Govt to promote IT SEZ in smaller towns

New Delhi: The government is likely to announce incentives to promote IT-related export hubs in small towns as part of its effort to woo back investors to special economic zones.

The commerce ministry is amending the rules for special economic zones (SEZs), which have become unattractive to investors following imposition of minimum alternative tax (MAT) and dividend distribution tax (DDT) in 2010-11. Earlier, SEZs were exempted from most levies.

While SEZs across sectors will benefit from the new rules, IT SEZs stand to gain the most as their contribution to exports is more than that of others, an official said.

"As IT accounts for more than a fourth of the exports from SEZs, the reforms will have a special dispensation for the sector," the official said, adding, "It would streamline incentives in a way that it encourages such zones to come up in tier-II and tier-III cities."

After imposition of MAT and DDT, growth in exports from SEZs slowed to 15.4% in 2011-12, from 43.1% in 2010-11 and 121% in 2009-10.

The proposals being considered include a sharp reduction in the mandatory minimum area requirement for different categories of SEZs, easier norms for building social infrastructure like schools, shopping complexes and residential blocks in SEZs in smaller cities, besides relaxation in vacancy and contiguity or continuity norms that have often proved to be hurdles for proposed zones.

The government may also allow broadbanding of sectors, which will allow ancillary units to come up in sector-specific SEZs. To factor in more certainty for investors, the government is also planning to issue clarifications in advance on investment and regulatory issues.

"Investors got a jolt when the finance ministry decided to impose minimum alternate tax and dividend distribution tax on SEZs in 2011, as the investment decisions had been taken keeping the initial tax-free status in mind," the official said.

The incentives, however, will mostly be aimed at simplifying rules for setting up SEZs and not have any direct revenue implications. "The revenue department has made it clear that it does not want to take on additional financial burden. We respect that and are ready to stay within the mandate specified by the SEZ Act," the official said.

Interestingly, the revenue department had given a list of objections to the proposed changes, many of which the commerce department has chosen to ignore. However, experts say the SEZ Act gives the commerce department enough powers to make significant changes in rules.

"The SEZ Act allows the government to make amendments, either for all or a particular class of zones, and it can come out with notifications on provisions that it finds appropriate," said Hitender Mehta, co-chairman of industry body Assocham's SEZ council. Plans are afoot to simplify contiguity or continuity norms, which often require developers to build infrastructure to by-pass public structures.

"IT SEZs need not have the same nature of physical fencing as required for a manufacturing SEZ. Even for manufacturing SEZs, contiguity issues can be examined on a case-to-case basis," the official said.

Several developers in the country have already written to the government for relaxation in these rules.