The Indian Government is all set to introduce the Development of Enterprise and Service Hubs (DESH) Bill in the upcoming monsoon session of Parliament. This legislation aims to revamp the Special Economic Zone law of 2005, stimulating interest in SEZs and creating more comprehensive economic hubs.
Understanding the DESH Bill
The DESH Bill proposes a significant transformation to the current SEZ law. The existing SEZs will be restructured and renamed as Development hubs, liberated from several limiting laws. Designed to boost both export-oriented and domestic investment, these hubs will perform dual roles as domestic tariff areas and SEZs.
To level the taxation playfield, the government might impose an equalization levy on goods or services supplied domestically, aligning taxes with those imposed by units outside.
The Rationale Behind Replacing the Existing SEZ Act
The World Trade Organization’s dispute settlement panel ruled that India’s export-related schemes, such as the SEZ Scheme, were inconsistent with WTO rules. This is due to direct linkage of tax benefits to exports, which could manipulate market prices—something that the countries are not permitted to do.
Furthermore, SEZs began to lose their appeal following the introduction of the minimum alternate tax and a sunset clause to eliminate tax incentives. For instance, SEZ units used to receive 100% income tax exemption on export income for the first five years, 50% over the following five years, and 50% of the reinvested export profit for another five years.
Significance of the DESH Legislation
Unlike the SEZ regime, which primarily aimed at promoting exports, the DESH Bill has a broader goal—it intends to boost domestic manufacturing and create jobs through ‘development hubs’. These hubs would no longer need to be net foreign exchange positive on a five-year cumulative basis, i.e., exporting more than importing, which is a mandate in the SEZ regime. This makes the hubs WTO-compliant.
New Provisions Under DESH Legislation
The DESH legislation introduces an online single-window portal for providing time-bound approvals for establishing and operating these hubs. It facilitates companies to sell in the domestic market, wherein they pay duties only on the imported inputs and raw materials instead of the final product. Notably, it does away with the mandatory forex payment requirement present under the SEZ regime.
Empowering States Under DESH Regulation
The DESH initiative provides an increased role for States. State boards will be established to supervise the functioning of these development hubs, approving imports or procurement of goods, monitoring the utilization of goods or services, warehousing, and trading. Unlike the SEZ regime where the commerce department at the Centre made most decisions, States will now have the authority to recommend development hubs for central board approval.
