On DESH bill, new conditions likely to apply

The draft bill, which was to be tabled in the monsoon session of the Parliament, may also see some revision, with the imposition of an equalization levy to bring supplies from the development hubs to the domestic market, to bring them on par with local players, two officials familiar with the development said.

The revenue department raised objections to the draft bill, which proposes a 10-year concessional corporation tax of 15% for new and brownfield units.

The revised bill is now expected to be tabled in the winter session of the Parliament and implemented next year. According to the proposal, companies setting up new manufacturing units in the proposed development hubs up to 2032 or scaling up operations will be allowed to pay a concessional corporation tax rate of 15%. However, the revenue department has argued that it will disadvantage domestic units outside DESH.

“We were open to a discussion on this at the time of rule-making. In principle, we agree that if we give any benefit or differential treatment, there has to be a slight obligation on these industries. We want to put a condition, and we will do it through the rules. There could be many. We could put a growth condition, an employment condition, and also a levy condition,” a commerce department official said.

As the revamped SEZs, to be called development hubs, will not be required to meet the net foreign exchange (NFE) positive condition or have any export obligation in compliance with the World Trade Organization (WTO) norms, the department of revenue is keen to know the new requirements for these developers to meet.

It wants to ensure that the tax revenue forgone due to benefits given to SEZs results in commensurate socio-economic benefits. “What is it that the DESH units will do that the domestic players will not? If there is no export obligation or NFE positive, the domestic industry will become non-competitive. The equalization levy is also not there in the bill to create a level-playing field. Units in DESH will enjoy a tax arbitrage. What additional things are these units going to achieve for the economy when compared with the units set up outside these enclaves? We need to ensure that units outside these proposed development hubs do not suffer in the local market while competing with producers in these specialized enclaves,” said a senior revenue department official.

The new law aims to make the SEZ Act, enacted in 2006 to boost export and manufacturing, compliant with WTO norms and boost manufacturing and job creation. “Since the units in the hubs would be entitled to fiscal and non-fiscal benefits, it would be logically expected to have underlying conditions. One would expect that the final draft of the DESH Bill and the rules would be put in public domain for industry consultations,” said Pratik Jain, a partner at Price Waterhouse & Co. LLP.

The commerce department may also introduce an equalization levy for sales from the revamped SEZs to the domestic market to create a level playing field. “We are open to putting the equalization levy condition. It will not be very high anyway,” said the commerce department official.

M.S. Mani, a partner at Deloitte, said it is essential that the bill makes it easier to sell in the domestic tariff area (DTA) and brings in minimal compliance for eligible units with fewer controls and more facilitation. “This will propel a new economic cycle with multipliers on employment and investment, which are essential to invigorate the economy,” he said.

An email sent to the finance ministry on Friday seeking comments for the story remained unanswered til press time. In response to a query, the department of commerce said, “We do not comment on speculation.” 

In a departure from provisions in the current law, units in development hubs will be allowed to sell goods in the domestic market, with customs duty to be paid only on the imported raw materials and not on the entire finished good.

Under this, if raw materials are imported at zero duty from a free trade agreement partner country, no duty will have to be paid when the final product is sold in the domestic market. This acted as a big deterrent in the current SEZ regime, as duty on the final product was levied on sale in the domestic market instead of only on the inputs that were imported duty-free for manufacturing.

Under the proposed bill, the minimum land condition is 50 hectares of contiguous land, the same as in the case of SEZs, but the new legislation proposes to allow services development hubs to de-notify floor-wise. Abhishek Jain, partner-indirect tax at KPMG in India, said the government should ensure there are no unnecessary delays in the new law to be enforced beyond the new timeline of early next year, as this could mean India will lose out on some foreign investments.

Experts believe further incentivizing SEZ units, especially by removing the condition on earning foreign exchange and by encouraging sales to domestic tariff area, will help.

“This, in turn, would help meet the objective of boosting manufacturing, optimum utilization of ideal land in SEZ, job creation and development of manufacturing hubs,” said Saurabh Agarwal, a tax partner at EY. 

First article