January 13, 2008
SEZs are not good for Small & Medium sized IT Enterprises
With the uncertainty over the Software Technology Parks of India (STPI) scheme after the union budget, a mad rush towards Special Economic Zones (SEZs) is very much expected. I have been studying about SEZ or last three weeks and two things are very clear –
- The SEZ Act is under constant change. So whatever is stated there cannot be taken as a confirmed policy from the Government.
- The Act has been poorly and loosely drafted leaving a lot of ambiguity, areas of misinterpretation and scope of misuse by people who have the best lawyers at their disposal.
The SEZ is going to benefit two classes of businesses –
- Manufacturing or service companies – They will get duty-free import capability and relief from various direct and indirect taxes including VAT, Service Tax, Excise Tax, FBT, Dividend Distribution Tax and above all Income Tax. These sops are given so that these businesses invest for setting up new infrastructure and in their business within the SEZ marked area.
- Real estate companies – They will develop the SEZ infrastructure and multiply the value of land literally overnight and reap rich dividends.
The unfortunate reality is that,
- SEZ scheme is mainly helping large, established businesses and is working against small and medium sized businesses. Large companies like Reliance, Infosys, Mahindra, etc. who can buy and build infrastructure measuring 25 acres or more will reap the benefit of tax exemption for another 15 years, while small companies will struggle with a collective tax burden of more than 50% of the total turnover. Big will become bigger, small will have a tougher time and perish.
- SEZ scheme is brining back (in a new package) the age old zamindari system. The SEZs which are being developed by real estate developers to accommodate medium sized companies are leasing out infrastructure at abnormally high costs (almost five times of normal rent) which makes it out of bounds for most entrepreneurs. There is no regulation on the ownership / lease / rent process between these real estate developers and the SEZ units. In one of the agreement that I have managed to get my hands on, the SEZ developer made a mix of Deed of Assignment and A Sub-lease Agreement keeping best of both worlds in his own favor and charging a price which a Freehold Land. Few companies, who will manage to afford it, will end up spending a major of their cash flow on rent/lease cost alone. This will make them highly vulnerable to cyclic depressions in the market which are very common on a new industry.
I will like to see a proper level playing field to be set up by Government of India.
- We do not mind paying taxes. If IT industry should do away with subsidies, Let everyone pay taxes! There should not be double standards by retaining tax benefits for large established players and punishing small & medium sized enterprises for being what they are – i.e. small.
- Please come out of the dream that infrastructure creation is fundamental to IT growth. IT is not like heavy engineering, steel or shipping business which depends heavily on top-quality infrastructure. In fact IT infrastructure has the highest depreciation and technologies / equipments get obsolete overnight. The largest companies in Silicon Valley have come out of garages and dorms. IT industry needs entrepreneurs and people for its growth. Focus on growing talent in colleges and universities.
- IT industry has low entry barriers. Try to keep it low. This will help innovativeness and constant evolution of the industry. Let entrepreneurs take control and scale new heights. Facilitate them, don't frustrate them.
In years to come, my company may also get into a SEZ (either on its own or through a SEZ developer). However, my stand on how SEZs are resulting in a divide between established player and small/medium sized companies will remain the same unless the policy is modified for inclusive growth (this is the term our respected PM, Mr. Manmohan Singh uses quite often).