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DESH Bill — Awaiting a revised draft

Siddharth Tandon |
Smita Roy, Partner & Leader (North)
Indirect Tax

19 September 2022

The much-awaited Development (Enterprise and Service) Hubs Bill (DESH Bill) is set to replace the existing SEZ framework. Based on the recommendations of the committee headed by Baba Kalyani, the DESH Bill seeks to focus on larger parameters of ease of doing business, economic activity, and employment generation to augment growth. The revised draft of the Bill is understood to have been finalised internally by the policymakers and is expected to be tabled in the winter session of the Parliament or, alternatively, the ordinance route may be explored to operationalise this reform at the earliest. To this effect, the ministry of commerce has also formed a working group for framing the rules under the proposed Bill which will form the backbone of the implementation framework.

Given that the existing SEZ regime faces a fair share of issues ranging from primarily being export centric, complex compliance mechanisms, waning tax concessions and sectoral restrictions, the industry is looking forward to significant reforms under the DESH Bill. At this stage, clarity around the list of permissible and ineligible activities under the DESH scheme is awaited by all segments of the industry. The services sector, manufacturing sector and thrust sectors earmarked across respective states, are keen to evaluate the possibility and feasibility of the transition to the DESH regime. Presently, SEZ units and non-SEZ businesses have shared feedback with policymakers so that the revised Bill factors measures for enabling ease of doing of business across the compliance framework, approval process and integration with state approval mechanisms, amongst others.

The existing draft of the Bill is unclear on several aspects such as pure play trading activities and availability of concessional customs duty rates in such scenarios, reversal of duty benefits in case of clearance of exempt goods to DTA, valuation mechanism for DTA clearances, treatment of sub-contracting and job work, implications on exit from notified areas. While these aspects are expected to be addressed in the final draft of the Bill, the government is making efforts to enhance the attractiveness of the DESH framework with measures such as concessional corporate income tax rate of 15% plus surcharge (which is currently available only to new manufacturing units established before March 31, 2024) to DESH units up to 2032. However, this is presently subject to inter-ministerial debate on account of possible revenue loss and disadvantages to DTA units. Understandably, a mere shift of units from one regime to the other without an increase in revenue or employment would not help the government achieve its objectives. Hence, it would be interesting to see if certain thresholds are built into the revised draft of the DESH Bill around year-on-year revenue and employment growth for units to qualify under the scheme or claim these incentives, possibly on similar lines of the Production Linked Incentive schemes. This would help prevent any misuse and allay fears of the DTA units being at a significant disadvantage as opposed to larger units in DESH. It is indeed an arduous task for the government to bring in clarity on such aspects while ensuring that this does not have an adverse impact on DTA units.

It would also be interesting to see if the government will continue the MOOWR scheme—if yes, then what will be the contours of the scheme. Additionally, questions concerning the co-existence of schemes under the Foreign Trade Policy like Advance Authorisation, EPCG, etc, with the DESH regime would need to be evaluated especially in cases where such license holders (currently operating in DTAs) aspire to move to DESH. Confirmation on compatibility with benefits and compliance requirements under PLI schemes and state incentives schemes would also be helpful. Moreover, the government could consider transitioning existing DTA industrial parks (private and state-owned) with low utilisation to DESH to attract investments and enhance the utilisation of these plug-n-play facilities. This can expedite the government’s efforts for enhancing infrastructure throughout the country under the PM Gati Shakti initiative.

Aspects around transition for existing SEZs, EOUs are also under intense debate within the industry. Internally, these questions revolve around the tax treatment of existing stocks and capital goods, changes required to the ERP and internal SOPs. Externally, there are apprehensions around processes and permissions involved and the impact on operations during the transition to the DESH regime. It is expected that procedural requirements for DESH units including the process of job work, sub-contracting and denotification would be eased out. If this transpires into reality, it will allow more flexibility to unit owners and contribute towards ease of doing business.

At this stage, India Inc is keenly awaiting the revised draft of the Bill and clarity on issues ranging from coverage of the scheme, comparative advantage vis-à-vis DTA, tax treatment in different scenarios, fate of tax incentives and concessions under different schemes, and the road ahead for the transition to DESH. Certainty with respect to tax incidence and incentives, simpler compliance framework and quick approval mechanisms, would instill investor confidence and could help the government recover lost ground with respect to special zones. The industry is looking forward to the introduction of the DESH framework and hopefully, the revised Bill will address concerns which could pave way for making the DESH regime a resounding success.

Source: Financial Express