The Centre plans to table the Development of Enterprise and Service Hubs (DESH) Bill in the monsoon session of the Parliament, which will overhaul the special economic zones (SEZ) legislation.

What are SEZs?

• A Special Economic Zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
• SEZs are located within a country’s national borders, and their aims include increasing trade balance, employment, increased investment, job creation, and effective administration.
• Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

SEZs in India

• The SEZ policy in India first came into inception on April 1, 2000.
• The prime objective was to enhance foreign investment and provide an internationally competitive and hassle-free environment for exports.
• The idea was to promote exports from the country and realize the need for a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally.
• Subsequently, the SEZ Act 2005, was enacted to provide the umbrella legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.
• SEZ units used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the ploughed back export profit for another five years

Why replace the existing SEZ Act?

• The World Trade Organization’s dispute settlement panel has ruled that India’s export-related schemes, including the SEZ Scheme, were inconsistent with WTO rules.
• India has been accused of giving tax benefits to exports through SEZs.
• Countries aren’t allowed to directly subsidize exports as it can distort market prices.
• SEZs also started losing their allure after the introduction of minimum alternate tax and a sunset clause to remove tax sops.

How is the DESH legislation different?

• The DESH legislation goes beyond promoting exports.
• It has a much wider objective of boosting domestic manufacturing and job creation through ‘development hubs’.
• These hubs will no longer be required to be net foreign exchange positive cumulatively in five years (i.e, export more than they import) as mandated in the SEZ regime.
• They will be allowed to sell in the domestic area more easily. The hubs will, therefore, be WTO-compliant.
• DESH legislation also provides for an online single-window portal for the grant of time-bound approvals for establishing and operating the hubs.

Will there be any tax benefits at these hubs?

• It’s not clear yet.
• However, the draft Bill does state that states and the Centre will be allowed to give further incentives in the form of tax rebates, incentives, exemptions, and duty drawbacks.
• Subsidy schemes may be offered for goods and services at these hubs.
• States and the Centre may take fresh measures to speed up clearances and simplify compliance.

Will it be easier to sell in the domestic market?

• Companies can sell in the domestic market with duties only to be paid on the imported inputs and raw materials instead of the final product.
• In the current SEZ regime, duty is paid on the final product when a product is sold in the domestic market.
• Besides, there is no mandatory payment requirement in forex, unlike in the case of SEZs.
• However, the government may impose an equalization levy on goods or services supplied to the domestic market to bring taxes at par with those provided by units outside

What role will states play in DESH?

• DESH is expected to play a larger role, definitely.
• In the SEZ regime, most decisions were made by the commerce department at the Centre.
• Now, states will be able to participate and even directly send recommendations for development hubs to a central board for approval.
• Besides, state boards would be set up to oversee the functioning of the hubs.
• They would have the powers to approve imports or procurement of goods, and monitor the utilization of goods or services, warehousing, and trading in the development hub.

Way forward

• If indeed India needs the special hubs, the govt must address the critical gaps in existing SEZ law through the DESH bill and it must be thought through before bringing it to the Parliament.
• Effective implementation of the law could act as a lever to India’s growth.

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