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SEZ Policy Tweaks Aid Flexible Usage (Explained for Investors)

Government Weighs Industry Requests on Retaining SEZ Customs Duty Benefits for Common Infrastructure Areas after New Norms

Analysis for Layman

This article discusses how the Indian government is considering requests from industries regarding Special Economic Zones (SEZs). SEZs are designated areas for export-oriented manufacturing where companies receive tax and customs duty incentives. Recently, there has been a change that allows Information Technology (IT) companies in SEZs to denotify full floors and use them for domestic operations, not just exports. However, companies are seeking clarity on whether common infrastructure facilities like gyms, cafeterias, and crèches in SEZs can still enjoy customs duty waivers after a floor is denotified.

The government is examining this aspect, especially in the context of declining exports from SEZs. These changes are aimed at providing IT/IT-enabled Services (ITeS) firms in SEZs with greater flexibility in space utilization to cater to both domestic and overseas clients.

SEZ Policy Tweaks Aid Flexible Usage (Explained for Investors)

Impact on Retail Investors

For retail equity investors, the policy changes allowing more flexible usage of IT/ITeS real estate in SEZs have mixed implications. A domestic focus may provide stability in revenue streams for companies compared to volatile export markets. This can benefit mid-sized IT firms operating from SEZs such as Persistent Systems, Cyient, and Mastek. Additionally, the reduction in vacancy risks in SEZ office spaces is a positive development.

However, the potential loss of customs duty benefits on denotified floors could lead to increased costs for imported hardware/software. There is still uncertainty regarding the continuity of incentives for common SEZ infrastructure post-denotification. Overall, these policy changes are unlikely to have a significant impact on stock prices. Investors should base their decisions on company-specific factors such as growth prospects, order flows, and client relationships rather than real estate policy measures.

Impact on Industries

The IT/ITeS sector stands to benefit from the flexibility in SEZ capacity utilization, allowing companies to adapt to changing requirements between export-oriented and domestic business. This flexibility shields players from fluctuations in global tech spending. Commercial real estate developers also benefit from reduced vacancy risks in SEZ IT parks.

However, ancillary industries that supply imported inputs to SEZs may see a slight impact from incremental customs duties on denotified floors. Despite this, services exporters benefit from policy changes that enable them to balance their export and domestic revenue mix as the global economy slows down. Overall, these SEZ tweaks support business continuity.

Long Term Benefits & Negatives

In the long run, adjusting SEZ incentives to allow dual usage for both overseas and domestic markets helps the IT/ITeS industries better navigate global tech spending cycles. As India continues to gain market share in global outsourcing, flexible SEZ norms promote sustainable growth. However, the moderate decline in exports signals the need for further improvements in export competitiveness. Achieving scale, moving up the software value chain to high-margin IP-led offerings, and expanding into new regions remain critical.

The potential loss of customs duty advantages for ancillary sectors could also slightly dampen export linkages and the cascading benefits of SEZs as hubs over time.

Short Term Benefits & Negatives

In the short term, while the flexibility for IT/ITeS units to recalibrate their export-domestic business is positive, the lack of clarity on continued incentives for common SEZ infrastructure could lead to moderate cost pressures. This may affect margins for some players in the coming quarters. However, resilient domestic consumption and government/BFSI (Banking, Financial Services, and Insurance) tech spending should help offset any global demand slowdown.

In summary, while export declines are a concern, the SEZ policy changes enable stability in operations. Retaining customs duty benefits for associated facilities is important to ensure short-term continuity.

Companies Impacted by Potential SEZ Benefits Clarification

Indian Companies:

Potential Gainers (5-10 companies):

  • SEZ Developers: L&T Infrastructure Development Projects Ltd., Mahindra SEZ India Ltd., GMR Infrastructure Ltd.: If allowed to retain benefits in common areas, developers could attract more tenants and potentially increase rental income and occupancy rates.
  • IT & ITeS Companies with SEZ Operations: Tata Consultancy Services Ltd., Infosys Ltd., Wipro Ltd.: Retaining benefits in common areas could reduce operating costs and potentially improve profitability. Additionally, flexibility in denotification might help optimize space utilization and adapt to changing business needs.
  • Companies Expanding into Domestic Areas: Reliance Jio Infocomm Ltd., ICICI Bank Ltd., Apollo Hospitals Enterprise Ltd.: The ability to use denotified space for non-export activities could create new business opportunities for companies diversifying beyond exports.

Potential Losers (5-10 companies):

  • Companies Dependent on Domestic Services within SEZs: Food & beverage outlets, retail stores, gyms within SEZs: If customs benefits for common areas are not clarified, their customer base might shrink due to higher prices resulting from loss of duty-free imports.
  • SEZ Units Facing Challenges: SPARC (Software Park) Companies, SEZ units struggling with profitability: The potential clarification might not benefit all SEZ units, and some might continue facing challenges due to factors like global economic slowdown or export competition.
  • Government Revenue: If benefits are extended to more areas, it could lead to lower customs duty collection from SEZs, impacting government revenue in the long run.

Global Companies:

Potential Gainers (5-10 companies):

  • Multinational Companies Utilizing SEZs: Accenture, IBM, Amazon: Clarification on benefits could increase the attractiveness of Indian SEZs for global companies looking to expand operations or enter the Indian market.
  • Global Suppliers to SEZ Units: Companies supplying raw materials or equipment to SEZ units: Increased activity in SEZs due to flexibility and potential cost benefits could boost demand for their products.

Potential Losers (5-10 companies):

  • Companies Facing Competition from SEZ Units: Domestic manufacturers outside SEZs: If SEZ units gain further cost advantages, they might pose increased competition for domestic companies in certain sectors.

Note: This analysis is based on the provided information and potential outcomes of the clarification process. The actual impact will depend on the government’s final decision and its implementation. Conduct your own research and analysis before making any investment decisions.

Citation: Suneja, Kirtika. “Centre Weighs Requests for Benefits in SEZ Common Areas.” The Economic Times, 19 Dec. 2023.

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