New SEZ Act should factor in hybrid work structure: IT industry

Finance minister Nirmala Sitharaman said during her budget speech that the SEZ Act would be replaced with a new legislation that would enable states to become partners in “development of enterprise and service hubs”.

The $227 billion sector is also seeking clarity around issues such as impact of work from home on Income Tax exemptions under Section 10AA and expansion of the SEZ Reserve to include investments on infrastructure and employees.

Some of these clarifications, which could be amendments to existing policies, will go a long way in securing long-term commitments for the industry, officials and experts told ET.

“We are very active in discussions with the government on SEZs. In fact, the clarification on hybrid work is not dependent on the new Act. We are requesting them to bring that clarification at the earliest because companies need it to prepare their long-term plans. It will give them assurance and stability to know that the option is available,” Debjani Ghosh, president of IT industry association Nasscom, said.

From an SEZ Act perspective, Ghosh said Nasscom is working with the government to ensure that hybrid work is built into the design principle of the Act.

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“As the Act reinvents itself, we are working with the government to make hybrid work a key element of the Act so that it accounts for expansion into tier 2-3 regions as well as flexibility for remote working,” she said.

Speaking at an industry forum last week, IT minister Ashwini Vaishnaw had said that the government was open to carrying out more reforms that benefit the industry and was looking at concerns regarding the SEZ Act.

“I’m so glad that the other service provider reforms have been really appreciated by the industry… SEZ exemptions and many more are there in the pipeline…We are a very open-minded government, will listen to these ideas and whatever is implementable we will together implement,” Vaishnaw had said.

Nasscom has been seeking clarification on the tax ramifications of Section 10AA, a provision under the Income Tax Act which allows deductions for businesses established in SEZs.

However, IT-BPM companies based inside SEZs have been working from home since the Covid-19 pandemic and have requested clarification on the impact of remote work on the tax holiday. SEZ exports fell to $102.3 billion in FY21 from $112.3 billion in FY20.

Ashish Aggarwal, VP and head of public policy, Nasscom said that since the government is open to encouraging both export-related and domestic services, the clarification on hybrid work for IT-BPM becomes especially relevant to encourage investments in new regions.

“There are activities which may not be directly related to exports like cafeteria and creche facilities, but companies offer them as part of their business. There have been some challenges in the past where certain benefits have been denied to the industry because they do not come under permitted activity. These are operational level concerns which can be addressed from time to time,” Aggarwal said.

The relook at the SEZ Act comes after the government adopted a sunset clause and said only those units that started production on or before June 30, 2020, would be granted a phased income tax holiday for 15 years.

With the industry and government pushing for expansion into tier II and III cities, the industry has been urging the government to create the necessary infrastructure in these towns.

India’s $44 billion BPM services industry alone could double its presence in smaller towns across the country by 2026, as per various estimates.

Former Infosys chief operating officer 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 supporting infrastructure to make jobs in these regions enticing.

“It is equally important to create world class educational institutions, job opportunities for spouses, healthcare among others. We need to start creating this infrastructure in tier 2-3 cities so that people do not have to migrate to tier 1 cities in the first place,” Rao said.

Nasscom has recommended that utilization of the SEZ Reserve should be expanded to include expenses incurred on leasing desktops and laptops, using cloud infrastructure, buying software and investment in building, infrastructure, workstation, interiors, and furniture-related costs.

WNS chief executive Keshav Murugesh said reforms in customs administration of SEZs, which will be fully IT-driven, is commendable and reiterated the need for clarification related to remote working.

“A focus on higher facilitation and only risk-based checks would significantly enhance the ease of doing business for SEZs. Another recommendation is that the SEZ Reserve be expanded to include expenses incurred on leasing of computers, software purchase, and investment in building and infrastructure,” Murugesh said.