Source: Financial Express, Aug 17, 2013
On Monday, the government rolled out the promised “package of reforms” to boost the country’s exports. The commerce ministry notified the Amended Rules, 2013, for special economic zones (SEZs) launched with much fanfare over seven years ago.
However, real estate developers are not very enthused by the amended policy. The reason, they say, is not just policy, but several other factors that have stifled the growth of a sector, which posted growth of over 121 per cent in exports in 2009-10.
As per the amended policy, the minimum land requirement norms have been eased, graded scale for minimum land criteria has been introduced, an exit policy for SEZ units has been offered while minimum land requirement for setting up an IT/ITeS SEZs has been done away with.
The minimum area requirement for single-product SEZs has been halved to 50 hectares and that for multi-product SEZs to 500 hectares. The minimum land requirement norm for IT SEZs has been scrapped. They are now subject to only a minimum built-up criteria norm, which is 5 hectares for category B cities such as Jaipur, Ahmedabad, Chandigarh and Lucknow and 2.5 hectares for smaller cities and rural areas. According to the government, the incentive is aimed at pushing IT SEZs into cities with lower densities.
Sector-specific SEZs have also been given the option to add an additional sector for every 50 hectares of contiguous area added. This would allow sectoral SEZs to bring in similar or related sectors under the same zone. Further, SEZs being set up exclusively for electronics hardware, agro-based food processing, biotechnology, handicrafts, the minimum area required would be 10 hectares. The government has introduced agro-based food processing SEZs given the demands by agrarian states including Punjab and Haryana where land is very expensive.
However, despite the relaxed land requirement, analysts, developers and real estate sector watchers say that the move would not mean much in the existing economic scenario, especially with key legislations including the Land Acquisition bill, Real Estate bill, and Direct Taxes Code, pending with Parliament.
Manoj Goyal, director, Raheja Developers, one of the major investors in SEZs, told The Indian Express that SEZs are not struggling because of land size alone. There are several issues plaguing the industry.
“The easing of land requirement certainly helps, but there are other factors which play a major role. The market has been very negative and there are no tenants available. Relief from minimum alternate tax (MAT) was the biggest USP and that advantage is no longer available. Secondly, although the SEZ Act claims single window clearance, it is not being followed,” said Goyal.
He added that economic slowdown in the last couple of years has further deteriorated the industry. “However, small land parcels would be good but only for IT and ITeS sector because now they will be able to go phase-wise, small steps and the financial risk will also come down.
Getting funding for small proposals is much easier,” said Goyal. The government in Budget 2011-12 levied MAT of 18.5 per cent on the book profits of SEZ developers and units, which were enjoying an exemption under the Income Tax Act. Dividend distribution tax (DDT) was also imposed in the Budget. This, according to developers, clearly dented the interest in SEZs.
An official from a leading real-estate company, who did not want to be quoted, said that the relaxed norms will not attract buyers because of the forthcoming General Elections. “The policy uncertainty is at its peak and people are on standstill mode, essentially waiting for the election results. That will be a big decisive development after which they will see the policy direction and start the work,” the official said.
Developers however agree on one point – private equity funds are, for the time being, only saving grace for the real estate sector. For instance, private equity giant Blackstone has already invested around $1 billion in India’s commercial and residential assets in the last two years and is reportedly scouting for more opportunities. Analysts say that even though the PE funds are here to stay, the relaxed norms cannot help much given the moderate demand.
“It is a good move. But real estate here is largely dominated by residential projects.
Commercial demand isn’t much. For developers, this relaxation does not mean much right now,” said Abhishek Kiran Gupta, senior manager, Jones Lang LaSalle India.
With a view to attracting greater foreign investments, the government had announced SEZ policy in April 2000 and until February 2006, SEZs functioned under the provisions of the Foreign Trade Policy. Later, to provide a stable policy regime, the SEZ Act, 2005, was passed and implemented from February 2006 onwards.
The announcement saw frenzied moves from realtors and industries wanting to cash in on the plethora of fiscal sops and ease of doing business offered through the policy. Exports from SEZs saw exponential growth over the seven-year period from 39 per cent in 2003-04 to 122 per cent in 2009-10. However, perennial land acquisition problems, sudden U-turn on fiscal sops and administrative issues adversely impacted what was being seen as an open market within an economy marred by several distortions.
Vikram Bapat, executive director, PwC, said that the policy changes are too little and too late. “Liberalising the area requirement works but what is not clear is the policy direction. The units were coming due to cost arbitrage but now since there is no tax benefit, why would SEZs come up? MAT and DDT have adversely impacted the demand-supply situation. Further, an SEZ has to make commercial sense too,” said Bapat. The Direct Taxes Code had provided for deduction of profits for units commencing operations on or before March 31, 2014. “With no clarity on DTC, the so-called 2014 window is also not clear. There may be a spurt in demand with more clarity,” said Bapat.