DESH & ‘videsh’ – The proposed Bill will create asymmetries

Source: The post is based on the article “DESH & ‘videsh’ – The proposed Bill will create asymmetries” published in the Business Standard on 6^th November 2022.

Syllabus: GS – 3 – Changes in industrial policy and their effects on industrial growth.

Relevance: About the draft DESH Bill.

News: The finance ministry has reportedly raised concerns about the Development Enterprise and Services Hub (DESH) Bill’s extension of tax concessions to special economic zones.

About the Development Enterprise and Services Hub (DESH) Bill 2022

Why does India need to replace the SEZ Act of 2005?

The draft DESH bill seeks to replace the SEZ Act of 2005. The Act aims to emulate China’s export-driven manufacturing strategy that transformed that country within a mere quarter-century. But the Act did not produce enough results because

a) Private sector-driven SEZ developers leveraged the tax arbitrage to create a massive real estate play, b) SEZ locations were not always optimal for export-oriented industries. For instance, large tracts of SEZs often comprise fertile farmland, and c) Supply eventually surpassed demand.

Hence, the draft DESH Bill seeks to maximise infrastructure use and enhance India’s export competitiveness.

What are the concerns highlighted by the finance ministry on the draft DESH Bill?

The issue of differential tax treatment: An SEZ is deemed “a customs territory outside India” and were liable for full customs duties plus integrated goods and services tax. But under the draft DESH bill, the SEZ units in the notified areas will be permitted to sell in the domestic tariff area (DTA).

This would create business units each of which would have a “DESH” area and “Videsh” area with differential tax treatments.

Create an outbreak of tax disputes: India’s existing tax laws are complex and contentious. The intra-unit variances were likely to create an explosion of tax disputes that will defeat the purpose of the new Bill.

Havoc for industrial units located outside the SEZs: DESH units producing the same goods as DTA units can enjoy tax breaks. This will create an inherent disadvantage for DTA units.

Does not address the problem with SEZ Act: Land acquisition by the private sector has proven a near-intractable problem to date. The DESH Bill does not address this issue.

What should be done?

A more universal approach to the problem of deficient infrastructure, red tape, and arbitrary and unpredictable policy intervention will benefit the country far more than reviving a largely unsuccessful attempt to reproduce China’s success.