Finance Minister Nirmala Sitharaman said during her budget speech that the SEZ law would be replaced by new legislation that would allow states to become partners in the “development of business and service centers”. .
The $227 billion sector is also seeking to clarify issues such as the impact of working from home on income tax exemptions under Section 10AA and the expansion of the SEZ reserve to include investments in infrastructure and employees.
Some of these clarifications, which could be changes to existing policies, will go a long way to securing long-term commitments for the industry, officials and experts told ET.
“We are very active in discussions with the government on SEZs. Indeed, the clarification on hybrid work does not depend on the new law. We ask them to provide this clarification as soon as possible because companies need it to prepare their long-term plans. It will give them the reassurance and stability of knowing the option is available,” said Debjani Ghosh, president of computer industry association Nasscom.
From the perspective of the SEZ Act, Ghosh said Nasscom is working with the government to ensure that hybrid working is incorporated into the design principle of the law.
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“As the law reinvents itself, we are working with the government to make hybrid working a key part of the law so that it takes into account expansion into Tier 2-3 regions as well as flexibility for working remotely,” she said.
Speaking at an industry forum last week, IT Minister Ashwini Vaishnaw said the government was ready to carry out more reforms that benefit the industry and was addressing concerns over the SEZ law.
“I am so happy that the other service provider reforms have been really appreciated by the industry…SEZ exemptions and many more are in the pipeline…We are a very open-minded government, will listen these ideas and whatever is feasible, we will implement together,” Vaishnaw said.
Nasscom requested clarification on the tax ramifications of Section 10AA, a provision of the Income Tax Act that allows deductions for businesses located in SEZs.
However, IT-BPM companies based in the SEZs have been working from home since the Covid-19 pandemic and have asked for clarification on the impact of remote working on the tax exemption. SEZ exports fell to $102.3 billion in FY21 from $112.3 billion in FY20.
Ashish Aggarwal, Vice President and Head of Public Policy, Nasscom, said that since the government is open to encouraging export-related and domestic services, the clarification on hybrid working for IT-BPM becomes particularly relevant in encouraging investments in new regions.
“There are activities that may not be directly related to exports such as cafeterias and nurseries, but companies offer them as part of their activities. There have been challenges in the past where certain benefits have been denied to industry because they were not a permitted activity. These are operational level issues that can be resolved from time to time,” Aggarwal said.
The overhaul of the SEZ Act comes after the government passed a sunset clause and said only units that started production no later than June 30, 2020 would benefit from a phased tax exemption for 15 years.
As industry and government push for expansion into Tier II and III cities, industry has urged the government to create the necessary infrastructure in these cities.
India’s $44 billion BPM services industry alone could double its presence in small towns across the country by 2026, according to various estimates.
Former Infosys COO Pravin Rao said that while the industry is in talks with the government to enable SEZ and IT-BPM infrastructure in these regions, it is also important to create infrastructure support to make jobs attractive in these regions.
“It is equally important to create world-class educational institutions, employment opportunities for spouses, health care, among others. We need to start creating this infrastructure in Tier 2-3 cities so that people don’t have to migrate to Tier 1 cities in the first place,” Rao said.
Nasscom recommended that the use of the SEZ reserve be expanded to include expenses incurred for the rental of desktop and laptop computers, the use of cloud infrastructure, the purchase of software and the investment in costs related to buildings, infrastructure, workstations, interiors and furniture.
WNS Managing Director Keshav Murugesh said the SEZ customs administration reforms which will be fully IT-driven are commendable and reiterated the need to clarify remote working.
“Focusing on greater facilitation and only risk-based controls would significantly improve the ease of doing business for SEZs. Another recommendation is that the SEZ reserve be expanded to include expenses incurred for computer rental, purchase of software, and investment in buildings and infrastructure,” Murugesh said.