Free Trade Zones

Liberate Special Export Zones

The Indian government’s decision to revamp the Special Economic Zones (SEZs) through the Development of Enterprise and Service Centers (DESH) Bill is a good one. The 268 or so zones, created by a separate law in 2005, to serve the export market have failed to take off. Big corporations rushed to give tax breaks to milk in these enclaves, leading to misallocation of resources and loss of revenue.

The DESH bill’s tax package could include levying a 15% corporate tax on units installed in these hubs through 2032. A lower rate, rather than a full tax exemption, is pragmatic. This could motivate global players to settle. Today, new domestic manufacturing companies are also subject to a 15% corporation tax, provided they avoid exemptions and the alternative minimum tax.

Another change includes modifying the eligibility criteria for SEZ units to link them to investments in R&D, innovation and job creation rather than foreign exchange earnings. This also makes sense. The SEZ Act 2005 required units to make positive net foreign exchange earnings.

Exports must exceed imports over five years from the start of production to qualify for tax breaks and exemptions. This has been challenged at the WTO, arguing for a policy overhaul. More concessions for SEZ units for sale in the Domestic Rate Area (DTA) will undo the harm done to the DTA industry by unequal competition from SEZ units. A policy framework that is non-discriminatory and minimizes import duties would be a better bet.

Allowing partial denotification of these hubs to free up unrequested areas is a good idea. The Indian government must provide sound infrastructure and administration and improve the regulatory environment for investors. Global trade reached $28.5 trillion in 2021. India’s share is still below 2%.