No Extension Of Sunset Clause For SEZ Units –Tale Of Lost Opportunity For Indian Economy

Hitender Mehta

30 July 2019 12:16 PM GMT

  • No Extension Of Sunset Clause For SEZ Units –Tale Of  Lost Opportunity For Indian Economy

    “Our biggest regrets are not for the things we have done but for the things we haven't done” ― Chad Michael Murray

    On July 5, 2019, Finance Minister Nirmala Sitharaman presented the Budget 2019-20 of Namo 2.0. In spite of being major contributor to the Indian Economy, the SEZs remain neglected in the budget.

    Despite performing exceedingly well on the counts of (i) augmenting the economic activity in the country, (ii) creating world-class industrial and commercial infrastructure, (iii) generating large scale employment, (iv) boosting exports, (v) promoting 'Make in India', and (vi) earning huge foreign exchange, the SEZs remain neglected in the budget. Quite surprising, but as a matter of fact, SEZ Policy has been an example of indifferent approach of the Government of India.

    Looking at the performance of the SEZs and considering the fear of a good number of SEZs that have been notified but have yet not become operational, it was expected that the Government would favourably consider removing or extending the sunset clause for SEZ units, which was introduced by the Finance Bill, 2016 to come into effect on March 31, 2020. After coming into force of the sunset clause, the income-tax incentives being provided to the newly set-up SEZ units in terms of Section 10AA of the Income Tax Act, 1961 would no longer be available. In other words, income tax benefits under Section 10AA would be available to those SEZ units which commence their operations on or before March 31, 2020.

    In view of the sunset clause coming into force w.e.f. March 31, 2020, new investments, domestic as well as foreign, in the SEZs have taken a hit. Also, it has adversely impacted the prospects of large scale job creation.

    Performance of SEZs in India

    Currently, 232 SEZs are operational (out of 372 Notified SEZs). Over 5,000 units are operating from these operational SEZs. SEZs are providing direct jobs to over 2 million people and it is estimated that over 4 million indirect jobs are created by the SEZs (by the vendors, service providers, contractors, sub-contractors of these SEZs). The turnover from these operational SEZs reached 7,01,179 crores in the financial year ended March 31, 2019. The operational SEZs contribute to over one-fifth of the exports from India.

    Given below are the facts regarding success story of SEZs in India on certain parameters, namely –increase in investments, generation of high scale employment and excellent exports performance in last over twelve years:

    A. Investments in SEZs


    (As on February, 2006)

    Figures in INR Cr.

    Incremental Investment

    Figures in INR Cr.

    Total Investment
    (As on 31st March,

    Figures in INR Cr.

    Central Government SEZs




    State/ Pvt. SEZs set up
    before 2006




    SEZs Notified under the Act







    B. Generation of large scale Employment


    (As on February, 2006)

    Incremental Employment

    Total Employment
    (As on 31st March,

    Central Government SEZs

    1,22,236 persons

    1,05,801 persons

    2,28,037 persons

    State/ Pvt. SEZs set-up before 2006

    12,468 persons

    90,584 persons

    1,03,052 persons

    SEZs Notified under the Act

    0 persons

    17,29,966 persons

    17,29,966 persons

    1,34,704 persons

    19,26,351 persons

    20,61,055 persons

    From the above, it may be observed that the SEZs have been playing an important role in the attracting investment as well as job creation.

    C. Export performance of operational SEZs



    (Value in Rs. Crores)

    Growth over previous year (INR)









































    (as on March 31, 2019)



    The operational SEZs continue to show a healthy growth trend, year-after-year.

    Concerns of the Ministry of Finance

    Time and again, concerns have been raised by the Ministry of Finance that the Government is foregoing huge revenue by providing tax exemptions/ concessions to the SEZs. Given the fact that the SEZ Policy could evoke interest of the investors mainly because of the incentives offered by the SEZ Policy, the concerns of the Ministry of Finance appears to be unfounded.

    The SEZ Act, 2005 was enacted by the Parliament to stimulate economic activity, generate employment, promote exports and attract foreign as well as domestic investment by providing a host of fiscal incentives single window mechanism. The SEZ Act 2005, which inter alia provides the fiscal incentives to SEZ units, was passed by the Parliament after a long consultation process with the stakeholders. It is therefore imperative that the legislative intent is respected and implemented in spirit. Needless to say, whoever commits investments in a scheme relying on the promises made by the State, would righteously hold legitimate expectation that the State would fulfil its promises.

    It is in this backdrop that the imposition of Minimum Alternate Tax (MAT) on SEZ Developers/ Units and imposition of Dividend Distribution Tax (DDT) on the SEZ Developers introduced by the Ministry of Finance through the Finance Act, 2011 were not received well by the SEZ stakeholders. This had not only adversely impacted the prospects of SEZs considerably, but also has led to erosion of trust and faith in the Government's intention and willingness to provide a stable policy framework. This, on the one hand, left the existing investors jittery, and other the other hand, kept the potential investors at bay.

    In fact, SEZs which emerged as major export hubs in the country started losing their sheen after the imposition of Minimum Alternate Tax (MAT), withdrawal of Dividend Distribution Tax (DDT) exemption. Empirically, whenever the Government has indicated any adverse change in the income tax regime for the SEZ Developers/ Units (viz., withdrawal of any tax incentive that was available to the SEZ Developers/ Units), there has been corresponding adverse impact on the growth of, and further investments in, the SEZs. All this has dampened the spirit of investment and has left the SEZ investors in jittery, as their long term business planning goes for a toss.

    Need of removal/ extension of Sunset clause for SEZ units

    1. Unleashing the Potential of SEZs which are notified but not yet operational

    If the 223 operational SEZs are contributing nearly one-fifth of India's total exports, what will happen when all 355 notified SEZ become operational. It's anybody's guess. Moreover, the Government aspires to reach 5 trillion dollar economy in next few years. SEZs hold tremendous potential to significantly contribute in accomplishing this goal.

    If the remaining 132 notified SEZs (355 notified SEZs as reduced by 223 operational SEZs) also become operational, the same will give huge boost to Indian economy, provided a conducive and business friendly environment and a stable policy framework is offered. In fact, if all the 355 SEZs were to become operational, it is expected that the exports from the SEZs are expected to cross INR 10,00,000 crore (i.e., INR 10 trillion).

    2. Likely withdrawal by the SEZs which are notified but not yet operational –Adverse impact on job creation, creation of infrastructure, etc.

    Once the sunset clause becomes applicable (w.e.f. April 1, 2020), what will be fate of those 132 SEZs (355 notified SEZs as reduced by 223 operational SEZs) which have been notified but have not become operational? Notably, the developers of these SEZs are already not entitled to avail income tax exemption, as the same stands withdrawn. Now to add to their woes, the Units in these SEZs will also not be eligible to avail income tax exemption if they commence operations April 1, 2020 onwards. In other words, there won't be any takers of these SEZs. There is high possibility that these SEZs would no longer remain viable. Investments worth hundreds of crore of rupees will go down the drain. Quite likely, 65 SEZs which have taken formal approvals but which are not notified (420 formal approvals as reduced by 355 notified SEZs) would surrender their SEZ approvals.

    Needless to mention, package of tax incentives has been one of the key drivers of success of the SEZs in India. So is the case with other competing countries, particularly Asian countries.

    3. Competing Regional Economies

    SEZs / FTZs (Free Trade Zones) all over the world are set-up to attract foreign investors. These Zones play a major role in generating employment, increasing exports, boosting FDI inflows and improving commercial/ industrial infrastructure. As a matter of fact, many competing regional economies, viz., China, Bangladesh, Singapore, UAE, Malaysia, Indonesia, Thailand, etc. continue to provide host of tax benefits and other incentives to attract foreign investors in their SEZs/ FTZs.

    4. To Augment the Cause of 'Make in India'

    Extension/ removal of time limit for sunset clause for SEZ Units was needed not only to augment the "Make in India" Policy of the Government, but also to generate large scale employment, to create large scale infrastructure and to considerably increase exports from India. It goes without doubt that India needs to significantly increase its export with twin fold objective of increasing its pie in the global trade and also to enhance the image of 'Made in India' brand globally.

    For promoting the ambitious 'Make in India' policy of the Government, the SEZs present the best bet for there is credible legislation already in place (SEZ Act, 2005). SEZ Act provides host of incentives and benefits to units operating from SEZs.


    Given the performance of SEZs in India, it is evident that despite all odds and roadblocks, the SEZ Policy has delivered on all the counts and has far exceeded the expectation of the Government on the following parameters: –

    • generation of additional economic activity;
    • promotion of exports of goods and services from India, and thereby increasing the foreign exchange reserves of the country besides increasing India's share in global trade;
    • promotion of investment from domestic and foreign sources;
    • creation of employment opportunities; and
    • development of infrastructure facilities and creation of world class industrial infrastructure, largely on Public Private Partnership (PPP) model.

    In view of the foregoing, it is imperative that the sunset clause under Section 10AA of the Income Tax Act, 1961 be removed and the new SEZ units be allowed to avail the income-tax benefits even after March 31, 2020.

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