Draft Development of Enterprise and Service Hubs (DESH) Bill: SEZs to be turned into mfg hubs for domestic markets

Source: The post is based on the article “SEZs to be turned into mfg hubs for domestic markets” published in Livemint on 6th July 2022.

What is the News?

Government plans to table the Development of Enterprise and Service Hubs (DESH) Bill in the monsoon session of the Parliament. This bill will replace the current Special economic zones (SEZ) Act,2005.

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

The World Trade Organization’s dispute settlement panel has ruled that India’s export-related schemes including the SEZ Scheme were inconsistent with WTO rules, since they directly linked tax benefits to exports. Countries aren’t allowed to directly subsidize exports as it can distort market prices. 

Further, SEZs also started losing their attraction after the introduction of minimum alternate tax and a sunset clause to remove tax sops. SEZ units used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the ploughed back export profit for another five years.

Hence, that’s why this new Draft DESH Bill has been brought to replace SEZ Act, 2005.

What are the key provisions of the draft Development of Enterprise and Service Hubs (DESH) Bill?

Firstly, Special Economic Zones will now be renamed as Development of Enterprise and Service Hubs (DESH).

Secondly, these hubs will no longer be required to be net foreign exchange positive cumulatively in five years (i.e, export more than they import) as mandated in the SEZ regime.

Thirdly, the hubs will be allowed to sell in the domestic market easily with duties only to be paid on the imported inputs and raw materials instead of the final product. In the current SEZ regime, duty is paid on the final product when a product is sold in the domestic market. 

Fourthly, the Bill proposes an equalization levy for goods or services supplied to the domestic market to bring taxes at par with those provided by units outside.

Fifthly, the units operating within the new hubs will no longer benefit from direct tax incentives, which will be scrapped — a move that will make the hubs compliant with World Trade Organization rules.

Sixthly, the bill does not limit how long units can store goods, which is one year currently. Besides, there is no mandatory payment requirement in foreign exchange.

Lastly, in the current SEZ regime, most decisions were made by the Department of Commerce at the Centre. Now the Bill allows states to participate and even directly send recommendations for development hubs to a central board for approval. Besides, state boards would be set up to oversee the functioning of the hubs.