Budget 2022: Reforming SEZ Act would act as a booster dose

Presenting her fourth union budget on February 1, 2022, Union Finance Minister Nirmala Sitharaman laid impetus on the promotion of the vision of an 'Atmanirbhar Bharat' and an intent to encourage the 'Make in India' mission. 

Despite facing the hits of the pandemic, the Indian economy has witnessed a sharp rebound and recovery, reflecting the strong resilience of the country. 

Baptising the Union Budget 2022 as a blueprint to steer the economy over the Amrit Kaal of the next 25 years, the government has assured growth of the economy in line with the vision of India at 100. 

Replicating the vision and measures for curbing tax evasion and easing taxpayer compliances for many years, the indirect tax policy continues to provide incentives and rationalise tax rates to foster domestic manufacturing.  

Exports have had a good run in FY22 with the target of $400 billion falling within reach in the financial year. The Economic Survey released before the budget also acknowledged the role of exports in building momentum in the economy. 

The survey noted growth in merchandise exports of 49.7% to $301.4 billion compared with the corresponding period of last year, and 26.5% over 2019-20 (April-December), exceeding the pre-pandemic levels. 

Focusing on the growth of economy vide export promotion, the finance minister proposed the replacement of the Special Economic Zones (SEZ) Act with a new legislation that will enable the states to become partners in 'Development of Enterprise and Service Hubs'. 

Besides the announcement of a new legislation for SEZs, the FM also stated that reforms would be undertaken in the customs administration of SEZs in order to make it fully IT-driven and function on the Customs National Portal with a focus on higher facilitation and with only risk-based checks. 

This would ease doing business by SEZs considerably. The announced reforms are expected to be implemented by September 2022. 

The extant SEZ legislation is over 16 years old and was framed under different economic situations then and a lot has changed thereafter. Making the SEZ laws World Trade Organization (WTO) compatible is also the need of the hour.  

The amendments are likely to factor in the recommendations of the Baba Kalyani report. The recommendations, submitted in November 2018, had suggested moving away from exports to a more integrated hub for employment and economic enclaves (3E's), supported by quality infrastructure and ease of doing business. 

Industry expectations under the new legislation 

The proposed revamping of the SEZ laws is expected to cater in the recommendations in addition to the below expectations of the industry. 

• Creation of a trust-based regime rather than a control-based regime. Implementation of audit/risk-based checks can be ensured to create a balance between ease of business and compliance risk involved. 
• Provisions to allow sub-contracting by or for SEZ units in such a way to ensure optimum utilisation of manufacturing capacities. 
• Amendment in definition of services under the SEZ Act is required to include receipt of consideration in Indian rupee. 
• Inclusion of SEZ units under the RoDTEP scheme as otherwise it would deprive the units of export promotion benefits that were earlier available and additional costs may make them uncompetitive in the global market. 
• Doing away with the uniform list of services and allowing all services which are used by an SEZ unit/developer "in furtherance of business" in line with the GST law to be considered as used for authorised operations. 
• Given the current circumstances during the pandemic, an explicit clarification is required regarding permanent work from home facility for SEZ employees (Rule 43 SEZ rules 2006). Further, allowing SEZ units to take-out duty-free assets on a permanent basis to facilitate work from home facility is the need of the hour. 
• Doing away with the endorsement process for all procurements is a time-consuming process that poses operational challenges due to the volume of procurements. Alternatively, in this stage of technology, requirement of physical endorsement can be reconsidered by policymakers. 
• The requirement of E-way bill for movement of duty-free assets between SEZ units and location of employees is expected to be done away with to reduce the administrative and compliance burden of companies.
• Allowing SEZ's to create recreation facilities to make it an attractive investment destination by making suitable amendments in SEZ Law/Instruction No 95 dated 11th June 2019  
• IT SEZs are expected to be given similar features as granted to GIFT SEZ. 
•  Physical approvals to be replaced with online approvals/intimations 

 
Conclusion 

SEZs, in India, are an important channel to promote the industry, infrastructure, employment generation and growth. 

The proposed restructuring of SEZ laws would act as a booster dose, specifically in the current recessionary scenario and make SEZ an engine of economic growth and employment creation besides exports in the given competitive environment. 
The government is aiming at the success of the much-touted 'Atmanirbhar Bharat' and 'Make in India' scheme which can be ensured with the effectiveness of a better implemented SEZ scheme. 

(Krishan Arora, Partner, Grant Thornton Bharat LLP, Praveen Kashyap, Executive Director, Grant Thornton Bharat LLP.) 

(With inputs from Adarsh Gupta, Manager and Hitika Munjal, Consultant - Grant Thornton Bharat) 

Also read: Here’s why government increased capital expenditure in Union Budget 2022

Also read: Budget 2022: Proposals for banking sector