SEZ overdrive

The Ministry of Commerce's amendments to the Special Economic Zone Rules amount to further concessions to business interests.

T.K. RAJALAKSHMI

EVER since the debate over Special Economic Zones (SEZs) began, the Congress-led United Progressive Alliance (UPA) has gone into overdrive to dispel doubts about the scheme. Even as critics kept up the momentum of protests, the Ministry of Commerce and Industry sought to allay fears by issuing a fact sheet. It says that the percentage of agricultural land acquired will not exceed 0.1 per cent and that the total land for the 224 SEZs formally approved thus far would be approximately 33,808 hectares or 1,750 square kilometres.

Notwithstanding the UPA's attempts to mollify critics, the Ministry of Commerce and Industry has courted fresh controversy by suggesting amendments to the SEZ Rules, 2006. Its March 16 notification has ignored the concerns expressed by the Left parties regarding the multifarious tax exemptions and concessions. It has given private developers the right to acquire land directly from agricultural landowners and expand the area of the SEZ. It has also given further tax concessions and duty exemptions to contractors appointed by a developer to set up and maintain structures such as factory buildings.

Protests over the rates of compensation for land continue in Gurgaon in Haryana, Dadri in Uttar Pradesh and Brihanmumbai. At the same time there are demands from prominent quarters (including Jan Morcha leader and former Prime Minister V P Singh) that the state should not be involved in acquiring land or determining its price and that developers should buy land directly from the agriculturist.

The Ministry and the government appear to have succumbed to this logic. Under the proposed changes, private developers would be responsible for rehabilitating displaced persons, "as per the relief and rehabilitation policy of the State government". This indicates that State governments would withdraw from acquiring land on behalf of the developers, as has been the case in most SEZs until now. The notification has also reduced the time frame for "in-principle" approval from three years to one year to keep out speculative developers and allay fears of real estate expansion.

Four Left parties, the Communist Party of India (Marxist), the Communist Party of India (CPI), the Revolutionary Socialist Party (RSP) and the All India Forward Bloc, have objected to what they have termed piecemeal amendments. They argued that because the entire SEZ Act and Rules are being studied by the Standing Committee on Commerce, the empowered Group of Ministers (eGOM), which is headed by External Affairs Minister Pranab Mukherjee, should wait for the Committee's report. The CPI(M) has warned that if the government proceeds with SEZs in their present form, the matter will have to be dealt with in Parliament.

The Left parties are not only perturbed by the amendments themselves but also by the fact that the eGOM chose to ignore the suggestions they gave in October 2006. One of the principal objections was the almost limitless tax concessions and exemptions given to the developer, through which the government stood to lose thousands of crores of rupees in revenue. Several others besides the Left had also pointed this out. The Left further objected that the employment potential of SEZs in the present form was negligible and that the type of industry eligible for SEZs had not been reviewed. Moreover, the Left said that the eGOM had neither considered amending the allowance of a maximum of 5,000 hectares for multi-product SEZs nor lowered the minimum area to 1,000 hectares for single-product SEZs. The CPI(M) had suggested that a multi-product SEZ should have an area of 400 hectares and that there should be a ceiling of 2,000 hectares on the maximum area. The party stated that the ownership of large tracts of land would put developers and SEZs outside the purview of land ceiling and town planning legislation. It warned that allowing developers to acquire land directly could enable the sale of large tracts of land and endanger the livelihoods of small farmers, cultivators and agricultural labourers. It is indeed peculiar that given the current crisis in agriculture the eGOM not only chose to ignore this suggestion but paved the way for further acquisition. Under the proposed changes, a developer could procure a certificate from the State government that guarantees him legal possession and irrevocable rights over the area. In the case of leases, this would last for at least 20 years.

Several outstanding issues regarding the applicability of labour laws in SEZs remain unaddressed. According to the Commerce Ministry, there are 1,016 units in operation that provide direct employment to over 1.79 lakh persons.

The SEZ Act was passed in May 2005, the Rules were framed in 2006 and the Act came into effect on February 10 the same year. The first round of amendments came in August 2006 when the government relaxed the percentage of the area earmarked for developing the processing area from 35 to 25 per cent. No vacant land in the non-processing area was to be leased for business and social purposes such as educational institutions, hospitals, hotels, recreation and entertainment facilities and residential and business complexes to any person except a co-developer approved by the Board of Approval. However, the infrastructure for business and social purposes was still eligible for exemptions, concessions and drawback.

In October 2006, the four Left parties submitted a jointly produced document expressing their reservations about the amended Rules. They made it clear that in the case of SEZs in China, with which the Ministry of Commerce has always sought to draw parallels, the Chinese government acquired the land and developed the required infrastructure, inviting private developers to set up units. The land was primarily owned by the state, a fundamental difference from what is envisaged in the Indian situtation. The Left parties were concerned that by handing over more than 10,000 hectares to private entities, a revival of the zamindari system was possible. The note therefore stated that there should be no transfer of land ownership to private developers; private developers could take land on lease or build infrastructure on a Build-Operate-Transfer (BOT) basis. Private entities, they said, should be given a franchise from the public sector to finance, design, construct and operate a facility for a specified period, after which the ownership would revert to the public sector. The Left parties also stated that private entities should not be allowed possession or control of land beyond the stipulated ceiling and that where this was the case the land should be developed by public sector enterprises. They suggested that joint ventures could be initiated if the public sector held the majority stake.

The Left parties highlighted that the responsibility for rehabilitation and relief lay with the government. They suggested that a national rehabilitation policy could be established, and model compensation and rehabilitation criteria should be framed in consultation with State governments. In addition to adequate compensation, their recommendations for displaced families included the following: amending the Land Acquisition Act for better protection of their livelihoods; giving them equity stakes in the companies floated for building the SEZs; and including those with long tenancy rights and farm labourers in compensation packages.

Instead of acquiring fresh land for SEZs, the Left parties suggested unblocking and recycling land in closed industrial units under liquidation. They quoted data from the Board for Industrial and Financial Reconstruction, which showed that recommendations for the liquidation of 1,254 private sector units, 31 Central units and 41 State units were before various high courts.

The parties recommended that the processing area inside an SEZ should not be less than 50 per cent for both sector-specific and multi-purpose SEZs. They also said that 25 per cent of the non-processing area should be dedicated to infrastructure development. They also touched upon the issue of housing facilities for the workers (who are likely to be women) and commented that "a situation were lakhs of workers of the SEZ units would be forced to stay outside the SEZ area, leading to a proliferation of shantytowns in neighboring areas, should not be allowed to arise."

While the issue of 100 per cent exemption from income tax on profits in the first five years is still a major issue with the Left parties, the exemptions to developers and entrepreneurs who do not contribute to exports are another irritant. These and other policies, it is feared, will attract investors from other States to set up operations in SEZs in a bid to get exemptions. Similarly, granting duty concessions on goods sold by a unit to the Domestic Tariff Area would result in a diversion of productive activities away from the Domestic Tariff Area to the SEZ and entail a substantial revenue loss to both Central and State governments. None of these recommendations has been considered in the March 16 notification. Instead, it appears that further concessions are being handed out. Notwithstanding the Congress' concerns over Nandigram, the party seems to be skirting the fundamental issues raised by the Left parties. These are relevant not only to the people affected by land acquisition but also to the Centre and the State; it is their ability to raise revenues that will be affected. It is apparent that if the government does not put on hold fresh approvals without sorting out these issues, it will definitely have some explaining to do to the Left parties.