DESH Act will allow seamless operation between SEZs and DTAs

Alex Paul Menon IAS | September 21, 2022

Alex Paul Menon IAS, Joint Development Commissioner, MEPZ Special Economic Zone, feels that the draft DESH Scheme is a well thought out legislation to replace the SEZ act, and India must now move towards a genuine single window clearance mechanism that relies on technology, ensures greater decentralisation and minimizes human intervention.

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While understanding the outcomes of the SEZ Act and the need for the current DESH Scheme, it is pertinent to study one particular data point. Under the jurisdiction of MEPZ, where we have Tamil Nadu, Pondicherry and Andaman & Nicobar Islands, there is over 2,000 hectares of land area, and the land utilized is only 50%. When we look at the services sector, we have close to 23.6 crore square feet of built up area with us, out of which around 7.6 crore square feet is lying vacant. Nationally, around 20,000 hectares of land and around 10 crore square feet of built-up space is lying vacant.

So why is this happening? On one end, the industry is asking for land and built up area. And on the other side, we are having developed, partially developed land areas where industry can just go and plug in and also a built up space, which is lying vacant. These anomalies happened (to draw an interesting parallel) because we actually brought a horse to India. And while bringing the horse, a gentleman offered transport services to bring the horse. And after he bought the horse, he said “Just because I offer transport, I will not let this horse move freely. You’re going to strap it to a pole and it is going to operate only within 10 square meter of this pole!”

The need to replace SEZ Act

So what we have done in the name of offering incentives is to basically create the infrastructure for continuous imports of raw material. Just because they offered something duty free, we decided that we’ll not let the horse go out and search for its own greener pastures. And the greener pasture may be inland or outside. It doesn’t mean we have to just lock the horse in. That is the story of Indian SEZs so far. We have a horse and we aren’t letting it run free to search its own pastures and grow.

If you look at it, when we conceived SEZs, we did not even have services in its scope in 2005. But if you look at the growth of the services sector today, it’s humungous. And the legislation neither meets domestic nor WTO needs. In fact, the criteria called Net Foreign Exchange Earnings is detrimental to our own domestic needs. If the industry becomes exclusively export oriented, the product becomes very expensive the moment you sell to the DTA. There are numerous stories, wherein a company just setting up shop in India is not able to sell locally. Alternatively, if the same company sets up a unit abroad, and is selling to India under a free trade agreement (say ASEAN), the products that come in are relatively much cheaper.

To sum it up, we have not carefully thought about optimization of the capex and the infrastructure put in place to basically create these world class products within the country. This optimization requires that every penny spent within this country in creating infrastructure, transport and logistics facilities will have to be thoroughly utilized. For that, we need to have a very flexible approach and think of larger scales; and not just restrict ourselves with smaller objectives. To do that and be integrated with the global value chain, we need to really think on a larger scale, better products and greater flexibility. The existing Act had to be modified in a big way, by relooking at the current highly centralized structure and involving more state governments in decision making.

If it’s possible to run the unit for 24 hours and current export orders mandate you to run for just eight hours, you put machinery for waste for the next 16 hours. That is not acceptable – you should still be able to utilize it 24/7, cater to the DTA or any other area. And when a unit requires any kind of subsidy or incentive for exports, they should reach us and freely operate, just by paying taxes. That should be the approach, rather than putting a filter at the valve and saying that everybody will go through the valve. Only those who seek incentives come through the valve, get a little scanning done and then move out, and the rest of them do business as usual.

As the Baba Kalyani committee report rightly pointed out, we need to create the triple Es or the Employment and Economic Enclaves, where we have infrastructure. Everybody can plug in and cater to all markets around. There are three key impediments to focus on –net foreign exchange, free movement to and from DTA and contiguity clauses. The moment you tackle these three, every zone becomes an absolutely free zone. This way, we are looking at an influx of existing units coming and asking for SEZ status and not the other way around. In the light of all this, it was extremely important to create a new bill with a new thought, where there is no NFE criteria and where to and fro movement between the DTA and the SEZ units happens seamlessly. This is what we are looking at in the new DESH Act.

Maximising ease of business

If we look at just the labor sector, there are around 45 state and central acts in all. Just for complaints in this area, companies have to maintain 94 registers. So a labour inspector can actually walk into any industry, catch hold of the entrepreneur and say, “You have not maintained your register number 92!” Since we have multiple laws and each of them has its own rules, one has to maintain a certain set of information in a certain format, and either file them or keep them as a register.

Apart from labour, there at least 30 plus more acts under which you need to maintain information – whether pertaining to central government, state government or authorities like pollution control. The only way that an industry thrive or survive in such a scenario is with a decentralized accountability structure and single window system for all approvals and compliances.

Even today, there are multiple single windows inside every single window. Whereas we’re speaking about a real single window, this can actually function in a manner that does not hamper the existing authority. Collection of information should instead happen in two forms – one for approvals and one for compliances. Each information should get divided and sent through an Application Programming Interface (API) to the concerned department for approvals. And we should have a system of deemed approvals within a timeline. The new proposed Act is actually going to have this provisional agreement. If somebody applies, and it’s not happening within 90 days, it will be considered a deemed approval.

We also introduced a concept called partnering government agency. It may be a state government authority, a public sector authority considered under certain laws as independent, central agencies or so on and so forth. Anybody who’s involved in the management of the industry, will have to become a partner government agency. And whoever volunteers to be part of the SEZ will be subjected to provisional approval over a time span of 90 days. They will still have another 90- or 180-day window to contest the provisional approval, and pull back approvals. If they don’t do so, it becomes deemed approval.

This kind of single-window system should be able to automatically check whether the industry is compliant to all rules and regulations or not. For example, if there is a particular labor law, say, Payment of Bonus Act, the system will automatically detect anomalies. Life becomes simple, and industry also stays vigilant.

There is one school of thought that the development commissioner of the SEZ should have all the powers of labor, industry, environment, etc and be the adjudicator on every law applicable on it. It is humanly impossible to vest that kind of responsibility with one single authority. Rather than depend upon people, we should be dependent upon a single-window computerized ecosystem with a provisional and a deemed approval scenario, which takes care of all our approvals as well as compliances. That will reduce the load from the central government to the state government or regional authority, as conceived in the new Act.

We have also proposed a state authority that will have a larger role on approvals, with a key role being played by the development commissioner’s office. In this kind of single window system, everybody is connected digitally and there is a faceless, paperless approval compliance monitoring system where we rely more on the business intelligence tools, and not on human intervention. This is the future we must envisage for the industry.

The author is Joint Development Commissioner, MEPZ Special Economic Zone. Views expressed are personal