SEZs and the Indian Economy: A Roadmap for the Future?

July 14, 2014 Posted by India Briefing Reading Time: 3 minutes

DELHI – India’s Ministry of Commerce and Industry has released new statistics that highlight the positive impact of special economic zones (SEZs) on economic growth and development — a trend the new BJP government is keen on sustaining and enhancing in the future.

Since the enactment of the SEZ Act in 2005, formal approval has been granted to 565 SEZ proposals and a total of 185 SEZs have successfully begun exporting from India. Companies operating in Indian SEZs are eligible to take advantage of several incentives including the duty free procurement of goods for the development, operation and maintenance of SEZ activities alongside exemptions from service, income and sales taxes.

According to the Ministry of Commerce and Industry, SEZs’ share of Indian exports rose from 24.86 percent in 2011-2012 to 26.10 percent in 2013-2014. This means that over the same period SEZ exports accounted for US$60.76 billion and US$82.37 billion, respectively.

SEZs also served India’s economy well in terms of employment generation. Between 2011 and 2014, SEZ employment rose more than 51 percent—from 844,916 in 2011 to 1,283,309 in 2014.

In an attempt to augment this positive track record, the Department of Commerce is reportedly considering a comprehensive package of investment incentives to boost Indian SEZs’ international competitiveness.

“It could not be included in the [2014] budget since the government is working on a package of sorts for SEZs. We will take up the issue with the finance ministry,” a senior tax department official commented.

According to sources quoted in the Times of India, the new SEZ package may include, among other incentives, exemptions from minimum alternative tax (MAT) and dividend distribution tax.

A substantial challenge for many foreign companies operating in SEZs remains persistent conflict with tax authorities, however. Nokia’s ongoing dispute with tax authorities over SEZ taxes and transfer pricing is only one example of several taxation battles foreign firms have been party to in recent years.

Despite PM Modi and the BJP promising to foster a more stable tax regime by abandoning India’s controversial retrospective tax policies, the 2014 budget failed to explicitly eliminate retrospective taxation and instead stated that pending cases would be examined by a committee before a decision would be taken on whether or not to continue legal proceedings.

Agreeing to extend SEZ benefits to National Investment and Manufacturing Zones (NIMZ) and industrial parks during VP Hamid Ansari’s recent visit to Beijing, it is possible that an improved SEZ model will become a cornerstone of Modi’s economic roadmap.

The BJP’s new SEZ incentive package is expected to be presented alongside the release of its Foreign Trade Policy (FTP) next month.

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