Huge Investements in SEZ's to further boost Realty

Reliance Venture Limited (RVL), a group company of Reliance Industries, is setting up of a multi-product Special Economic Zone (SEZ) in Haryana. The biggest SEZ in Haryana + Reliance Industries Ltd's proposed SEZs in Mumbai would contribute Rs 50,000 crore to the country's exports once they operational (let's hope so).

The SEZs, to be set up with an initial investment of Rs 25,000 crore, will see further funds being pumped in to the Rs 2,50,000 crore over the next decade and create employment opportunities for 25 lakh people, as per RIL.

The SEZs known as Navi Mumbai SEZ (NMSEZ) and Maha Mumbai SEZ (MMSEZ) will earn a capital investment to the tune of Rs 25,000 crore, which as per primary expectations is likely to touch a total investments of Rs 2,50,000 crore over a decade. The SEZs will need around 1,600 MW power for their energy needs.

The agreement also paves the way for the transfer of about 1,395 acres that were acquired by the HSIIDC for setting up of the SEZ near Garhi Harsaru in Gurgaon district. In return, the HSIIDC will receive the exact cost of compensation paid to the Land Acquisition Collector (LAC), nine per cent interest on this amount from the date of payment made to LAC till the payment by the special purpose vehicle to the HSIIDC and 15 per cent administrative charges on the amount of compensation paid.

This will translate into Rs. 360 crore as against the compensation of Rs. 300 crore paid by the HSIIDC. In addition, the HSIIDC will get sweat equity without any investment at 10 per cent of the total equity. Also, the HSIIDC will be allotted shares equivalent to 10 per cent of the total share capital. These shares will be allotted on the face value of Rs. 10 per share for which the HSIIDC will not have to make any payment. The site was finalised jointly by the HSIIDC and RVL. The location falls in Gurgaon and Jhajjar districts and would be abutting the proposed Kundli-Manesar-Palwal Expressway on both sides.

The agreement also provides that in case the special purpose vehicle fails to implement the project, the land being transferred by the HSIIDC will be reverted and the corporation will pay back only the cost of land acquisition.

Haryana's CM described this agreement as a giant stride towards fulfilment of the declaration made by the State Government in its Industrial Policy announced in June last year. The policy had set an investment target of Rs. 200,000 crore and employment for ten lakh people in the next ten years. The multi-product SEZ alone would catalyse an investment of over Rs. 100,000 crore and generate direct and indirect employment for more than five lakh people, he claimed.

The CM made it clear that the State Government had a uniform policy on land acquisition and any multi-product SEZ being set up would be given similar treatment under the policy. The charges being paid by RVL to the HSIIDC were strictly in accordance with this policy and any further acquisition that might be necessary for implementation of the project would follow the same norms.

RIL's plans for a Special Economic Zone in Haryana seem to have got political clearance, but it has come at a price.

Anything that Reliance builds in its SEZ, should have got tax-breaks but now the rules are going to be made much tighter. But as per media reports, that tax break will only be given for facilities that are directly used by workers within an SEZ.

Realty players had been worried that SEZ developers would misuse rules and use their land for commercial property development without paying regular taxes.
But the government says the safeguards will ensure that this doesn't happen.

"The SEZs will primarily be for workers in the SEZs. Why should outsiders stay in an SEZ? And in any case, the tax breaks are for units in the processing zone," as said by Kamal Nath, Commerce Minister to NDTV. "Any realty development will be in the non processing zone, so there are no tax breaks," he says.

Now any house built in an SEZ will attract taxes, unless it is sold or leased to an SEZ worker, which means they won't have any cost advantage. But there could still be some loopholes. The implementation and monitoring will be a tough challenge.

It may add to speculations in an already unsteady market. What happens if you work in an SEZ and get a flat but then you change jobs, but you are paying your EMI, which is based on a price that has taken the tax breaks into account. It will be very difficult to implement, as per Cushman and Wakefield.

The government, as always, is confident that all loopholes fill be plugged when the revised SEZ rules come into effect in the next one year. This will further boost the already hot real estate market in India.