Special economic zones (SEZs), once a major attraction for investors, lost their sheen following a combination of economic slowdown, adverse tax changes like the imposition of minimum alternate tax (MAT) and dividend distribution tax (DDT), and acute difficulty in aggregating large tracts of barren vacant land. A growing number of SEZ developers’ approaching the board of approvals (BoA) to denotify their existing SEZs or giving up their letters of approval has cajoled the BoA to revisit the policy and address investor concerns.
Sensing the need to revive interest in SEZ policy, the government has announced significant reforms by amending the SEZ rules in August. The significant amendment is in relation to the reduction in minimum area requirements. The minimum area required for setting up multi-product and sector-specific SEZs has been reduced to 500 hectares and 50 hectares, respectively. This is a 50% reduction from the earlier norm.
Minimum land area requirement of 10 hectares for information technology (IT) and IT enabled services (ITeS) SEZs have been dispensed with, but with the rider that the minimum built-up processing area requirement is 1 lakh sq metres for seven category A cities – Mumbai, Delhi (NCR), Chennai, Hyderabad, Bangalore, Pune and Kolkata; 50,000 sq metres for the 15 category B cities, including Jaipur, Ahmedabad and Bhubaneswar, and 25,000 sq metres for rest of the cities.
The reduction in the minimum land area requirement will certainly be a game changer. Developers holding in-principle approvals and facing challenges of land
aggregation, or those who are unable to market their built-up area can now reduce the SEZ area and utilise the same for other infrastructure development.
New players will be keen to enter the SEZ space, especially the IT/ ITeS SEZs, which have been the most successful entrant under the SEZ regime. With these revisions, depending on the FAR/FSI norms as applicable in the state, setting up SEZs over relatively smaller land tracts of about 8-10 acres would now be possible. (See illustration)
In a further relief, developers of existing and new SEZs can create additional sector(s) within the SEZ for each incremental land parcel of 50 acres or more. This would enable developers to add additional sectors to their SEZs. It is expected that this will help diversify the risk for the developers by enabling them to cater to more industries.
The definition of ‘sector’ has been expanded to include products or services, similar or compatible with each other, including related ancillary services and research and development services of the sector. This much-desired sectoral broadbanding would lead to clustering of similar units in the same area, thereby achieving economies of scale and reduction of operational cost for the industry as a whole.
Presently, the SEZ policy only allows for vacant or parcels of land with pre-existing structures, not in commercial use, to be considered as vacant land for the purpose of notifying the SEZ. As per the new reforms, any development or upgradation to pre-existing structures which has been subsequently added in the SEZ would be eligible for duty benefits similar to any other activity therein. Authorised operations carried on in such infrastructure would also be eligible for duty benefits in accordance with the law.
This fine-tuning of the SEZ policy provides a breather for this sector, which has been severely impacted after the dilution of tax benefits and ability to get funding from banks.
The author is tax partner, EY. Views expressed are personal