Government exploring alternative incentives for SEZs to make them WTO compliant

With the World Trade Organization (WTO) prescribing withdrawal of prohibited subsidies given to the Special Economic Zones (SEZs) by the middle of 2020, the government is trying to fast-track work on reforming provisions for the zones to make them compatible with the multilateral norms.

One the options before the Commerce Ministry, which is exploring several alternative incentives for SEZ units, is the new bonded manufacturing space scheme that the Customs department implemented earlier this year, an official told.

“Discussions will take place between officials of the Commerce and Finance Ministries to see if some of the provisions of the new bonded manufacturing scheme could be replicated for SEZ units,” the official added.

Although India has challenged the panel verdict at the WTO Appellate Body, where work is temporarily suspended, the government wants to get its house in order as soon as possible with members like the US breathing down its neck.

Draw insights

“The Commerce Ministry is trying to draw insights from the revamped scheme for manufacturing in bonded warehouses as it involves exempting manufacturers from paying import duties on inputs and capital goods on items that are exported. As the tax exemptions are on inputs and not income, these are permissible under the WTO rules. For those selling the items in the domestic market, the payment of import duty could be deferred,” the official said.

Some experts point out that de-linking the SEZ sops from exports would also make them compliant with the WTO norms. As per the report of the high-level group on SEZs headed by Bharat Forge chief Baba Kalyani, Dominican Republic is a good example of regulatory reforms aimed at eliminating incentives contingent on export performance for entities in the SEZ. The government delinked the minimum export share requirement for various units operating in SEZs in a phased manner. Some studies done of the Dominican Republic model point out that the attractiveness of its SEZs as a destination to export from did not go down with the change in rules.

“One needs to be clear that the WTO ruling prohibiting export subsidies is for the SEZ units and not the developers. Since the WTO prohibits subsidies for exports, if the government revisits the incentives, namely the export-linked tax exemptions, the issue could be addressed. The tax exemption could be linked to investments made rather than export profits,” said Hitender Mehta, Managing Partner, Centrum Legal.

No clarity on sunset clause

SEZ investors are in the midst of more uncertainty as there is no clarity yet on whether the government would extend the sunset clause on the income tax exemption under the scheme. According to the sunset clause, the 100 per cent income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for the first five years, 50 per cent for next five years and 50 per cent of the ploughed back export profit for subsequent five years, will expire on March 31, 2020.

A total of 351 SEZs have been notified so far, of which only 234 SEZs are operational.