DESH Bill: Revisiting The SEZ Policy

The Development of Enterprise and Service Hubs Bill, while replacing the SEZ Act, is targeted to increase trade balance and investment, employment and effective administration

The Development of Enterprise and Service Hubs (DESH) Bill, 2022, aims to re-visit the Special Economic Zone (SEZ) Policy and thereby boost exports. The DESH Bill has been initiated to make industry clusters/SEZs in India WTO-compliant.

One of the major changes that is sought to be amended is domestic sale from an SEZ scheme by payment of applicable duty consisting of customs duty on the imported input. The goods or services is proposed to be chargeable to customs duties including anti-dumping, countervailing and safeguard duties including the duties. In case of capital goods, duty is proposed to be on the depreciated value of such goods and in the case of other goods or services, on the value of any imported inputs in the manufacture or provision of such goods or services.

An Integrated Goods and Services Tax Act, 2017 on the sale of goods or services shall also then be applicable if the goods or services are removed or provided from a development hub to a domestic tariff area. Further, an 'equalisation levy' would be imposed on goods or services supplied to the domestic tariff area to bring taxes on them at par with those provided by units outside the zones. The equalisation levy would be equivalent to duty forgone on the raw material used in the manufacture of finished goods sold in DTA. This would give big relief to the units to compete in the Domestic market. The rate of duty and tariff valuation applicable to goods removed from a Development Hub is proposed to be at the rate and tariff valuation in force as on the date of such removal, and where such date is not ascertainable, on the date of payment of duty.

Another major change that would give relief to companies and SEZ developers for using any unoccupied built-up area is the proposed provision for partial de-notification. This would free up the area not in demand with no requirement of contiguity with respect to the balance area post de-notification.

The de-notified area of the SEZ could, once the DESH Bill is passed and then notified, be used as per the concerned state government land use policies. The government can cancel the letter of approval and de-notify the identified area as a 'development hub'. This would be subject to such procedure and safeguards as may be prescribed by the government. Such denotification is proposed notwithstanding its effect on the contiguity of such built up processing area and any units in such development hub shall be provided with the option to exit.

It is proposed that we should consider moving away from net foreign exchange and consider services to be paid in Indian Rupees. Under the existing SEZ Act, payment for services is required to be made in foreign currency. This creates an unnecessary burden on the foreign exchange reserves. This is not the case with goods. Such a change could help in improving ease of doing business.

Under the existing SEZ Act, the job work of domestic tariff area units is not permitted. Due to the economic slowdown adversely impacting the exports of capital goods, some of the units have slowed down their production capacities which may eventually hamper the growth of such units. These facilities are technologically advanced, high end and unique in nature and are required to be utilised to their optimum capacity and cannot be allowed to be idle for long. Therefore, such units would logically be looking forward to various opportunities in the domestic tariff area for utilizing their optimum capacity. Section 52 of the DESH Bill relates to Sub-contracting to or from Development Hubs, which states that every developer or entrepreneur, may, up to certain prescribed limits sub-contract a part of its production or any production process, to or from a unit in the Domestic Tariff Area or in a Development Hub subject to certain specified conditions. The limits may be determined based on the previous turnover of the developer or entrepreneur and other relevant factors.

There are certain activities that may not be directly related to exports, such as cafeteria and creche facilities, but companies offer them as part of their business. There have been issues where certain benefits have been denied to such companies since they do not come under the permitted activity/authorised operations. The treatment of these ancillary activities needs to be clarified.

Further, IT business process management companies have a hybrid work structure and therefore the impact of remote work on the tax holiday needs to be clarified.

As per Section 60 of the DESH Bill, a settlement agreement through mediation can be challenged on certain grounds that are specified. The DESH Bill needs to consider that a mediation settlement agreement should be permitted to be challenged on additional grounds, which are the same as an arbitral award, such as coercion and agreements that violate the basic principles of public order.

The Development of Enterprise and Service Hubs Bill while replacing the SEZ Act is targeted to increase trade balance and investment, employment and effective administration.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.