SEZ Concept is Slowly Dying

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SEZ Concept is Slowly Dying

If elder brother robs younger brother, will it be an issue?

The concept of SEZ has taken roots in India but one cannot say it has taken very deep roots. Many owners of SEZs are trying to wriggle out of their ventures because of various reasons. Japan made a steep progress in exporting its goods all over the world, but it is pertinent to note that Japan did not experiment with the concept of SEZ. But China seems to have liked this model which has inspired other nations like Bangladesh, Angola, Iran, Brazil, Philippines, Kazakhstan, Russia, Poland and North Korea. Many of these countries are communist countries or socialist countries. India seemed to have a liking for communist and socialist philosophy right from the beginning when Pundit Nehru, India’s first Prime Minister, declared ‘Indo Chini Bhai Bhai’ (India and China are brothers). China attacked India in 1962 and captured 32000 sq km of its Territory. China felt nothing wrong in this act. If the elder brother takes away some items belonging to younger brother, is there anything wrong in it? Will the younger brother find fault with his elder brother whom he holds with greatest respect, love and affection?

Change of mind

Now, coming back to the topic of SEZ, the private equity firm Blackstone has purchased Pune IT SEZ for Rs.810 crore. The two partners Hubtown and DLF have sold the joint venture. DLF is planning to raise Rs.7000 crore in the next three years through sale of assets. It is planning to bring down its debt to Rs.10000 crore by the year 2013. Once upon a time not long back, many companies lined in the queue for starting their SEZs. Today, there is a change of mind among many of them. The SEZs have lost their appeal.

Decline in SEZs

SEZs were conceived as economic hubs because of the facilities they offered to the entrepreneurs. These facilities include no tax for five years, excise duty exemption on imports, sales tax exemption, service tax exemption, liberal norms for external commercial borrowings and more concessions from State governments. But after a period of time, interest in the concept of SEZs is waning as seen from the decline in the number of approvals. In 2007-08, there were 146 approvals. It declined to 36 approvals in 2008-09, 25 approvals in 2009-10 and 14 approvals in 2010-11. Withdrawals from SEZs are also increasing. In 2008-09, there were 19 withdrawals which increased to 27 in 2009-10 and further to 28 in 2010-11.

Land issue

What is the reason for this fading interest in SEZs? Land acquisition has become very difficult for initiating SEZs after the 2008 legislation wherein the government transferred the responsibility of land acquisition from its shoulders to the companies themselves. The Direct Tax Code has changed the basis of incentives to SEZs from profits to investments. The government has also broken its earlier policy by levying income tax on SEZs in its 2011 Budget. The government has also slapped 18.5% MAT (Minimum Alternate Tax) and 15% dividend distribution tax on the SEZs.

Telangana agitation has stopped Andhra Pradesh’s progress

The government itself seems to be disfavouring the SEZs for some reason. There are 583 approved SEZs and 143 functioning SEZs. Software, hardware and semiconductor sectors constitute the bulk of the SEZs at 354. Andhra Pradesh, Maharashtra, Tamil Nadu, Karnataka and Haryana have gone for these SEZs. Other States seemed to have no interest in the concept. But if you analyse profit-wise, Gujarat tops the list followed by Karnataka and Tamil Nadu. In fact infrastructure and SEZs are the growth drivers of Andhra Pradesh State. With a large port network in its vast coastal line, Andhra Pradesh attracted large investment. But due to the present Telangana agitation, the investment has faded. But even then 75 SEZs in Andhra Pradesh attracted an investment of Rs.15000 crore in the past. But the future may be bleak unless the government finds a solution to the vexed problem of Telangana.

Big relief for SEZ developers

On the SEZ issue, Vallarpadam terminal has taken Customs authority to Court for the Customs authorities’ move to withdraw its staff from the terminal gate. The Commerce Ministry has proposed revamp of the SEZ policy to address land issues. Developing an SEZ in a backward area will attract incentives but the Maoist problem remains as threatening. Department of Legal Affairs has ruled that SEZ stake sale does not amount to transfer of land. This has given a big relief to the SEZ developers.

Relief to power units

Tamil Nadu State government has unveiled various components of an aerospace park project. Securing SEZ status for a private aviation company in Hosur is one among them. Power units wishing to set up their units in SEZs may be exempt from the positive net foreign exchange obligation applicable to regular units. This may favour power companies in SEZs like Welspun Energy, Torrent Energy and AES among others.


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