There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool of industrial development,…

Question

There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool of industrial development, manufacturing and exports. Recognizing this potential, the whole instrumentality of SEZs requires augmentation. Discuss the issues plaguing the success of SEZs with respect to taxation, governing laws and administration.

Ghissu Editorial · Accepted Answer

SEZs are held back by eroded and uncertain tax incentives, laws that overlap with mainland and state rules, and a multi-layered approval system that is no true single window. MAT and DDT imposed in Budget 2011-12 removed much of the promised tax advantage.

**Introduction**

The SEZ Act, 2005 promised duty-free enclaves with a single window for manufacturing and exports, but the CAG's 2014 audit found much notified land idle and tax concessions out of step with the jobs and exports generated.

**Taxation: Eroded and Uncertain Incentives**

1. **MAT and DDT shock**: Budget 2011-12 imposed Minimum Alternate Tax on SEZ units and developers and Dividend Distribution Tax on developers, eroding the promised tax holiday.
2. **Policy flip-flops**: The draft Direct Taxes Code proposed withdrawing SEZ exemptions, unsettling long-gestation investors.
3. **WTO vulnerability**: Export-linked Section 10AA exemptions are open to challenge as prohibited subsidies, as the United States did in 2018.

**Governing Laws: Enclave Out of Step**

1. **Land conflict**: Nandigram (2007) and Goa's cancellation of its SEZs made them land-banking controversies.
2. **Overlapping laws**: Central labour, environment and state laws still apply, so the Act is no single code.
3. **Domestic market barrier**: Sales into the Domestic Tariff Area pay full customs duty, while FTA partners' goods often enter cheaper.

**Administration: Many Desks, No Single Window**

SKETCH: flow | SEZ Approval Chain
- Developer proposal
- State recommendation
- Board of Approval
- Development Commissioner
- Unit Approval Committee

1. **Layered clearances**: Approvals pass through the state, the Board of Approval and the Development Commissioner, while state permits stay outside the window.
2. **Weak monitoring**: The Development Commissioner is both promoter and regulator, and the CAG found investment and export commitments untracked.

**Conclusion**

SEZs falter for want of stable taxation, harmonised laws and a genuine single window. Recasting them as WTO-compatible employment and economic hubs, as the Baba Kalyani Committee (2018) and the proposed DESH Bill suggest, would make them true engines of manufacturing.

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