZ Policy Topical Issues (2/8) Issue II: Tax Breaks & Associated Revenue Losses to Central, State Governments (1/3) SEZ Act Highlights: “every Developer and the entrepreneur shall be entitled to the following exemptions, drawbacks and concessions, namely: “exemption from any duty of customs,… to carry on the authorised operations” “exemption from any duty of excise, …on goods brought from Domestic Tariff Area to a Special Economic Zone or Unit, to carry on the authorised operations” “drawback or such other benefits as may be admissible from time to time on goods brought or services provided from the Domestic Tariff Area into a Special Economic Zone” “exemption from service tax on taxable services provided to a Developer or Unit to carry on the authorised operations” “exemption from the levy of taxes on the sale or purchase of goods under the Central Sales Tax Act, 1956 if such goods are meant to carry on the authorised operations” Income Tax Act (Section 80-IAB): Income tax exemption for Developers:100% for a period of 10 years (within a block of 15 years) Income tax exemption for Units: 100% for a period of 5 years, 50% for a further 5 years, followed by another 5year period where certain exemptions are allowed if reinvestment reserve is created out of profits 27
Infrastructure Advisory
SEZ Policy Topical Issues (2/8) Issue II: Tax Breaks & Associated Revenue Losses to Central, State Governments (2/3)
A policy debate between the Ministry of Finance and Ministry of Commerce is underway – key concerns: Continuing exemptions on various taxes and duties will be availed by exporting units (including EOUs, STP units, etc.) that relocate to SEZs Real Estate developers will benefit from tax exemptions to activities in the non-processing area, that are not necessarily linked to export promotion
MOF estimates revenue losses of Rs. 100,000 cr p.a. MOC projects revenue enhancement of Rs. 44,000 cr p.a. on account of enhanced economic activity
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Infrastructure Advisory
SEZ Policy Topical Issues (2/8) Issue II: Tax Breaks & Associated Revenue Losses to Central, State Governments (3/3) Not all of the available fiscal benefits are allowable under the WTO Agreement on Subsidies & Countervailing Measures: Tax exemptions to EOUs, STP Units, EPZ Units against export activity are to be phased out in April 2010 (‘sunset clause’) Prohibited subsidies under WTO, such as “the full or partial exemption remission, or deferral specifically related to exports, of direct taxes”, will continue to be available to SEZ units even after the sunset period Sectors where the country has reached ‘export competitiveness’ – e.g., textiles & clothing – will require phasing out of export subsidies Countervailing remedies available to trading partners under WTO may nullify part of the benefits to exporters Some benefits will not be countervailed – e.g., those driven by superior / cheaper infrastructure, lower transaction costs in an SEZ, etc. – leading to greater trade volume
The net effect of fiscal benefits will be determined by a complex interplay between the scale of countervailing action, residual increases in competitiveness to exporting units, and the impact of these on incremental export-focused investment Partial re-distribution of tax revenues from India (exporting country) to importing countries, due to the impact of countervailing Enhancement in trade volume, and therefore economic activity, indirectly enhancing government tax revenues 29
Infrastructure Advisory
SEZ Policy Topical Issues (3/8) Issue III: Over-built SEZ capacity, leading to under-performance (1/2) More than 600 applications for Special Economic
% of Formal & In-principle Approvals
Zones at various stages of processing 53, 13%
28, 7% 6, 2% 31, 8%
Investment absorption capacity of Rs. 4,000,000 cr
19, 5%
Between 1991 and 2005, cumulative investment
75, 19%
17, 4%
intentions countrywide totaled Rs. 1,894,200 cr Conversion of ~ 30% into physical investment on the ground
Conclusion: severe over-capacity being planned in the SEZ space
167, 42%
Apparel and Textile
Auto Sector
Biotech & Pharma
Electronics
Engineering
IT/ ITES
Multi Product / Multi Services
Others
Note: values in the order of Number, Percentage Website: http://sezindia.nic.in/; Data as on 1st May 2007
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Infrastructure Advisory
SEZ Policy Topical Issues (3/8) Issue III: Over-built SEZ capacity, leading to under-performance (2/2)
Large number of competing SEZs will limit success for all zones Empirical evidence: China, which today has only 6 special economic zones Shenzhen, near Hong Kong is the only zone to have reached significant levels of success Pudong, near Shanghai, identified recently as a SEZ, is the other emerging star performer
Key inferences: Only a limited number of zones will be successful Very likely, these will be in close proximity to the country’s largest and most economically vibrant centres, such as Mumbai, Pune, Bangalore, Delhi Large tracts of land could be locked into non-performing SEZs
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Infrastructure Advisory
SEZ Policy Topical Issues (4/8) Issue IV: Locking of large land tracts into under-utilised SEZ space
Significant over-capacity in SEZs will lead to under-utilisation of land Industrial estates, especially in land-locked states such as Punjab, UP, etc. are characterised by occupancy levels of 35-40% or less
Taxation structures applicable to SEZ units make them non-competitive in servicing the DTA market SEZ Act envisages no mechanism for de-notification of unsuccessful Zones Even if such a mechanism is put in place, de-notification will be a challenge with reference to the fate of any units located in such unsuccessful zones Continuation of the EOU scheme – in its current form or in a modified version – may be necessary to provide the flexibility to de-notify zones
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Infrastructure Advisory
SEZ Policy Topical Issues (5/8) Issue V: Privatized local government (1/2) Constitution of India, Section 243Q There shall be constituted in every state… a municipal council (corporation) for a smaller (larger) urban area Provided that a Municipality… may not be constituted in such urban area… as the Governor may, having regard to the size of the area and the municipal services being provided… specify to be an industrial township
SEZ Bill, Maharashtra The State Government may notify such (special economic) zone as an Industrial Township The Authority for such township shall comprise the following members, namely: The Chairman to be nominated by the Developer Two members to be nominated by the Developer One member to be nominated by the Development Commissioner One member to be nominated by the State Government 33
Infrastructure Advisory
SEZ Policy Topical Issues (5/8) Issue V: Privatized local government (2/2)
Key implications of prevailing policy environment: Urban townships of whose populations could run into millions will not have a democratic process of election of local government Private monopolies will be responsible for provision of a wide range of services falling into the third tier of government – such as water supply, solid waste, sanitation, …
Our expectation: This will be a highly litigated element of SEZ policy, where the Supreme Court will probably need to intervene in coming years In the meanwhile, a sector regulator is likely to be put in place, at least for tariff regulation
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Infrastructure Advisory
SEZ Policy Topical Issues (6/8) Issue VI – Under-served Domestic Market (1/2) Policy – SEZ Act Any goods removed from a SEZ to the DTA shall be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties, as leviable on such goods when imported The effect of this policy: to make servicing the DTA market non-competitive from within an SEZ location, especially where
Other taxes* Income tax
-39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5
DTA Unit
SEZ Unit
Case I: Import Content of raw materials = 0% 35
Duties / taxes on DTA Sales (% of sale price)
Sales Tax / SAD Excise/CVD on FG#
Duties / taxes on DTA Sales (% of sale price)
Customs on FG Duties on RM
production is based on local raw materials -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5
DTA Unit
SEZ Unit
Case II: Import Content of raw materials = 100% Infrastructure Advisory
SEZ Policy Topical Issues (6/8) Issue VI – Under-served Domestic Market (2/2)
Key implications: Separation of DTA and SEZ operations enforced by the prevailing policy regime, may lead to sub-optimal scale manufacturing facilities, as well as duplication of infrastructure The creation of fresh infrastructure for a growing domestic market has taken a backseat
Policy expectations: Review of domestic market access for SEZ goods produced with raw materials substantially sourced from domestic sources
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Infrastructure Advisory
SEZ Policy Topical Issues (7/8) Issue VII: The fate of EOUs, STP Units, etc. post March 2010 (1/2) Exporting units located in the DTA – EOUs, STP Units, etc. – account for a large proportion of the country’s exports EOU exports in 2005-06: Rs 47,426 cr (Rs 37,035 cr from April - Dec 2006) STP exports in 2005-06: ~Rs. 95,000 cr
These units will be subject to a ‘competitive shock’ come March 2010, when fiscal exemptions available to these units will cease Other exporting units not under SEZ / EOU regime are already subject to a full tax regime
The Ministry of Finance seeks to prevent relocation of existing units into SEZs, to prevent their continuing to avail tax exemptions Key implications: The existence of multiple regimes for exporting firms is not an efficient situation Exporting firms likely to be forced to close down DTA operations and relocate to SEZ locations This will especially hold true for industries like apparel and software, where capital intensity is low relative to sales
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Infrastructure Advisory
SEZ Policy Topical Issues (7/8) Issue VII: The fate of EOUs, STP Units, etc. post March 2010 (2/2) SEZ
EOU NFEP to be 20+% for most products
NFEP to be > 0
50% exports allowed as DTA sales @ concessional duty
Unlimited DTA sales @ full duty
Duties applicable on goods used to set up units
No customs/excise duties applicable on goods used to set up units
Retention of up-to 70% earnings in EEFC a/c allowed Export proceeds to be realized & repatriated to India within 6 months Material can be stocked for 1 year
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Retention of full earnings in EEFC a/c allowed Export proceeds to be realized within 12 months Material can be stocked for 5 years
Development commissioner to attest import of Capital goods
All imports on self certification
Customs examination in import & export cargo
No routine customs examination in import & export cargo
FIPB approval required for some FDI
100% FDI automatic
SSI reservation policy applicable
SSI reservation policy not applicable
Jewellery units cannot subcontract work to DTA units
Jewellery units are can subcontract work to DTA units
Infrastructure Advisory
SEZ Policy Topical Issues (8/8) Issue VIII: Undefined exit mechanisms SEZ Policy: “land or built up space in the processing area… shall be given on lease only to the entrepreneurs holding a valid Letter of Approval … and the lease period shall be co-terminus with the validity of the Letter of Approval” “The Letter of Approval shall be valid for five years from the date of commencement of production… and, after the completion of five years from the date of commencement of production, the Development Commissioner may, at the request of the Unit, extend validity of the Letter of Approval for a further period of five years” “The Unit may opt out of Special Economic Zone with the approval of the Development Commissioner… Provided that if the unit has not achieved positive Net Foreign Exchange, the exit shall be subject to penalty that may be imposed under the Foreign Trade (Development and Regulation), Act, 1992”
Key implications: Units not fulfilling NFE criteria as per the Letter of Approval may be required to exit The fate of fixed assets created by the unit in such a situation is undefined This is likely to discourage the establishment of capital-intensive operations within the SEZ 39
Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
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Infrastructure Advisory
Summary The policy regime for special economic zones has some way to go before it approaches perfection. Key lacunae are likely to result in: Promotion of inefficiencies, through duplication of infrastructure investments, promotion of DTA unemployment, locking in of land into unproductive uses… Substantial revenue losses to the Government, with less than proportional benefits in the form of economic gains from increased activity Legal and constitutional challenges
41
Infrastructure Advisory
India’s Leading Integrated Infrastructure Development Company
www.feedbackventures.com
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Infrastructure Advisory
Discussion Backdrop (1/2) SEZ is a geographical region that has economic laws that are more liberal than a country's typical economic laws and is typically created to serve one or more of the following purposes To enhance foreign investment To promote exports from the country To create a level playing field for the domestic enterprises and manufacturers to be competitive globally
Since the end of WW – II, SEZs / EPZs / FTZs have been handed over as solutions to the developing nations to jumpstart economic development
China, which started experimenting with SEZs from 1980 onwards, has shown great success in integrating its economy to the world’s through these zones
India, which had earlier followed the EOU / EPZ route for export promotions, came out with a SEZ policy in 2000 followed by an act in 2005 on the lines of the Chinese model
3
Infrastructure Advisory
Discussion Backdrop (2/2) Though controversial both inside and outside the government, the act has been a runaway success with the developer community – With more than 600 applications Over 2200 sq. km. of promised development Over USD 500 billion (Rs 22,00,000 crore) in annual revenues targeted More than USD 120 billion in development investments (Rs 5,50,000 crore)
Today, the debate on SEZ’s is reaching a crescendo and the entire SEZ landscape is in a state of flux. The major issues of the SEZ debate are: Policy and macroeconomic debate Direction, consistency and impact of policy Policy objective Public good Resource grabbing Creation of private oligopolies Microeconomic debate SEZ formats Economics inherent in the SEZ concept for the various stakeholders Land acquisition and R&R Drain on public exchequer Administration and regulation debate Debate on alternatives 4
Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
5
Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
6
Infrastructure Advisory
Constitutional Backdrop Section 1: India shall be a “Union of States” Executive and legislative powers across all matters in the country have been divided between the Union and states
Section 73: The Executive Power of the Union shall extend to matters which respect to which the Parliament has the right to make laws… provided that it shall not, except as provided in the Constitution, extend in any State to matters with respect to which the Legislature of the State has also power to make laws
7
Schedule 7 of the Constitution defines the distribution of legislative and executive powers between the Central and State Governments
The 74th Constitutional Amendment Act provides for devolution by the State Legislature of powers and responsibilities upon Municipalities with respect to preparation of plans for economic development and social justice, and for the implementation of development schemes
Infrastructure Advisory
Distribution of Responsibilities STATE LIST • Public order & police • Local government • Public health & sanitation • Roads, bridges, etc. • Water • Land, incl. Colonisation • Industries • Gas & gas works • Taxes on: • Land & buildings • Entry of goods into a local area • Consumption / sale of electricity • Sale / purchase of goods • Professions, trades, etc. • Luxuries & entertainments • Stamp duties
CONCURRENT LIST • Registration of births & deaths • Ports, other than major ports • Factories • Boilers • Electricity 8
UNION LIST • Railways, National Highways • Foreign exchange and foreign loans • Trade and commerce with foreign countries • Definition of customs frontiers • Income taxes, excise duties, customs duties
• • • • • • • • •
12th SCHEDULE – FUNCTIONS OF MUNICIPALITIES Urban planning Regulation of land use and construction of buildings Planning for economic and social development Water supply for domestic, industrial and commercial purposes Public health, sanitation & solid waste Fire services Provision of urban services & amenities – parks, street lighting, parking lots, … Burial / cremation grounds Registration of births & deaths
Infrastructure Advisory
Regulatory Framework: Central Central SEZ Act: The Special Economic Zone Act, 2005 defines regulation for SEZs within the domain of union subjects: Stipulations regarding size and scope of SEZs Approval and notification of Special Economic Zones Institutional framework for the same
Institutional framework for the discharge of various regulatory functions at zone level – Development Commissioner, Approval Committee Delegation of powers under the Union list of subjects
Fiscal regime applicable to SEZ developers and units, under various subjects within the Union list FDI approvals, establishment of units subject to industrial licensing Definition of customs procedures, establishment of zone level customs facilities
Environmental laws and local rules regarding land planning etc apply on SEZ’s 9
Infrastructure Advisory
Regulatory Framework: State State Legislations: Institutional facilitation mechanisms – e.g., Empowered Committee in Maharashtra Project Evaluation Committee; and Project Approval Committee
Zone-level administration mechanisms – e.g., Industrial Township Authority in Maharashtra – constitution, functions
Empowerment of developer for the discharge of various planning and infrastructure services within the zone: Urban planning Delivery of infrastructure services, including electricity generation and distribution, water supply, waste water treatment and solid waste, ports, roads / bridges and transportation services, gas distribution, telecommunication and data distribution Recovery of user charges for services above
Fiscal benefits to developer and units under various state legislations Delegation of powers on various subjects within the state list to the Development Commissioner at zone level Relaxation of the applicability of various state legislations to the zone
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Infrastructure Advisory
SEZ: Physical Concept The DC of the SEZ is responsible for demarcating processing/non-processing areas
To be fully secured by taking such measures as approved by the Board of Approval
Notified Area of SEZ
•
Land / built-up space in the processing area to be leased:
•
To entrepreneurs holding valid letters of approval, with lease period co-terminus with LOA
•
For facilities for exclusive use of the Units such as canteens, public telephone booths, first aid centres, creches, etc.
•
To a person desiring to create infrastructure facilities for use by prospective Units
•
Developer may allot the land in the nonprocessing area for business and social purposes such as:
Entry / Exit Point(s)
FTWZ Non-Processing Area
IFSC
Facilities such as Free Trade & Warehousing Zones, International Financial Services Centre may be approved for establishment within the Processing Area • 11
•
Educational institutions
•
Hospitals
•
Hotels
•
Recreation and entertainment facilities
•
Residential and business complexes
DTA units not allowed to set up
Infrastructure Advisory
Flavors of SEZs – Indian Context Special Economic Zone for Multi-Product
• • •
Minimum size = 1,000 hectares; Maximum size = 5000 hectares Contiguous area required Minimum size of ‘processing area’ = 50% •
•
Special Economic Zone for Multi-Services
• • •
Minimum size = 10 hectares • Contiguous area required • Minimum size of ‘processing area’ = 50% Minimum built-up space (for IT SEZ) = 1 mn sq feet.
Minimum size = 100 hectares Contiguous area required Minimum size of ‘processing area’ = 50% •
•
Special Economic Zone in port / airport
• • •
Special Economic Zone for IT, Biotech, Nonconventional Energy or Gems & Jewellery
Minimum size = 100 hectares • Contiguous area required Minimum size of ‘processing area’ = 50%
Special Economic Zone for Specific Sector
Minimum size = 100 hectares Contiguous area required Minimum size of ‘processing area’ = 50% •
•
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Minimum size = 40 hectares • Contiguous area required • Minimum size of ‘processing area’ = 50% • Minimum built-up space of 100,000 sq. m. • May be set up as part of an SEZ for multi-products May be set up as part of an SEZ for specific sector, with area not exceeding 20% the zone area
Special Economic Zone for Free Trade & Warehousing
Infrastructure Advisory
SEZ – Entity Landscape Board of Approvals
Central Govt. Single Window
State Govt.
Unit Approvals Committee
Development Commissioner DC’s Office
Oversight and facilitation committees
Dispute settlement tribunal Industrial Township Authority
Utility & Infrastructure
Customs
Township Management
Urban Planning & design
Regulatory body
Developer
Project Execution
BD, Mktg. & Sales
SPA
Service delivery
Business Support functions
Outsourced service delivery Co-developers
Providers
Residents
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Residential
Industrial
Commercial
Infrastructure Advisory
SEZ Institutional Framework - Overview Grant all local and state level clearances, etc. delegated by the Central / State Government. Monitor such approvals, licenses, registrations, etc. Make town planning regulations Board of Approval Approve imports of goods and services into the SEZ Approve proposals for establishment of SEZ units Allow foreign collaborations / FDI proposals duly cleared by the Board of Approval Monitor compliance by SEZ Developer, units State oversight & facilitation committees Coordinates between the DC’s office single window and the state administration Evaluates and approves SEZ proposals at the state level
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Approving proposals to set up SEZs Approval of “authorized” operations in an SEZ FDI Approvals to Developers, Units Approvals for infrastructure provision (through co-developers, etc.) Monitoring of infrastructure services and O&M of the SEZ
Regulator Development Commissioner Approval Committee
Planned development of SEZ • Prepare development plan • Demarcate and develop sites • Allocate and transfer plots, buildings • Regulate the erection of buildings in accordance with the plan • Develop, operate, maintain infra • Demarcate Zone boundary
SEZ Development Authority
Governing body in the case of state run SEZ’s (Equivalent to the developer) “Proper Officer”
Developer Customs administration
Co-Developer
Entity
Provider of infrastructure facilities
SPV for delivery of Developer / CoDeveloper Services
Infrastructure Advisory
Central Government – SEZ Legislative landscape Acts & Policies
Entities
Central SEZ Act
Board of Approvals
Rules accompanying the Central SEZ Act
Development Commissioner
Electricity Act
Unit Approval Committee
Model Municipal Law
Regulatory Bodies
73rd & 74th Amendments
SEZ Development Authority
EOU / EHTP / STP Acts
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Infrastructure Advisory
States – Typical SEZ Legislative landscape Acts & Policies State SEZ Act
Entities State oversight & Facilitation Committee
State Municipal Policy
State Land Policy State Labour Policy State Town Planning Policy
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Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
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Infrastructure Advisory
State SEZ Policies (1/3)
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Infrastructure Advisory
State SEZ Policies (2/3)
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Infrastructure Advisory
State SEZ Policies (3/3) Model Provisions (1/2)
Municipal Powers
Industrial Township Authority should be constituted Developer should be the given control over the ITA
Planning Powers
Single Window
Developer should be given the power of a Special Planning Authority
The state government should constitute an organization to facilitate between the SEZ’s and the state government machinery in a transparent manner Process Re-engineering at the state government department level is a must
Public Utility Service
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Special Economic Zones should be declared “Public Utility Service” to ensure continuity of seamless operations
Infrastructure Advisory
State SEZ Policies (3/3) Model Provisions (2/2)
Labor Policy
State Labor union acts should be abrogated Hire & fire
Environmental Policy Deemed Clearance Route
Self certification should be allowed for non-polluting industries
The state government should allow for deemed clearance route for approvals from state government bodies
Model land acquisition policy should be formulated at the central level
Land Acquisition
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R&R should be handled by a dedicated government body that collects user charges
Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
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Infrastructure Advisory
SEZ Policy Topical Issues (1/8) Issues
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1
Policy exploitation by real estate developers who have no track record in economic activity / export promotion and associated infrastructure creation / development scale
2
Tax exemptions to drive significant revenue losses to state and central governments
3
Over-built SEZ capacity leading to under-performance
4
Diversion of large volumes of land from agriculture and other productive uses into potentially under-utilised SEZ capacity
5
Constitutional and moral tenability of large-population industrial-urban townships with non-elected, privately-run local governments with monopoly over utility and infrastructure provision
6
Under-served domestic markets, as industrial capacity is diverted to export use
7
The fate of STP units, EOUs, etc., post March 31, 2010
8
Undefined exit for units
Infrastructure Advisory
SEZ Policy Topical Issues (1/8) Issue I: Policy Exploitation by Real Estate Developers (1/3) Policy Highlights “at least fifty percent of the area shall be earmarked for developing processing area” “A … Developer may import or procure from the DTA without payment of duty, taxes or cess … all type of goods … required for authorized operations” “import of duty free material for setting up … residential and / or business complex … or any other facilities in the non-processing area of the SEZ shall be as approved by the Board”
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Infrastructure Advisory
SEZ Policy Topical Issues (1/8) Issue I: Policy Exploitation by Real Estate Developers (2/3) Policy Analysis – Quantum of Non-Processing Area Is a 50% area for non-processing activities justifiable? UDPFI* Guidelines, issued by the MoUD, GOI, recommend the following area allocations for large-scale projects Land Use
% Area Allocation
Residential
35-40%
Commercial
4-5%
Industrial
10-12%
Recreational
18-20%
Public & Semi-Public
Empirical evidence: Greater NOIDA “Land use breakup of Outline Development Plan year 2021 for Projected urban population of 12 Lakhs…As a model of smart town planning, land has been appropriated for various activities as under:
Recreational
25%
Transportation
13%
12-14%
Public and semi utilities
12%
Transportation
12-14%
Residential
25%
Agriculture & Water Bodies
Balance
Commercial
6%
Industrial
19%
Total
100%
* Urban Development Plan Formulation & Implementation
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Infrastructure Advisory
SEZ Policy Topical Issues (1/8) Issue I: Policy Exploitation by Real Estate Developers (3/3) Developer Incentive Structures • Value addition – 600-1000% on land cost
• Low value addition – 20-50% on land cost • Limited price appreciation – 3-5% p.a. – including over the long term
Industrial Estate
Real Estate
• Limited project returns – 1015%
• Attractive long-term price trends – e.g., 27% p.a. in Gurgaon over a 22 year period • Project returns of 45%+ are common
Developer incentives – predominantly impelled by market forces – have driven the view of SEZs as real estate opportunities A combination of regulation, competitive forces and reduction in tax breaks for real estate activity required to reinforce policy objectives of export promotion The solution is not to reduce the quantum of non-processing areas 26
Infrastructure Advisory
SEZ Policy Topical Issues (2/8) Issue II: Tax Breaks & Associated Revenue Losses to Central, State Governments (1/3) SEZ Act Highlights: “every Developer and the entrepreneur shall be entitled to the following exemptions, drawbacks and concessions, namely: “exemption from any duty of customs,… to carry on the authorised operations” “exemption from any duty of excise, …on goods brought from Domestic Tariff Area to a Special Economic Zone or Unit, to carry on the authorised operations” “drawback or such other benefits as may be admissible from time to time on goods brought or services provided from the Domestic Tariff Area into a Special Economic Zone” “exemption from service tax on taxable services provided to a Developer or Unit to carry on the authorised operations” “exemption from the levy of taxes on the sale or purchase of goods under the Central Sales Tax Act, 1956 if such goods are meant to carry on the authorised operations” Income Tax Act (Section 80-IAB): Income tax exemption for Developers:100% for a period of 10 years (within a block of 15 years) Income tax exemption for Units: 100% for a period of 5 years, 50% for a further 5 years, followed by another 5year period where certain exemptions are allowed if reinvestment reserve is created out of profits 27
Infrastructure Advisory
SEZ Policy Topical Issues (2/8) Issue II: Tax Breaks & Associated Revenue Losses to Central, State Governments (2/3)
A policy debate between the Ministry of Finance and Ministry of Commerce is underway – key concerns: Continuing exemptions on various taxes and duties will be availed by exporting units (including EOUs, STP units, etc.) that relocate to SEZs Real Estate developers will benefit from tax exemptions to activities in the non-processing area, that are not necessarily linked to export promotion
MOF estimates revenue losses of Rs. 100,000 cr p.a. MOC projects revenue enhancement of Rs. 44,000 cr p.a. on account of enhanced economic activity
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Infrastructure Advisory
SEZ Policy Topical Issues (2/8) Issue II: Tax Breaks & Associated Revenue Losses to Central, State Governments (3/3) Not all of the available fiscal benefits are allowable under the WTO Agreement on Subsidies & Countervailing Measures: Tax exemptions to EOUs, STP Units, EPZ Units against export activity are to be phased out in April 2010 (‘sunset clause’) Prohibited subsidies under WTO, such as “the full or partial exemption remission, or deferral specifically related to exports, of direct taxes”, will continue to be available to SEZ units even after the sunset period Sectors where the country has reached ‘export competitiveness’ – e.g., textiles & clothing – will require phasing out of export subsidies Countervailing remedies available to trading partners under WTO may nullify part of the benefits to exporters Some benefits will not be countervailed – e.g., those driven by superior / cheaper infrastructure, lower transaction costs in an SEZ, etc. – leading to greater trade volume
The net effect of fiscal benefits will be determined by a complex interplay between the scale of countervailing action, residual increases in competitiveness to exporting units, and the impact of these on incremental export-focused investment Partial re-distribution of tax revenues from India (exporting country) to importing countries, due to the impact of countervailing Enhancement in trade volume, and therefore economic activity, indirectly enhancing government tax revenues 29
Infrastructure Advisory
SEZ Policy Topical Issues (3/8) Issue III: Over-built SEZ capacity, leading to under-performance (1/2) More than 600 applications for Special Economic
% of Formal & In-principle Approvals
Zones at various stages of processing 53, 13%
28, 7% 6, 2% 31, 8%
Investment absorption capacity of Rs. 4,000,000 cr
19, 5%
Between 1991 and 2005, cumulative investment
75, 19%
17, 4%
intentions countrywide totaled Rs. 1,894,200 cr Conversion of ~ 30% into physical investment on the ground
Conclusion: severe over-capacity being planned in the SEZ space
167, 42%
Apparel and Textile
Auto Sector
Biotech & Pharma
Electronics
Engineering
IT/ ITES
Multi Product / Multi Services
Others
Note: values in the order of Number, Percentage Website: http://sezindia.nic.in/; Data as on 1st May 2007
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Infrastructure Advisory
SEZ Policy Topical Issues (3/8) Issue III: Over-built SEZ capacity, leading to under-performance (2/2)
Large number of competing SEZs will limit success for all zones Empirical evidence: China, which today has only 6 special economic zones Shenzhen, near Hong Kong is the only zone to have reached significant levels of success Pudong, near Shanghai, identified recently as a SEZ, is the other emerging star performer
Key inferences: Only a limited number of zones will be successful Very likely, these will be in close proximity to the country’s largest and most economically vibrant centres, such as Mumbai, Pune, Bangalore, Delhi Large tracts of land could be locked into non-performing SEZs
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Infrastructure Advisory
SEZ Policy Topical Issues (4/8) Issue IV: Locking of large land tracts into under-utilised SEZ space
Significant over-capacity in SEZs will lead to under-utilisation of land Industrial estates, especially in land-locked states such as Punjab, UP, etc. are characterised by occupancy levels of 35-40% or less
Taxation structures applicable to SEZ units make them non-competitive in servicing the DTA market SEZ Act envisages no mechanism for de-notification of unsuccessful Zones Even if such a mechanism is put in place, de-notification will be a challenge with reference to the fate of any units located in such unsuccessful zones Continuation of the EOU scheme – in its current form or in a modified version – may be necessary to provide the flexibility to de-notify zones
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Infrastructure Advisory
SEZ Policy Topical Issues (5/8) Issue V: Privatized local government (1/2) Constitution of India, Section 243Q There shall be constituted in every state… a municipal council (corporation) for a smaller (larger) urban area Provided that a Municipality… may not be constituted in such urban area… as the Governor may, having regard to the size of the area and the municipal services being provided… specify to be an industrial township
SEZ Bill, Maharashtra The State Government may notify such (special economic) zone as an Industrial Township The Authority for such township shall comprise the following members, namely: The Chairman to be nominated by the Developer Two members to be nominated by the Developer One member to be nominated by the Development Commissioner One member to be nominated by the State Government 33
Infrastructure Advisory
SEZ Policy Topical Issues (5/8) Issue V: Privatized local government (2/2)
Key implications of prevailing policy environment: Urban townships of whose populations could run into millions will not have a democratic process of election of local government Private monopolies will be responsible for provision of a wide range of services falling into the third tier of government – such as water supply, solid waste, sanitation, …
Our expectation: This will be a highly litigated element of SEZ policy, where the Supreme Court will probably need to intervene in coming years In the meanwhile, a sector regulator is likely to be put in place, at least for tariff regulation
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Infrastructure Advisory
SEZ Policy Topical Issues (6/8) Issue VI – Under-served Domestic Market (1/2) Policy – SEZ Act Any goods removed from a SEZ to the DTA shall be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties, as leviable on such goods when imported The effect of this policy: to make servicing the DTA market non-competitive from within an SEZ location, especially where
Other taxes* Income tax
-39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5
DTA Unit
SEZ Unit
Case I: Import Content of raw materials = 0% 35
Duties / taxes on DTA Sales (% of sale price)
Sales Tax / SAD Excise/CVD on FG#
Duties / taxes on DTA Sales (% of sale price)
Customs on FG Duties on RM
production is based on local raw materials -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5 -39 5
DTA Unit
SEZ Unit
Case II: Import Content of raw materials = 100% Infrastructure Advisory
SEZ Policy Topical Issues (6/8) Issue VI – Under-served Domestic Market (2/2)
Key implications: Separation of DTA and SEZ operations enforced by the prevailing policy regime, may lead to sub-optimal scale manufacturing facilities, as well as duplication of infrastructure The creation of fresh infrastructure for a growing domestic market has taken a backseat
Policy expectations: Review of domestic market access for SEZ goods produced with raw materials substantially sourced from domestic sources
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Infrastructure Advisory
SEZ Policy Topical Issues (7/8) Issue VII: The fate of EOUs, STP Units, etc. post March 2010 (1/2) Exporting units located in the DTA – EOUs, STP Units, etc. – account for a large proportion of the country’s exports EOU exports in 2005-06: Rs 47,426 cr (Rs 37,035 cr from April - Dec 2006) STP exports in 2005-06: ~Rs. 95,000 cr
These units will be subject to a ‘competitive shock’ come March 2010, when fiscal exemptions available to these units will cease Other exporting units not under SEZ / EOU regime are already subject to a full tax regime
The Ministry of Finance seeks to prevent relocation of existing units into SEZs, to prevent their continuing to avail tax exemptions Key implications: The existence of multiple regimes for exporting firms is not an efficient situation Exporting firms likely to be forced to close down DTA operations and relocate to SEZ locations This will especially hold true for industries like apparel and software, where capital intensity is low relative to sales
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Infrastructure Advisory
SEZ Policy Topical Issues (7/8) Issue VII: The fate of EOUs, STP Units, etc. post March 2010 (2/2) SEZ
EOU NFEP to be 20+% for most products
NFEP to be > 0
50% exports allowed as DTA sales @ concessional duty
Unlimited DTA sales @ full duty
Duties applicable on goods used to set up units
No customs/excise duties applicable on goods used to set up units
Retention of up-to 70% earnings in EEFC a/c allowed Export proceeds to be realized & repatriated to India within 6 months Material can be stocked for 1 year
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Retention of full earnings in EEFC a/c allowed Export proceeds to be realized within 12 months Material can be stocked for 5 years
Development commissioner to attest import of Capital goods
All imports on self certification
Customs examination in import & export cargo
No routine customs examination in import & export cargo
FIPB approval required for some FDI
100% FDI automatic
SSI reservation policy applicable
SSI reservation policy not applicable
Jewellery units cannot subcontract work to DTA units
Jewellery units are can subcontract work to DTA units
Infrastructure Advisory
SEZ Policy Topical Issues (8/8) Issue VIII: Undefined exit mechanisms SEZ Policy: “land or built up space in the processing area… shall be given on lease only to the entrepreneurs holding a valid Letter of Approval … and the lease period shall be co-terminus with the validity of the Letter of Approval” “The Letter of Approval shall be valid for five years from the date of commencement of production… and, after the completion of five years from the date of commencement of production, the Development Commissioner may, at the request of the Unit, extend validity of the Letter of Approval for a further period of five years” “The Unit may opt out of Special Economic Zone with the approval of the Development Commissioner… Provided that if the unit has not achieved positive Net Foreign Exchange, the exit shall be subject to penalty that may be imposed under the Foreign Trade (Development and Regulation), Act, 1992”
Key implications: Units not fulfilling NFE criteria as per the Letter of Approval may be required to exit The fate of fixed assets created by the unit in such a situation is undefined This is likely to discourage the establishment of capital-intensive operations within the SEZ 39
Infrastructure Advisory
SEZs: Legislation & Policy - Agenda SEZs – Legislative Landscape Central Laws State Laws
SEZ Policy – State Comparison SEZ Policy – Topical Issues Policy exploitation for Real Estate Revenue losses due to tax exemptions Over-capacity creation Diversion and locking of land Tenability of private local government Underserved domestic markets Fate of EOU’s and STP’s post 2009 Undefined exit for units & developers
Summary
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Infrastructure Advisory
Summary The policy regime for special economic zones has some way to go before it approaches perfection. Key lacunae are likely to result in: Promotion of inefficiencies, through duplication of infrastructure investments, promotion of DTA unemployment, locking in of land into unproductive uses… Substantial revenue losses to the Government, with less than proportional benefits in the form of economic gains from increased activity Legal and constitutional challenges
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Infrastructure Advisory
India’s Leading Integrated Infrastructure Development Company
www.feedbackventures.com
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Infrastructure Advisory
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