Post-Budget pessimism on investor interest in SEZs

In the wake of the Union Budget proposals, developers of Special Economic Zones (SEZs) say the scheme is heading for an end, with investors' interest certain to reduce drastically.

Developers of SEZs were expecting some positive announcement in the Budget over removal of the Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT). However, their hopes were belied.

According to an expert on the sector, this is going to deal a big blow, especially to service sector SEZs -- manufacturing SEZs might still survive, due to sheer scale of investment and capital intensiveness.

Total exports from SEZs in 2010-2011 increased 43 per cent to Rs 3,15,868 crore (Rs 3158.68 billion) over 2009-2010. In the present financial year, SEZ exports till December 31 were Rs 2,60,973 crore (Rs 2609.73 billion).

Exports from SEZz are 34 per cent of the country's total exports. As on December 2011, investments worth Rs 2,77,259 crore (Rs 2,772.59 billion) have been made in SEZs and direct employment of 732,839 persons generated in these enclaves.

"Despite all the constraints, the performance of SEZs has been well but this is now coming down and so is investment. Investors' confidence has been shaken with the government's unstable policy measures. The government should have made some announcement towards removing MAT on SEZs. These are nothing but ways to frustrate investors," said P C Nambiar, director of Serum Bio Pharma Park, the country's first biotech SEZ and vice-chairman of the Export Promotion Council for EOUs and SEZs.

MAT and DDT were earlier not levied on SEZs. Last year, the government decided to change this and began making changes in the law; the matter has gone to court.

In the past two years, as many as 60 applications for SEZs have been withdrawn, while 35 developers have applied for denotification, according to data by CB Richard Ellis (CBRE),

the real estate consultants.

"If the government does not promote SEZs and takes away the tax incentives, the scheme would lose its flavour. Though the SEZ scheme does enjoy infrastructure status, investors are losing interest. The services sector SEZs would not be as attractive as they used to be," said Hitender Mehta, co-chairman of Assocham's Special Task Force on SEZs.

So far, the government has approved 584 SEZs. There are 381 notified SEZs, of which 148 are operational. Of these 148, only 17 are multiproduct SEZs. The remaining ones are SEZs dealing in engineering, electronics, IT/ITeS, hardware, textiles, bio-technology and gems & jewellery.

"The scheme was largely ignored despite the fact that it was launched as India's big grand plan for infrastructure development. Without a huge push from the government now, the demand for SEZs would come down substantially," averred Anshuman Magazine, chairman and managing director, CBRE South Asia Pvt Ltd.

SEZ units are given full income tax exemption on export income under Section 10AA of the Income Tax Act for the first five years, 50 per cent exemption for the next five years and 50 per cent of the ploughed-back export profit for the next five years. They are also, for the present, exempt from paying MAT and DDT.

Ajay Nijhawan, convener of the SEZ Developers Panel, has urged the government to keep these zones outside the purview of the Direct Taxes Code.

"Instead of announcing new policy measures to increase foreign capital inflows by building consensus, the government should focus on promoting the SEZ scheme only, which will ensure a steady flow of funds. SEZs are gradually becoming defunct.

Exports from SEZs should be given special incentives if the government really wants to promote exports," said Sanjay Budhia, chairman of the Confederation of Indian Industry's national committee on exports and imports and managing director, Patton Group.