Infrastructure: Government eases norms for land use by SEZs :: Kotak Securities

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Government eases norms for land use by SEZs. A government notification allowing
the dual use of social and commercial infrastructure in non-processing areas of SEZs will
offer a fillip to land monetization plans of SEZ developers. The area will however, get no
tax concessions. Adani Ports & SEZ will be a natural beneficiary given its operational SEZ
at Mundra has large area that is yet to be leased. A potential bigger boost to SEZs may
come from lowering of tax rates in the upcoming budget.

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Notification allows dual use of social, commercial infrastructure in non-processing areas of SEZs
In a recent gazette notification (click here) to amend the Special Economic Zones (SEZ) Rules,
2006, the Ministry of Commerce & Industry has allowed dual use (both by the SEZ and the
domestic tariff area entities) of “social or commercial infrastructure and other facilities”, within
non-processing areas. The core commercial activity of SEZ units is undertaken in the processing
area, and the rest of the land in the SEZ is the non-processing area.
It is pertinent to note that non-processing areas will be divided into two zones: (1) where social
or commercial infrastructure and other facilities are permitted to be used by both the SEZ and
the domestic tariff area entities, and (2) one that will be exclusively used by SEZ units (this area
will be bonded and physically segregated from the rest). While the first category will not enjoy
tax incentives, the second will be eligible for tax concessions.
Notification lays out restrictions for duty-paid dual-use non-processing areas
The individual caps are: (1) housing (capped at 25%), (2) commercial (capped at 10%), (3) open
area and circulation (not less than 45%) and (4) social and institutional infrastructure including
schools, colleges, socio-cultural centers, training institutes, banks and post offices in the
remaining area.
Also, as with other portions of SEZ land, the land used for dual use in the non-processing area
can be leased and not sold.
A positive for the SEZ developers, but the absence of tax concessions limits upside
The notification is positive for SEZ developers with land monetization plans (will potentially lead
to an uptick in land leased and pricing), given that it will lead to better economics for operators
of social or commercial infrastructure facilities in the dual use non-processing area. The positive
impact, though, for an SEZ developer, has been somewhat curtailed given that the dual-use
non-processing area will get no tax concessions. The developer must refund prior central or
state tax concessions availed for creation of the infrastructure.
As per the Export Promotion Council for Export-oriented units and SEZs (EPCES), the change in
guidelines will be beneficial to SEZs with infrastructure in the non-processing area. The
chairman of EPCES was quoted in the media as saying: “If somebody has to pay duties on the
inputs used, it is as good as building anywhere in India. They can denotify the unused nonprocessing
area land and build houses and malls. There is no reason to keep the SEZ tag and
build these facilities without any tax benefit”.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily12012015az.pdf