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1/3rd of India’s office market supply coming from SEZ’s; faces the Sunset clause challenge

Awantika Mohanty • 29/01/2020

A report by Cushman and Wakefield India in association with Dhruva Advisors

  • 1/3rd of India’s office market supply coming from SEZ’s
  • IT SEZs have a majority share of exports from SEZs, with INR 4320 crores (USD 43.2 bn)
  • 64 operational SEZ’s in the country in which Bangalore is leading with maximum share of 32% followed by Hyderabad (16 %), Pune (14%) and Chennai (14%)
  • The C&W Occupier Perception Survey revealed that 60% of SEZ occupiers want to expand before March 2020 i.e. before the Sunset Clause applies
Cushman and Wakefield India, today launched a joint report with Dhruva Advisors on a trending topic of impending sunset clause of India named “SEZ Sunset clause – A 360 degree perspective”. The report provides an insight into the Real estate performance in SEZ, Demand & Supply and Impact assessment. We have also conducted the Occupier’s perception survey to find out their views and probe more on their possible expansion and business strate¬gies going forward in the wake of changing landscape due to Sunset clause. The respondents were a wide range of business sectors although Technology (52%) and Engineering & Manufacturing (22%) comprised the majority.

The inferences from the survey cast light on the favourable and optimistic outlook from occupiers planning to expand their footprint across the SEZ and non-SEZ regions. While SEZ occupiers plan to expand before the sunset clause is applied to avail tax benefits, non-SEZ occupiers find the clause’s indirect tax benefits as a major draw. Therefore, they are expected to expand into the SEZ zone in the longer term. This perception has also percolated down to supply creation, as developers are also expediting construction timelines in order to meet the Q1 2020 deadline, where possible. 
 

Key highlights of the report

  • We expect that the demand for SEZs will remain healthy over the next 3 to 4 months.
  • SEZs have continued to hold a consistent share in the India office stock, retaining a long-term average share of 25% since 2014.
  • The sunset clause has not significantly impacted rental growth in any market. Demand-supply dynamics driven by low vacancy levels and an occupier rush will have direct impact on rents.
  • Tech cities are likely to continue playing a significant role in the SEZ landscape, having a major share of the upcoming supply.
  • Occupiers from Tech, Engineering & Manufacturing sectors are the most represented in SEZ facilities. 

Impact assessment of Sunset Clause:

  • Occupiers: New SEZ occupiers are eligible to receive both direct and indirect tax benefits, only if they commence operations before the end of March 2020. All new SEZ occupiers commencing operations beginning 1 April 2020 will not be eligible to receive direct tax benefits. However, the sunset clause will not impact their indirect taxes, and they will continue to receive benefits such as exemptions on GST and SEIS incentives (on eligible services), as long as they are operational. 
  • Developers: The direct tax benefits are no longer available to SEZ developers and co-developers, but their indirect tax benefits continue uninterrupted. The sunset clause will not impact their indirect tax benefits in any form. 
Commenting on the report release, Ramita Arora, Managing Director - Bengaluru, Cushman and Wakefield, said “The Sunset Clause, which comes into effect from 1st April 2020, gives the occupiers an opportunity to explore cost savings over the longer term as the indirect tax benefits in SEZs will continue. Expansion or relocation can be explored by occupiers having existing SEZ units post the sunset clause. SEZ demand is expected to be in moderation following Q1 2020, however, active SEZ requirements in the market will keep the demand constant in the medium term with potential decline in the long run, requiring the Developers with projects scheduled for construction post 2020 to progress as expected to cater to the expected demand.”
 
Mr. Ajay Rotti, Partner, Dhruva Advisors LLP commented “The direct-tax incentive available to units operating in a SEZ is one of the last few profit linked incentives currently in the income-tax law.  These are expected to be phased out soon though there are representations by various stakeholders for extension of the timeline of the sunset clause.  The recent change of subjecting companies not availing tax incentives (including SEZ) at a lower rate of tax, the recent negative WTO ruling on export incentives offered by India may seem to have taken the sheen out of the SEZs from a tax benefit perspective. Nevertheless, issues relating to tax incentives claimed by existing SEZ units, litigation around the same is of importance to corporates.”

 

 

About Dhruva Advisors
Dhruva Advisors is a leading tax boutique with offices in 6 cities in India offering a wide range of services in the tax and regulatory space to clients in India and around the world.  Dhruva Advisors has been awarded the India Tax Firm of the year award for three years running (2017, 2018, 2019) by International Tax Review.  With a highly regarded and experienced team of professionals, Dhurva provides well-thought out strategies and solutions to complex problems in tax and regulatory matters. Our professionals have advised on some of the most significant transactions and have handled several of the largest and most critical tax controversies and related matters in India.

 

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