Tuesday, December 27, 2011

Companies pulling out of SEZ after incentives were scaled down in India

Looks like companies are pulling out of SEZs after the Indian government pruned benefits given to companies locating and operating inside SEZ. Below is a story published in The Economic Times.

But this February, finance minister Pranab Mukherjee pruned some of those benefits to SEZs, leaving entrepreneurs like Sonthalia fretting. "Having already made a significant investment of Rs 200 crore, we couldn't have pulled out," says Sonthalia, vice-chairman & managing director, Sonthalia Group of Companies. Sonthalia represents India Inc's growing disenchantment with SEZs -- the previous government's big idea to drive exports and, in turn, employment and growth.

China was reaping the benefits of such a policy crafted in the eighties and UPA-I felt SEZs could redefine India's status as an exporter. It rolled out a 15-year SEZ plan in 2006. Land on a platter. Speedy approvals. No income tax for five years and concessions for another 10 years. No tax on inputs.

Except after two years, the promises started coming unstuck, like the one on income tax. "We don't know what the government might do next," says Sonthalia. Faced with a harsher business climate and a government that is wavering on SEZ laws, companies are unsure whether they can plan for 15 years. About one-third of companies that held the rights to build an SEZ -- 202 of 583 -- have raised their hands and walked away.

The pace of withdrawals is increasing, with 60 leaving in the past two years alone. These include companies that were looking to set up SEZs for captive purposes (Bata, Dr Reddy's and Essar) or to lease it out (DLF, Omaxe and Unitech). It's no different for tenants. "Most units are evaluating their tax arbitrage before deciding whether to go to an SEZ," says Anshuman Magazine, managing director, CB Richard Ellis, a real estate consultancy.

About one-third of India's exports come from SEZs. Impressive as that headline number is, it is boosted by some migrating exporters -- for example, IT companies moved from software technology parks to SEZs. Further, it hides the skew of just five states and five sectors account for 90% of exports from SEZs. It hides the fact that SEZs are anything but nonurban and manufacturing conclaves, as they were conceived to be.

Of the 583 SEZs the Indian government had approved till October 2011, only 143 were operational. The running SEZs are operating under capacity as well. The government recently changed land acquisition, incentives and taxation provisions. In 2008, the Indian government transferred the responsibility of land acquisition from government to developer itself. In 2009, the government changed the basis of incentives from profits to investments in the draft of the direct tax code (DTC). In 2011, the budget removed income tax exemption for 15-year period and slapped 18.5% minimum alternate tax and 15% dividend distribution tax. Investors argue that once the DTC is enacted, SEZs won't be an attractive option. Why did this happen? It is because  of the tussle between two ministries for long-term plan (commerce) and short-term imperatives (finance).