Even before 1991, when India’s economy was broadly autarkic by design, export promotion was part of our policy agenda. Designated areas were carved out as special economic zones (SEZs), with these industrial estates exempt from various levies that went against export competitiveness. Set up in the mid-1960s, Kandla in Gujarat was our first SEZ. It has long been dwarfed by another one across the Gulf of Kutch in Jamnagar, home to a huge Reliance oil refinery that logs major exports, but we also have hundreds of other SEZs, all of them governed by the SEZ Act of 2005.
Even before 1991, when India's economy was broadly autarkic by design, export promotion was part of our policy agenda. Designated areas were carved out as special economic zones (SEZs), with these industrial estates exempt from various levies that went against export competitiveness. Set up in the mid-1960s, Kandla in Gujarat was our first SEZ. It has long been dwarfed by another one across the Gulf of Kutch in Jamnagar, home to a huge Reliance oil refinery that logs major exports, but we also have hundreds of other SEZs, all of them governed by the SEZ Act of 2005. By basic definition, these are duty-free enclaves. So long as businesses earn more foreign exchange than spend over each five-year stretch, units located here can freely import what they need (i.e., sans permits, duties and customs checks) and also enjoy a clutch of tax exemptions, such as zero GST on domestic supplies. As these operate like offshore zones, any sales of their products and services in the Indian market face regular import tariffs. In 2019, however, the World Trade Organization (WTO) held that subsidies for our SEZ units violated its rules of fair trade. In response, the government now plans to enact a bill that will restructure and reposition SEZs. While this may offer us a way out, let's do it with minimal scope for unintended consequences.
The Centre proposes to rebrand Indian SEZs as 'development hubs' under the Development of Enterprise and Service Hubs (DESH) bill. Since this legislative proposal has been drafted for WTO compliance, it has reportedly dropped the net forex earnings criterion for SEZ units, to be replaced with a set of growth criteria that could include investment and employment ramp-ups as qualifiers for benefits. Apart from an expected holiday on customs duty and GST for machinery imports and raw inputs, the main benefit might be an offer of a special corporate tax rate of 15% instead of 22%, as available to new manufacturers that start operations by March 2024, except that this window will be open for a decade, with existing units allowed to avail of it if they increase capacity by 50% or reinvest half their net worth. A 15-year sliding scale of income-tax relief under India's current SEZ law looks likely to be retained. With easy clearances thrown in, our development hubs would thus be attractive to investors. What's unclear is the overall impact this move away from an explicit export orientation will have.
In order to ease sales made by hub units within the country but outside hubs, the Centre envisages tariffs levied on just imported inputs rather than finished products. Also, in case of domestic sales, the DESH Bill wants space left for case-by-case easing of retrospective duties that currently get slapped on imports of capital goods. While the redefinition of SEZs could help us get around WTO restrictions on export subsidization, it should not distort playing fields within India. According to reports, the idea of an 'equalization levy' to counter hub privileges has been rejected. This would leave hub players with an advantage over others, with special treatment justified only by their fast pace of expansion. Spurring private investment is a worthy goal, no doubt, but the blurring of target markets will complicate taxation and raise the question of why non-hub enterprises can't be treated at par. All Indian businesses need to get more competitive, regardless of location. For this, light levies and low tariffs in general would be a better formula. Success stories, after all, can emerge from anywhere.