The union budget has proposed to replace the existing law governing special economic zones (SEZs) with a new legislation to enable states to become partners in “Development of Enterprise and Service Hubs”.

“The Special Economic Zones Act will be replaced with a new legislation that will enable the states to become partners in ‘Development of Enterprise and Service Hubs’. This will cover all large existing and new industrial enclaves to optimally utilise available infrastructure and enhance competitiveness of exports,” union finance minister Nirmala Sitharaman said in her budget speech.

The existing SEZ Act, 2005 aims to create export hubs and boost manufacturing in the country. However, these zones started losing their sheen after imposition of minimum alternate tax and introduction of sunset clause for removal of tax incentives.

Industry has demanded continuation of tax benefits provided under the law. Units in SEZs used to enjoy 100 per cent income tax exemption on export income for the first five years, 50 per cent for the next five years and 50 per cent of the ploughed back export profit for another five years.

“We will also undertake reforms in Customs Administration of SEZs and it shall henceforth be fully IT driven,” the finance minister said.

and function on the Customs National Portal with a focus on higher facilitation and with only risk-based checks,” the minister said.

“The announcement to replace the current SEZ Act of 2005 by a new legislation with active participation of the state governments will unleash the true potential of SEZs. The readily available infrastructure and huge investment of Rs 6 lakh crores in SEZ caters to 1/3rd of India’s total exports,” said Sanjay Budhia, MD, Patton Group.

“With the reduction in benefits for entities intending to set up a unit in SEZ, the proposal to replace SEZ Act with new legislation should create significant growth opportunities for service entities. It might also introduce operational benefits for entities having domestic clients and for new ways of working (from home) which were the problem areas for entities operating in SEZ,” said Ankur Gupta, practice leader, Indirect Tax, SW India.

As on January 27, the government has given formal approvals to 425 SEZ developers. Out of this, 268 were operational till December 31, 2021.

As on September 30, 2021, these zones had attracted Rs 6,28,565.89 crore investments and employed 25,60,286 persons. During April-December this fiscal, exports from these zones rose by 25 per cent to Rs 6.89 lakh crore (USD 92.83 billion). It was USD 102.32 billion in 2020-21.