Govt exploring alternative incentives for SEZs to make them WTO compliant

The government is toying with various options, including de-linking of SEZ sops from exports and revamping the customs department’s scheme for manufacturing in bonded warehouses, to make them compliant with the WTO norms, the reports said. 

With the WTO prescribing withdrawal of export subsidies given to the special economic zones (SEZs) by the middle of 2020, the commerce ministry is exploring all options to alternative incentives for SEZ units.

“Discussions will take place between officials of the Commerce and Finance Ministries to see if some of the provisions of the new bonded manufacturing scheme could be replicated for SEZ units,” the official added.

On 31 October,  the WTO ruled that many of India’s export subsidies, including the ones given to SEZs, flouted multilateral trade rules as the country’s annual gross national income (GNI) had exceeded $1,000 annually for three consecutive years and such countries were not allowed to give export sops. The ruling was based on a complaint filed by the US.

Although India has challenged the panel verdict at the WTO appellate body, where work is temporarily suspended, the government is trying to get trade relations with partners like the US in order as soon as possible.

“The commerce ministry is trying to draw insights from the revamped scheme for manufacturing in bonded warehouses as it involves exempting manufacturers from paying import duties on inputs and capital goods on items that are exported. As the tax exemptions are on inputs and not income, these are permissible under the WTO rules. For those selling the items in the domestic market, the payment of import duty could be deferred,” the official was quoted as saying.

As per the report of the high-level group on SEZs headed by Bharat Forge chief Baba Kalyani, Dominican Republic is a good example of regulatory reforms aimed at eliminating incentives contingent on export performance for entities in the SEZ. The government delinked the minimum export share requirement for various units operating in SEZs in a phased manner. Some studies done of the Dominican Republic model point out that the attractiveness of SEZs as a source of export did not change with revamped rules.

According to the sunset clause, the 100 per cent income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for the first five years, 50 per cent for the next five years and 50 per cent of the ploughed back export profit for subsequent five years, will expire on 31 March 2020.

Of the total 351 SEZs that have been notified so far, only 234 SEZs are operational.