Interview with Commerce Secretary on SEZs and land acquisition

The controversy over the threatened withdrawal of Tata Motors from Singur in West Bengal has come not a day too soon. The Singur plant is not located in any designated Special Economic Zone (SEZ).

The acquisition of land from farmers by the company and the support extended, and still being extended, by the West Bengal Government to Mr Ratan Tata in the interest of attracting investments into the State in the face of the Opposition onslaught, piloted mainly by the Trinamool Congress leader, Ms Mamata Banerjee, is something incredible.

There was trouble in Goa too where the SEZ developers are facing the wrath of the State government despite a few SEZs having been notified by the Centre. Justice demands that the developers be compensated for their sunk cost in the case of SEZs . This is needed to ensure that the promises of assured support to industrialists for investing their capital and labour to generate income, employment and manufacturing activity that would do proud to the State, are redeemed.

In both the cases, the moot point is, how far the Central and State governments would renege on their commitments to industry, particularly when faced with political choices for survival. In this case, the domestic investors who could ill-afford to squander their precious capital in endless litigation or prolonged spell of uncertainty over the future of their proposed activities.

To get an idea of what the Centre thinks about this issue here is the extracts of an interview with Commerce Secretary, Mr Gopal K Pillai.

Always courteous and candid and not to mince words in the usual officialese, Mr Pillai gave his views on SEZ, land acquisition for industrial projects and on how the Commerce Ministry hopes to transform the country’s manufacturing activity and employment generation through the vehicle of SEZs in the foreseeable future.

Excerpts from the interview:

On SEZs: Since the Special Economic Zones Act, 2005 along with SEZ Rules 2006 came into effect on February 10, 2006, over 253 new SEZs have been notified, which have established 343 units and got over a lakh of employment to people. Then, there are also 332 units in other Central Government SEZs and there are SEZs set up by States numbering 285 units.

Before 2005, there were 927 units under the extant SEZ and, post-SEZ Act and Rules, 970 units have come in two years.

SEZs get notified and it takes 12-18 months for initial infrastructure like laying roads, giving electricity and water connections and to put other amenities in place before the first unit comes up. Of 235 notified SEZs, a little less than 100 are functional, while others are in the process of building basic infrastructure; the units will be set up subsequently.

Multi-product SEZs, where the area spreads to 1,000 hectares or above, take at least five years to come up.

On SEZ land ceilings: The empowered Group of Ministers (eGoM) has fixed an upper limit of 5000 ha for the time being for the SEZ. As it is, nobody today has more than 2,000 ha in the SEZs. Let somebody set up an SEZ with 5,000 ha before the existing ceiling is raised.

The only SEZ that is coming near the ceiling figure now is the Adani Group-promoted Mundra SEZ with Mundra Port SEZ of 2,700 ha and another multi-product SEZ in adjacent site with the same acreage or so. At the moment, it is two separate companies.

Administratively, it would be convenient if the two SEZs are run as one, but the question as to whether the existing ceiling should be eased or not, will go to the eGoM.

On parallel row in Singur and Goa SEZ: In the Goa case, government acquired the land for industrial purposes in 2002, but the issue today is that the State government does not want the SEZ and has told the developers to give up the SEZ status and run the factory normally But the fact remains that neither industrialists nor SEZs can function without the approval of the State.

So if the developer gets compensation for all the investments he has made, he would go away as he is responsible to the shareholders.

In the case of the Singur, the West Bengal government has handled the situation badly. When you had a problem with the acquisition, the parties should have been compensated. There are SEZs coming up in West Bengal and there is no problem.

Bharat Forge is acquiring 4,000 ha in Pune, Maharashtra. Social activists, including Ms Medha Patkar, visited the place and were told by the agriculturists there that the company was formulating a rehabilitation package, with plans for training and social infrastructure. Sri City SEZ in Nellore, spread over 5000 acres, purchased the entire land from the farmers without any agitation or protests. The eGom is meeting this month to resolve some issues plaguing SEZs, following its meeting last month when it took three important steps.

One, for handicrafts SEZ, it decided to bring down the area to 10 ha from 100 ha.

Second, for SEZ’s authorised activities outside the SEZ, it gets refund of service tax provided the earnings is in foreign currency.

But the SEZ developers buy equipment, steel or cement for infrastructure works and do not earn foreign exchange to qualify for exemption from service tax.

But the drawback duty had the stipulation that the payment must be in foreign exchange for purchase of domestic materials to get refund. The Finance Ministry has agreed that, in such cases, even if the payment is in Indian rupees, you can pay him drawback or DEPB reimbursement.

On ‘vacant’ land issue: The Finance Ministry has taken a stance that the SEZ units in an abandoned building, even if it has a shed or foundation or a small building, would not qualify for tax breaks. But the Board of Approval (BoA) for the SEZ has taken a view that if it is a shed, the SEZ developer/unit can demolish it. Where there is a building inside the vacant land inherited by the developer that can be used as part of the non-processing area, why ask for it to be demolished?

Because, first, the developer is not claiming tax benefits and if he is asked to demolish the building, he would re-construct it and then seek reimbursement for building activities. This may look like a non-issue but the matter has been referred to the Law Ministry.