Q. What is a Special Economic Zone ?

Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs. Q. Where in India SEZs are located ? At present there eight functional Special Economic Zones located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal) and Nodia (Uttar Pradesh) in India. Further a Special Economic Zone at Indore ( Madhya Pradesh ) os now ready for operation. In addition 18 approvals have been given for setting up of SEZ at Positra (Gujarat), Navi Mumbai and Kopata (Maharashtra), Nanguneri (Tamil Nadu), Kulpi and Salt Lake (West Bengal), Paradeep and Gopalpur (Orissa), Bhadohi, Kanpur, Moradabad and Greater Noida (U.P.), Vishakhapatnam and Kakinada (Andhra Pradesh), Vallarpadam/Puthuvypeen (Kerala) Hassan ( Karnataka), Jaipur and Jodhpur ( Rajasthan) on the basis of proposals received from the State Governments. Q. Who can set up SEZs? Any private/public/joint sector or State Government or its agencies can set up Special Economic Zone (SEZ). Q Can Foreign Companies set up SEZs ? Yes Q How can one apply for setting up of SEZs ? 15 copies of application, indicating name and address of the applicant, status of the promoter along with a project report covering the following particulars may be submitted to the Chief Secretary of the State: Location of the proposed Zone with details of existing infrastructure and that proposed to be established; Its area, distance from the nearest sea port / airport / rail / road head etc. Financial details, including investment proposed, mode of financing and viability of the project. Details of foreign equity and repatriation of dividends etc., if any Whether the Zone will allow only certain specific industries or will be a multi-product Zone.

The State Government shall, forward it along with their commitment to the following to the Department of Commerce, Government of India: That area incorporated in the proposed Special Economic Zone is free from environmental restrictions; That water, electricity and other services would be provided as required; That the units would be given full exemption in electricity duty and tax on sale of electricity for self generated and purchased power; To allow generation, transmission and distribution of power within SEZ; To exempt from State sales tax, octroi, mandi tax, turnover tax and any other duty/cess or levies on the supply of goods from Domestic Tariff Area to SEZ units;

That for units inside the Zone, the powers under the Industrial Disputes Act and other related labour Acts would be delegated to the Development Commissioner and that the units will be declared as a Public Utility Service under Industrial Disputes Act. That single point clearances system and minimum inspections requirement under State Laws/Rules would be provided.

The proposal incorporating the commitments of the State Government will be considered by an InterMinisterial Committee in the Department of Commerce. On acceptance of the proposal, a letter of permission will be issued to the applicant Q. Are there any terms & conditions for setting up of SEZ ? Only units approved under SEZ scheme would be permitted to be located in SEZ. The SEZ units shall abide by local laws, rules, regulations or bye-laws in regard to area planning, sewerage disposal, pollution control and the like. They shall also comply with industrial and labour laws as may be locally applicable. Such SEZ shall make security arrangements to fulfill all the requirements of the laws, rules and procedures applicable to such SEZ. The SEZ should have a minimum area of 1000 hectares and at least 25 % of thye area is to be earmarked for developing industrial area for setting up of units. Minimum area of 1000 hectares will not be applicable to product specific and port/airport based SEZs . Wherever the SEZs are landlocked, an Inland Container Depot (ICD) will be an integral part of SEZs.

Detailed guidelines on setting up of SEZ in the Private/Joint/State Sector is given in Appendix 14-II.N of Handbook of Procedures Volume I. Q. What is role of State Governments? State Governments will have a very important role to play in the establishment of SEZ. Representative of the State Government, who is a member of the Inter-Ministerial Committee on private SEZ, is consulted while considering the proposal. Before recommending any proposals to the Ministry of Commerce & Industry (Department of Commerce), the States must satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc. Q What are the facilities Incentive/ Facilities to SEZ Developer ? 100% FDI allowed for:

(a) townships with residential, educational and recreational facilities on a case to case basis, (b)franchise for basic telephone service in SEZ. Income Tax benefit under ( 80 IA ) to developers for any block of 10 years in 15 years Duty free import/domestic procurement of goods for development, operation and maintenance of SEZs. Exemption from Service Tax /CST. Income of infrastructure capital fund/co. from investment in SEZ exempt from Income Tax Investment made by individuals etc in a SEZ co also eligible for exemption u/s 88 of IT Act Developer permitted to transfer infrastructure facility for operation and maintenance. Generation, transmission and distribution of power in SEZs allowed

Full freedom in allocation of space and built up area to approved SEZ units on commercial basis. Authorised to provide and maintain service like water, electricity, security, restaurants and recreation centres on commercial lines.

Q. How to set up a unit in SEZ ? For setting up a manufacturing, trading or service units in SEZ, 3 copies of project proposal in the format prescribed at Appendix 14-IA of the Handbook of Procedures, Vol.1 to be submitted to the Development Commissioner of the SEZ. Q. What is the approval mechanism for the units ? All approvals to be given by the Unit Approval Committee headed by the Development Commissioner. Clearance from the Department of Policy and Promotion/Board of Approvals, wherever required will be obtained by the Development Commissioner, before the Letter of Intent is issued. Q. What is the obligation of the Unit under the Scheme? SEZ units have to achieve positive net foreign exchange earning as per the formula given in paragraph Appendix 14-II (para 12.1) of Handbook of Procedures, Vol.1. For this purpose, a Legal Undertaking is required to be executed by the unit with the Development Commissioner. The units have to provide periodic reports to the Development Commissioner and Zone Customs as provided in Appendix 14-I F of the Handbook of Procedures, Vol.1. The units are also to execute a bond with the Zone Customs for their operation in the SEZ. Any company set up with FDI has to be incorporated under the Indian Companies Act with the Registrar of Companies for undertaking Indian operations

Q. What are the incentive/facilities available for SEZ units? Following incentive/ facilities to SEZ enterprises: Customs and Excise : SEZ units may import or procure from the domestic sources, duty free, all their requirements of capital goods, raw materials, consumables, spares, packing materials, office equipment, DG sets etc. for implementation of their project in the Zone without any licence or specific approval. Duty free import/domestic procurement of goods for setting up of SEZ units. Goods imported/procured locally duty free could be utilised over the approval period of 5 years. Domestic sales by SEZ units will now be exempt from SAD. Domestic sale of finished products, by-products on payment of applicable Custom duty. Domestic sale rejects and waste and scrap on payment of applicable Custom duty on the transaction value .

Income tax Physical export benefit 100% IT exemption (10A) for first 5 years and 50% for 2 years thereafter. Reinvestment allowance to the extend of 50% of ploughed back profits Carry forward of losses

Foreign Direct Investment :

100% foreign direct investment is under the automatic route is allowed in manufacturing sector in SEZ units except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes , cigars and manufactured tobacco substitutes. No cap on foreign investments for SSI reserved items.

Banking / Insurance/External Commercial Borrowings Setting up Off-shore Banking Units allowed in SEZs. OBUs allowed 100% Income Tax exemption on profit for 3 years and 50 % for next two years. External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions. Freedom to bring in export proceeds without any time limit. Flexibility to keep 100% of export proceeds in EEFC account. Freedom to make overseas investment from it. Commodity hedging permitted. Exemption from interest rate surcharge on import finance. SEZ units allowed to write-off unrealized export bills.

Central Sales Tax Act : Exemption to sales made from Domestic Tariff Area to SEZ units. Income Tax Act:

Service Tax: Exemption from Service Tax to SEZ units

Environment : SEZs permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels and non-polluting service industries in the Coastal Regulation Zone area Exemption from public hearing under Environment Impact Assessment Notification

Companies Act : Enhanced limit of Rs. 2.4 crores per annum allowed for managerial remuneration Agreement to opening of Regional office of Registrar of Companies in SEZs. Exemption from requirement of domicile in India for 12 months prior to appointment as Director.

Drugs and Cosmetics : Exemption from port restriction under Drugs & Cosmetics Rules.

Sub-Contracting/Contract Farming SEZ units may sub-contract part of production or production process through units in the Domestic Traiff Area or through other EOU/SEZ units SEZ units may also sub-contract part of their production process abroad.

Agriculture/Horticulture processing SEZ units allowed to provide inputs and equipments to contract farmers in DTA to promote production of goods as per the requirement of importing countries.

Q. Whether SEZs have been exempted from Labour laws? Normal Labour Laws are applicable to SEZs, which are enforced by the respective state Governments. The state Government have been requested to simplify the procedures/returns and for introduction of a single window clearance mechanism by delegating appropriate powers to Development Commissioners of SEZs. Q. What are the facilities for Domestic suppliers to Special Economic Zone Supplies from Domestic Tariff Area (DTA) to SEZ to be treated as physical export. DTA supplier would be entitled to : Drawback/DEPB CST Exemption Exemption from State Levies Discharge of EP if any on the suppliers Income Tax benefit as applicable to physical export under section 80 HHC of the Income Tax Act.

Q Who monitor the functioning of the units in SEZ ? Performance of the SEZ units monitored by a Unit Approval Committee consisting of Development Commissioner, Custom and representative of State Govt. on annual basis. Q. Are SEZs controlled by Government ? In all SEZs , the statutory functions are controlled by the Government. Government also controls the operation and maintenance function in the 7 Central Government controlled SEZs. In rest of the operation and maintenance are privatised. Q. What are the special features if we come to the zone? The units would be entitled for a package of Incentives and a simplified operating environment Q. What about the Licenses for Imports? No License is required for imports, including second hand machineries. Q. If one buy goods from DTA should they require to pay State Sales Tax and Excise? NO. State has exempted the sales from DTA to SEZ from local levies and taxes. Q. What is the practical role of Development Commissioner? Development Commissioner is the nodal officer for SEZs and help in resolution of problem, if any, faced by the units / developer. Q. Routine examination of goods by customs in the EOU is common.

Will the same practice continue at the SEZ? Customs examination is to the bear minimum. SEZ units function on self certification basis. Q. What are the provisions relating to External Commercial Borrowing (ECB) in SEZ ? External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions For details please see guidelines issued by RBI (F.No. 4(2)/2002-ECB, dated 15.9.2002). Q. Will it be possible to supply to other units in SEZ? YES. Inter Unit Sales are permitted as per the Policy. Buyer procuring from another unit pays in Foreign Exchange.

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Historical Review
August 18th, 2007 2 Comments India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asias first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations. SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. To instill confidence in investors and signal the Governments commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. A number of meetings were held in various parts of the country both by the Minister for Commerce and Industry as well as senior officials for this purpose. The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005. The draft SEZ Rules were widely discussed and put on the website of the Department of Commerce offering suggestions/comments. Around 800 suggestions were received on the draft rules. After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. The main objectives of the SEZ Act are:

(a) generation of additional economic activity (b) promotion of exports of goods and services; (c) promotion of investment from domestic and foreign sources; (d) creation of employment opportunities; (e) development of infrastructure facilities;

It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities. The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and creation of related infrastructure. A Single Window SEZ approval mechanism has been provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administration are considered by this BoA periodically. All decisions of the Board of approvals are with consensus. The SEZ Rules provide for different minimum land requirement for different class of SEZs. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created. The SEZ Rules provide for :

Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs; Single window clearance for setting up of an SEZ; Single window clearance for setting up a unit in a Special Economic Zone; Single Window clearance on matters relating to Central as well as State Governments; Simplified compliance procedures and documentation with an emphasis on self certification

Approval mechanism and Administrative set up of SEZs

Approval mechanism

The developer submits the proposal for establishment of SEZ to the concerned State Government. The State Government has to forward the proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of

Approval. The applicant also has the option to submit the proposal directly to the Board of Approval. The Board of Approval has been constituted by the Central Government in exercise of the powers conferred under the SEZ Act. All the decisions are taken in the Board of Approval by consensus. The Board of Approval has 19 Members. Its constitution is as follows: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19)

Secretary, Department of Commerce Member, CBEC Member, IT, CBDT Joint Secretary (Banking Division), Department of Economic Affairs, Ministry of Finance Joint Secretary (SEZ), Department of Commerce Joint Secretary, DIPP Joint Secretary, Ministry of Science and Technology Joint Secretary, Ministry of Small Scale Industries and Agro and Rural Industries Joint Secretary, Ministry of Home Affairs Joint Secretary, Ministry of Defence Joint Secretary, Ministry of Environment and Forests Joint Secretary, Ministry of Law and Justice Joint Secretary, Ministry of Overseas Indian Affairs Joint Secretary, Ministry of Urban Development A nominee of the State Government concerned Director General of Foreign Trade or his nominee Development Commissioner concerned A professor in the Indian Institute of Management or the Indian Institute of Foreign Trade Director or Deputy Sectary, Ministry of Commerce and Industry, Department of Commerce Administrative set up

Chairman Member Member

Member Member Member Member Member Member Member Member Member Member Member Member Member Member Member Secretary

The functioning of the SEZs is governed by a three tier administrative set up. The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce. The Approval Committee at the Zone level deals with approval of units in the SEZs and other related issues. Each Zone is headed by a Development Commissioner, who is exofficio chairperson of the Approval Committee.

Once an SEZ has been approved by the Board of Approval and Central Government has notified the area of the SEZ, units are allowed to be set up in the SEZ. All the proposals for setting up of units in the SEZ are approved at the Zone level by the Approval Committee consisting of Development Commissioner, Customs Authorities and representatives of State Government. All post approval clearances including grant of importer-exporter code number, change in the name of the company or implementing agency, broad banding diversification, etc. are given at the Zone level by the Development Commissioner. The performance of the SEZ units are periodically monitored by the Approval Committee and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of violation of the conditions of the approval.

Incentives and facilities offered to the SEZs The incentives and facilities offered to the unitsin SEZs for attracting investments into the SEZs, including foreign investment include:

Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. Exemption from minimum alternate tax under section 115JB of the Income Tax Act. External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels. Exemption from Central Sales Tax. Exemption from Service Tax. Single window clearance for Central and State level approvals. Exemption from State sales tax and other levies as extended by the respective State Governments.

The major incentives and facilities available to SEZ developers include:

Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. Income Tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act. Exemption from dividend distribution tax under Section 115O of the Income Tax Act. Exemption from Central Sales Tax (CST).

Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

SEZ Approval Status Consequent upon the SEZ Rules coming into effect w.e.f. 10th February, 2006, fifteen meetings of the Board of Approvals have since been held. During these meetings, formal approval has been granted to 341 SEZ proposals and in-principle approval has been granted to 171 SEZ proposals. Out of the formal approvals, 130 SEZs have been notified. Land requirements for approved Special Economic Zones: The total land requirement for the 341 formal approvals granted till date is approximately 44268 hectares out of which about 87 approvals are for State Industrial Development Corporations/State Government Ventures which account for over 21169 hectares. In these cases, the land already available with the State Governments or SIDCs or with private companies has been utilized for setting up SEZ. The land for the 130 notified SEZs where operations have since commenced involved is approximately 17663 hectares only. Out of the total land area of 2973190 sq km in India, total agricultural land is of the order of 1620388 sq km (54.5%). It is interesting to note that out of this total land area, the land in possession of the 130 SEZs notified amounts to approximately 177 sq km only. The 341 formal approvals granted also works out to only around 443 sq km.

SEZs- leading to the growth of labour intensive manufacturing industry: Out of the 341 formal approvals given till date, over 120 approvals are for sector specific and multi product SEZs for manufacture of Textiles & Apparels, Leather Footwear, Automobile components, Engineering etc.. which would involve labour intensive manufacturing. The employment projected in the 130 SEZs notified so far is over 17,43,530 additional jobs. SEZs are thus going to lead to creation of employment for large number of unemployed rural youth. Nokia and Flextronics electronics hardware SEZs in Sriperumbudur are already providing employment to 3800 and 2069 persons, majority of which are women. Hyderabad Gems SEZ for Jewellery manufacturing in Hyderabad has already employed 1200 girls majority of whom are from landless families, after providing training to them. They have a projected direct employment for about 30,000 persons. Apache SEZ being set up in Andhra Pradesh will employ 20, 000 persons to manufacture 10,00,000 pairs of shoes every month. Current employment in Apache SEZ is 2500 persons. Brandix Apparels, a Sri Lankan FDI project would provide employment to 60,000 workers over a period of 3 years. Even in the services sector, 12.5 million sq meters space is expected in the IT/ITES SEZs which as per the NASSCOM standards translates into 12.5 lakh jobs. It is, therefore, expected that establishment of

SEZs would lead to fast growth of labour intensive manufacturing and services in the country.

Benefits derived from SEZs Benefit derived from SEZs is evident from the investment, employment, exports and infrastructural developments additionally generated. Investment of the order of Rs.100,000 crores including FDI of US $ 5 6 billion is expected by the end of December 2007. 500,000 direct jobs are expected to be created by December 2007. The benefits derived from multiplier effect of the investments and additional economic activity in the SEZs and the employment generated thus will far outweigh the tax exemptions and the losses on account of land acquisition. Stability in fiscal concession is absolutely essential to ensure credibility of Government intensions.

Exports from the functioning SEZs during the last three years are as under: Value (Rs. Crore) 13,854 18,314 22 840 34,787 Growth Rate ( over previous year ) 39% 32% 24.7 52.3% Rs. 67088 crores

Year 2003-2004 2004-2005 2005-2006 2006-07

Projected exports from all SEZs for 2007-08:

(b) Investment and employment in the SEZs set up prior to the SEZ Act, 2005: At present, 1087 units are in operation in the SEZs established prior to the Act coming into force, providing direct employment to over 1.85 lakh persons; about 40% of whom are women. Private investment by entrepreneurs in these SEZs established prior to the SEZ Act is of the order of over Rs. 5661 crore. (c) Investment and employment in the SEZs notified under the SEZ Act 2005: Current investment and employment:
o o

Investment: Employment:

Rs. 43123 crores 35053 persons

Expected investment and employment (by December 2009):

 o o

Investment: Employment:

Rs. 2,59,159 crores 17,43,530 additional jobs

(d) Expected investment and employment if 341 formal approvals becomes operational:
o o

Investment: Rs. 3,00,000 crores Employment: 4 million additional jobs

Impact of the scheme The overwhelming response to the SEZ scheme is evident from the flow of investment and creation of additional employment in the country. The SEZ scheme has generated tremendous response amongst the investors, both in India and abroad, which is evident from the list of Developers who have set up SEZs:

Nokia SEZ in Tamil Nadu Quark City SEZ in Chandigarh Flextronics SEZ in Tamil Nadu Mahindra World City in Tamil Nadu Motorola, DELL and Foxconn Apache SEZ (Adidas Group) in Andhra Pradesh Divvys Laboratories, Andhra Pradesh Rajiv Gandhi Technology Park, Chandigarh ETL Infrastructure IT SEZ, Chennai Hyderabad Gems Limited, Hyderabad