That Mysterious SEZ Appeal

Context: The recent appeal by the Special Economic Zones (SEZ), demanding extension of the income tax holiday in light of pandemic, is based on the unreasonable fascination that is endured in policy making towards SEZ, despite their consistent failures.

Issues with the SEZ in India

• Unfounded Fascination for SEZ: SEZs account for just about a third of India’s merchandise exports.

• Based on insulation rather than facilitation: 

• • • • The principal impulse for India’s SEZs was to offer businesses shelter from troublesome rules and regulations and tax laws.
      • Unlike China, which modelled its to offer global manufacturers the advantages of giant integrated efficiencies and economies of scale.

• Foundered visions of the SEZ Act 2005:

• The vision of the Act: the 2005 SEZ Act certainly offered a systemic approach. For E.g. 

• Duty-free imports of raw materials.
• Income tax breaks and exemption from domestic sales tax and excise (these were the pre- GST days). 
• A special-purpose Board of Approval, for scanning proposals and provide single-window clearances to provide administrative, infrastructure and other facilities.

• Unaligned with other Policies: 

• Inflexible labour laws: and labour inspections are still applicable to any industrial unit in India including the SEZ’s - Achilles’ Heels of Investment.
• Onerous compliances: there are 674 compliances at the central level and 26,484 at the state level.
• Tedious Land Acquisition: Law stipulating compensation levels that made land acquisition prohibitively expensive and the Ordinance brought for it was also foundered.

• Reckoning of Revenue Foregone by the government: The former Finance Minister decreed the sunset clause for SEZ tax breaks, reiterated by the latest Budget too.
• Political Difficulties: The absence of a viable social safety net makes it politically difficult to formally campaign for easier hire-and-fire laws or lower compensation for land losers.
• Recent Problems: Triple whammies for exporters including SEZs.

• Falling global demand since 2008.
• The confusions of the GST after 2017.
• The successive rise of protectionist tariffs from 2019.

Way Forward: 

• Land Acquisition:

• China’s Model of Township and Village Enterprises: to support rural labour who lost their livelihoods from the giant land acquisitions for SEZ.
• Mobilizing the vast land banks: available to the government via Port Trusts and public sector units.