Incentivise manufacturing services in SEZs to boost exports

About 90% of the manufacturing units in global supply chain are manufacturing service providers. Manufacturing services can be incentivised by providing them with SEIS benefits as they are WTO compliant, says Tamil Nadu Association of SEZ Infrastructure Developers
Incentivise manufacturing services in SEZs to boost exports
Tamil Nadu Association of SEZ Infrastructure Developers (TASID) has urged the government to incentivise manufacturing services in special economic zones (SEZs) by providing benefits of SEIS to boost local production and exports.

About 90 per cent of the manufacturing units in the global supply chain are manufacturing service providers. This means that the buyer provides these manufacturing units all production designs, specifications and also instructs the manufacturing unit to procure the raw materials/components from vendors nominated by them. In some exceptional cases the buyer may provide raw materials/components free of charge to carry out the manufacturing services.

“Manufacturing Services like every other service in the supply chain will now be truly uberized thereby resulting in much lower costs towards production and transactions besides quick turnaround. This model is highly scalable,” said Sunil Rallan, Chairman and Managing Director, J Matadee Free Trade Zone Pvt Ltd (JMFTZ) and Founder President of TASID.

Manufacturing services can be incentivised by providing them with SEIS benefits as they are WTO compliant. The government based on national objectives can have a priority list of the manufacturing sectors to be supported viz - sunrise sectors, employment creations, new markets location of units etc.

“The SEZ Rule 18(6) which covers the concept of Manufacturing Services must be revised to cover the prevailing business models. Rule 76 can must be amended to include Manufacturing Services in the List of Services. DGFT Annexure 3D to be amended to include the activities eligible for SEIS. This list can be drawn from the document Central Product Classification (CPC) Version 2.1 88 Section 8 Division 88 - Manufacturing services on physical inputs owned by others,” added TASID.

The association has given other policy recommendations to leverage SEZs to attract FDI into the manufacturing sector for Make in India for DTA (Domestic Tariff Area) consumption and exports:
  • Recalibration of NFE conditions for manufacturing units: Supply chains in China are desirous of catering to the growing Indian DTA as well as exports and are keen to set up manufacturing units in Indian SEZs. There are no restrictions on supplies to DTA from manufacturing SEZ units. However, the sales proceeds received by them is not taken into computation for NFE (Net Foreign Exchange Earning) purposes irrespective of whether it is in FFE or Indian Rupees. There is no requirement of NFE in the current Policy of the Government of India, Ministry of Finance, Department of Revenue and Central Board of Indirect Taxes & Customs as detailed in Circular No. 34/2019-Customs dated October 1, 2019. “Recalibration of the NFE Requirement will give a positive boost to fresh investments and support Make in India,” said TASID.
  • Duty foregone principle: India has free-trade agreements (FTAs) with countries such as Sri Lanka, Japan, South Korea and the Association of South-East Asian Nations (ASEAN) - which groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. It is more competitive for a company to invest in manufacturing facilities in one of these FTA countries and supply the Indian DTA via zero tariff imports than creating manufacturing assets on India soil. This clearly impacts the nation’s manufacturing sector with its effects on Indian employment, investment, etc.

Potential of SEZs
The many weeks of the much-required lockdown has caused widespread disruption in every sector and field. It has also given many businesses the time to stop, pause think and perhaps re-strategise their way forward. In chaos lies opportunities; this disruption has shown the great potential India has to offer to foreign companies looking to Invest in India.

The Government of Tamil Nadu over the last year has signed MoUs with foreign companies looking to invest in the state, of the tune of Rs 19,000 crore. These projects would result in over 50,000 jobs besides upskilling the workforce.

The Tamil Nadu Government recently signed an MoU with Salcomp to bring in Rs 1,300 crore investment and provide over 10,000 jobs. Tweak in the policies as recommended by the association could result in doubling of investments and creation of over 300,000 jobs in Tamil Nadu alone, said TASID.

Sunil Rallan added, “SEZs offer great potential to foreign companies to invest in India which is a vastly untapped market. I urge the Government of India to strongly consider the policy recommendations given in the TASID report so we can all truly be ‘Vocal for Local’.”

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