The recent changes in the SEZ rules will benefit commercial office leasing and allow flexibility in demarcating parts of the SEZ area without significant cost implications, according to a report.
The department of commerce on December 6 notified amendments to the Special Economic Zones (SEZ) rules of 2005. The amendments permit demarcation of parts of an SEZ area into non-SEZ area after repayment of tax benefits availed to date.
Such demarcated areas are expected to have better occupancy, in line with the existing non-SEZ spaces, Crisil Ratings said in a note on Friday.
Hence, benefits from better leasing and higher income from such parts will outweigh associated costs, the report said.
The SEZ Act was introduced in 2005 to drive exports by providing tax exemptions for companies operating in such areas. While the sunset clause on these benefits kicked in from April 2020, higher compliance requirements continued.
Also, prior to the amendments, SEZ operators could de-notify only the land parcel from the SEZ to the non-SEZ, which required the entire built-up area over the said land parcel to be vacated before applying for de-notification. As a result, SEZ spaces saw a gradual exit of tenants, leading to a decline in occupancy.
A non-SEZ area is a non-processing section within an SEZ that does not need to adhere to the same compliances.
The minimum built-up SEZ areas -- referred to as processing area in the notification -- are in Mumbai, Delhi-NCR, Chennai, Hyderabad, Bengaluru, Pune, and Kolkata.
The report is based on an analysis of office space operators with over Rs 70,000 crore debt and total grade-A leasable area of 188 million sq ft (msf), of which SEZs account for 47-49 per cent.
According to Anand Kulkarni, a director with the agency, the revisions will allow commercial office operators to demarcate non-SEZ areas within SEZs on a floor-wise basis, which will help in widen the tenant base and support faster leasing.
According to Saina Kathawala, an associate director with the agency, the preliminary assessment indicates that repayments associated with demarcation will be equivalent to 3-6 months of rental income generated by a comparable non-SEZ area.
Therefore, the benefits, in terms of better occupancy and consequent higher rental income, will outweigh the costs.