SEZ: A vision gone awry

By Ajay Dabas
Founder Certes Realty ltd.


When the current SEZ policy was formulated it was done with the aim to provide a level playing field for domestic enterprises and manufacturers. India already had Export Processing Zone (EPZ) model dating back to 1965 and while formulating the SEZ policy the objective was to learn from the shortcomings of the EPZ model and improve it.

As soon as the policy was unveiled, it seemed that the government had hit a jackpot. One after another, big industrialists threw their weight behind SEZ, announcing big plans. As of Sept 30, 2011, 582 formal approvals had been granted for setting up of SEZs out of which 382 have been notified, over Rs 2,77,258 crores had been invested in the SEZs, which has resulted in direct employment of more than 7 lakh people.

While this might seems like a rosy scenario, the truth is far from it. It was a clear indication that something is amiss many mammoth SEZs have failed to even start up. Some big ticket projects which have been scrapped include Mukesh Ambani -led Reliance SEZs which were supposed to come up near Gurgaon and Jhajjar in Haryana. While the deal for setting up of the SEZ was signed more than six years ago no progress has been made on the actual site where the projects were supposed to come up. Some other projects which have been abandoned because of poor business outlook have been Videocon Realty and Infrastructure’s proposed 10 hectare-IT/ITeS SEZ in Jalpaiguri, West Bengal and Larsen & Toubro’s proposed 11-hectare IT/ITeS SEZ in Coimbatore, Tamil Nadu.

The reasons for delay and sometimes scrapping of the projects under the scheme can be attributed mainly to lack of foresight while formulating the policy and additional taxes imposed by the Finance Ministry.

Land acquisition per se has been a big bone of contention in India for a while. Nandigram is a prime example of how lack of proper policy can cause massive problems in the setting up on projects. Something similar is being repeated in Jaitapur, Maharashtra where most villagers have refused to give up their land for upcoming nuclear power plant. While the government on its part has struggled, it has been a thorny road for corporates also. The current policy states that a corporation requires minimum 1,000 hectares of land if they intend to set up an SEZ. Acquiring of such large swathes of land has proved to be a stumbling block. In most places, SEZ developers have had to deal with stiff opposition from farmers whose land was to be acquired. The farmers not only demanded compensation based on market rate, they also wanted a comprehensive rehabilitation policy and work opportunities in the SEZ.

The biggest blow to SEZ units however was dealt by the imposition of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT). When the SEZ policy was unveiled the government had promised tax concessions on profit for a period of 15 years to boost early adaption. In budget last year, however the Finance Ministry imposed 18.5 per cent MAT and 15 per cent DDT on SEZ units. The rising cost of land acquisition coupled with the new taxation structure made a huge dent on the business viability and profitability of SEZ. Most operating SEZs saw a dwindling of their net margins by 8 to 10 per cent as a result of the new taxation policy.

In the last few months these factors have made a lot of corporations go in for delisting. In the last six months in Maharashtra alone, which was once the flag bearer of SEZ, at least 28 SEZ proposals have been withdrawn or projects denotified.

A less explicit but more worrying reason which prompted the government to come down heavily on SEZs was the anomaly in trade data. Due to worldwide recession and sluggish economy the export market has taken a major hit. While the general export market fell in India, the SEZ units recorded a jump of 123 per cent. A lot of people insisted that the projection were being worked on as the people behind SEZs wanted to show profitability while actually they were using the policy to consolidate land at lowest prices.

Faced with growing indifference to SEZs it is about time the government takes a hard look at reformulating the policy and coming out a comprehensive land acquisition model which protects the interests of the farmers but also makes land acquisition a transparent process. Simplifying of the rules of setting up and running of SEZs is also the need of the hour. As more and more corporates bow out of the SEZ dream, it is up to the government to tackle these contentious issues.

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