Budget 2022: SEZ Act to be replaced with new legislation, says Nirmala Sitharaman

Budget 2022: The decision of the government to relax SEZ norms stems from the fact that a number of them operate at sub-par levels and have suspended operations despite proliferation of such entities at a rapid pace.

Finance Minister Nirmala Sitharaman on Tuesday announced that SEZ (Special Economic Zones) Act will be replaced with new legislation. She said that the move aimed "for the development of enterprise and hubs".

"It will cover the existing industrial enclaves and enhance the competitiveness of exports," Sitharaman added during her Budget 2022 speech.

This is possibly to reduce the compliance burden and allow companies operating within the conclaves to sell their products in the domestic market without additional customs duty.

While the department of commerce has been looking to make changes in the SEZ norms for some time now, it had recently received an in-principle approval from the finance ministry.

In January, commerce secretary BVR Subrahmanyam had said: “If there is a unit in an SEZ facing the domestic market, it will behave like a domestic tariff area entity. If it is facing the international market, it will behave like an SEZ unit. It will still be one unit. That’s going to be a breakthrough once we get it through the next session of Parliament.”

Why changes were required?
The decision of the government to relax SEZ norms stems from the fact that a number of them operate at sub-par levels and have suspended operations despite proliferation of such entities at a rapid pace, reported CNBCTV18 earlier in January.

The Parliament had passed the SEZ Act in 2005 with the aim of attracting foreign direct investment (FDI) and creating a competitive and hassle-free environment for companies engaged in exports of goods and services. Since then, the government has given formal approval under the SEZ Act, 2005, to 426 SEZs and in-principle clearance to 33 SEZs, Moneycontrol reported quoting the commerce department.
But, as of September 30, only 268 units were operational across the country, employing 2.36 million people.

Read more: Budget 2022: SEZs may be allowed to sell goods in domestic market with no extra customs duty

According to Financial Express, the policy has leveraged those in the services sector, while companies in the manufacturing segment have languished.

Meanwhile, the commerce and finance ministries have often disagreed on the tax incentives to SEZ units. In 2018, an expert committee led by Bharat Forge chairman Baba Kalyani recommended significant changes in the SEZ policy, calling for separate rules and procedures for manufacturing and service SEZs.

While the commerce ministry rewrites the legislation, the finance ministry is likely to announce the simplification of SEZs in the budget, showing better collaboration between the two wings.