Explained: What new DESH Bill entails, how it varies from SEZ Act

The Development of Enterprise and Service Hubs (DESH) Bill, which when passed by Parliament will replace the Special Economic Zones Act (SEZ) law of 2005, is likely to be introduced in the winter session.

Union Finance Minister Nirmala Sitharaman had, in her Budget speech this year, announced that a new legislation will replace the SEZ Act. The new bill, which it was said will allow states to become collaborators in development, also aimed at making SEZ rules more WTO-compliant.

The bill to overhaul the SEZ Act was scheduled to be tabled during the monsoon session but was deferred.

What’s in the bill?

The DESH Bill looks at reviving SEZs and developing them into inclusive economic hubs. It makes two crucial changes to the SEZ Act. It delinks the positive net foreign exchange requirement and provides these hubs with access to domestic markets.

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Under the new law, if cleared, the units will be allowed to manufacture for domestic as well as international markets. The SEZs will be called development hubs, and will facilitate both export-oriented and domestic investment.

The new bill is also likely to provide for a single-window system for both central- and state-level clearances.

To comply with WTO rules, evaluation of net forex and direct tax incentives has been done away with. Also, to bring taxes at par with those provided by units outside, the government may impose an equalisation levy on goods or services supplied to the domestic market.

A nod to WTO rules

According to WTO’s dispute settlement panel, India’s export-related schemes, including the SEZ scheme, were inconsistent with WTO rules since they directly linked tax benefits to exports. India had lost an appeal against this order.

The SEZ Act was implemented in 2006 to create export hubs and boost manufacturing in the country. However, the introduction of a minimum alternate tax (MAT) and a sunset clause for the removal of tax incentives took the sheen off these SEZs.

The government had set a sunset date for SEZ units to begin operations to be eligible for a 15-year phased income-tax holiday, which made the need for the new bill necessary.

The new law aims at creating large industrial manufacturing zones with world-class infrastructure so as Indian domestic units achieve global standards and become competitive.

Finance Ministry’s objection

However, the Finance Ministry has some issues with the DESH Bill and no compromise has yet been reached with the Commerce Ministry in this regard. The Finance Ministry has been opposing some key provisions of DESH, according to a Financial Express report, which includes the corporate tax rate of 15 per cent until 2032 for units in these planned hubs.

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The newspaper report says that the ministry has, in its formal comments on the Bill, emphasised its reluctance to integrate the hubs with the domestic market in contrast to SEZs, which have explicit export obligations.

This stand by the finance ministry may further delay the passage of the DESH Bill.