SEZ - Success story, interrupted

Special Economic Zones or its more popular acronym SEZ was conceived off the foreign policy initiatives of 1999, aimed at providing impetus to the export industry. This started gaining ground due to its various fiscal and non-fiscal exemptions covering sectors like real estate, manufacturing units and servicing facilities.



A SEZ is considered as a country within a country as domestic supplies to SEZ are considered as "exports" and the reverse movement of supply is termed as "imports" to the country.



A state of limbo



Many real estate agents have invested heavily in the SEZs to avail of tax discounts in the non-processing areas. SEZs are an answer to the growing demand for cheap commercial property in India. Its concessions had made it a tax haven for the builders and investors boosting the sector of real estate India , improving the infrastructure and garnering huge investments from big players.



Entrepreneurs are given 100 percent income tax exemption and no MAT (Minimum Alternat Tax) was to be given. Even the Dividend distribution clause is not applicable in SEZs.



But all that is now going to change after the state governments have expressed their desire to levy stamp duty on all non-processing areas in SEZs. A concrete decision is yet to come on that but heated debates are doing the rounds all over the country.



The new rule if implemented would mean that the real estate agents would have to shell out 8% to 12% stamp duty on each office space. This is going to seriously hamper the intention of introducing SEZ according to the pro-SEZ group. They debate that exemptions were the only magnet that brought builders to these zones and if they are not provided this, the builders would refrain from investing in commercial properties in India. The non-processing areas contain the social infrastructure such as residential properties, hospitals, educational institutes, shopping malls and public parks.



The government on the other hand is keen to implement the new rule as they are worried about the loss incurred on the exchequer and the additional burden on the already tight state resources due to exemptions to SEZs. They opine that since the non-processing areas do not contribute to the activity for which the zone was set up, they should not be given any tax exemption.



Such a dilemma and uncertainty is affecting major investment plans in India as these projects (Mega real estate projects by Reliance Industries in Navi Mumbai, Jam Nagar, and Ghaziabad) are getting held-up till such a time.



To solve this potential deadlock certain amendments are required to be made. If acceptable, instead of 100 percent income tax exemption to developers, one can impose tax after a certain period of time. Further, instead of totally exempting SEZs from paying service tax, they could either be reduced or imposed after a period of time. The now exempted dividend distribution tax could be given similar treatment.



As the whole political and social fraternities of the Center and individual States are engulfed in debate over this now burning issue, a speedy resolution is much eagerly awaited by the entire real estate community along with the end user.





Michaelle Sui is an associated editor to the website http://www.indianground.com. Indianground is dedicated to explain all your related queries for real estate India and India properties, with the latest news updates. Your feedback and comments will be highly appreciated at "michaellesui@gmail.com".