Вы находитесь на странице: 1из 49

Special Economic Zones


Special Economic Zones

A case study on Special Economic Zones in India, the role played by them in the Indian economy and their impact on the same

Project Report by:

Special Economic Zones

In the new world trade environment, Indian economy is beaming like anything. With the government welcoming foreign investment, with policies designed to ease entry, location decisions, and choice of technology, production, import and export FDI is bound to increase exponentially. Investors are also attracted to India by its rich mineral and agricultural resources. The country boasts a well-established major manufacturing sector that encompasses almost all areas of activity. A policy was introduced on 1.4.2000 for setting Special Economic Zones in the country with a view to provide an internationally competitive and hassle free environment for exports. This study aims at creating awareness about the scheme of SEZ and analyzing the performance of SEZ and the impact they have actually had in the Indian economy; whether they have served the purpose for which they were formed or not? I am grateful to St. Xaviers College, Kolkata for providing me the opportunity to do the study on such recent development in the nation. I am also grateful to my project guide Prof. S. Prakash for guiding me through the course of the project. I am sincerely thankful for the guidance rendered by him. I would like to thank my family and friends for the support rendered to me during the study. The practical training I had during my internship during the graduation period helped me a lot in knowing about the intricacies of the Industry.

Special Economic Zones

Table of Contents
Preface ................................................................................................................................ 2 1. 2. 3. 4. 5. 6. 7. 8. Introduction ................................................................................................................. 5 Objective of Study ....................................................................................................... 6 Methodology of Study ................................................................................................. 7 Literature Survey ......................................................................................................... 8 Introduction to SEZ ...................................................................................................... 9 Raison D'tre SEZs in India ........................................................................................ 11 About SEZs ................................................................................................................ 13 Statutory Overview Acts & Rules............................................................................ 15 8.1 8.2 9. Overview of the Special Economic Zones Act, 2005 .......................................... 15 Overview of the Special Economic Zones Rules, 2006....................................... 16

Structure & Types of SEZ ........................................................................................... 17 9.1 9.2 9.3 Persons Involved with SEZ ................................................................................. 17 Types of SEZ ....................................................................................................... 17 Parts of SEZ......................................................................................................... 18 Facilities/ Incentives available to SEZs.................................................................. 19


10.1 Incentives to Units ............................................................................................. 19 10.2 Incentives to Units ............................................................................................. 19 10.3 Detail of Facilities/ Benefits to Special Economic Zones ................................... 20 11. Authorities under SEZ Act ...................................................................................... 26

11.1 Board of Approval .............................................................................................. 26 11.2 Development Commissioner.............................................................................. 27 11.3 Approval Committee .......................................................................................... 28 12. Setting up of SEZ .................................................................................................... 29

12.1 Requirements for forming SEZ ........................................................................... 29 12.2 Letter of approval & Notification ....................................................................... 31 12.3 Proposal for approval of Unit ............................................................................. 32

Special Economic Zones

12.4 Letter of Approval to a unit................................................................................ 33 12.5 Conditions for Exemptions, Drawbacks and Concessions ................................. 34 12.6 Other Conditions & Compliances ....................................................................... 35 13. Developments in SEZ scheme ................................................................................ 36

13.1 Minimum Alternate Tax (MAT) Finance Bill, 2011 .......................................... 36 14. Position of SEZs in India ........................................................................................ 38

14.1 Performance so far............................................................................................. 38 14.2 SEZs in India....................................................................................................... 40 15. 16. 17. 18. 19. Criticism ................................................................................................................. 42 SWOT Analysis of SEZ Policy .................................................................................. 45 Findings & Conclusion............................................................................................ 46 Bibliography ........................................................................................................... 48 Annexures.............45

Special Economic Zones

1. Introduction
The number of Special Economic Zones (SEZs) globally continues to expand. SEZs account for an increasing share of international trade flows and employ a growing number of workers world-wide. In the global economy, EPZs are viewed as an important if a second best policy instrument to promote industrialization, generate employment, and for regional development. However, costs and benefits of SEZs have generated an intense debate, touching on almost every possible aspect of SEZs. Therefore, whether SEZs are beneficial for development remains a subject of controversy. The present study tries to analyze the financial and social impact that SEZs have had on the Indian Economy. India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's 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 2000. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package with the minimum possible regulations. However, the new SEZ policy has triggered a wide ranging debate in India. In view of this ongoing debate, this paper is timely and will contribute to a better understanding of the financial dimensions of SEZs. It is therefore my hope that this study will help move the debate forward.

Special Economic Zones

2. Objective of Study
The study aims at analysing the SEZ policy introduced in India. The project goes into details of the policy regarding the existence of SEZs both in India and abroad. It is important to know the conditions which lead to a step being taken before commenting on the same. Therefore, the reasons for implementation of the strategy have been evaluated. Along with the study of the policy, the procedure and legal compliance for formation of SEZs has also been elucidated. The further compliances to be maintained by SEZs have also been studied. Various incentives are offered by the government to SEZs to promote exports in the country. The study scrutinizes the various incentives and benefits that are availed to SEZs for inviting investors to SEZs. It has been quite some time since SEZs have started to operate in India. The data on performance of the SEZs so far has been analysed and the trend of growth in exports through SEZs reviewed. There have been criticisms faced by SEZs from all fronts; both socially and financially. SEZs have been criticised for depriving farmers of their land and causing unjustified land acquisitions. They are claimed to be used as a mode by real estate developers as an unjust means to acquire land for developing real estate projects in the non processing area of the SEZ. Another school of critics argue that SEZs are causing monetary losses to the Government through exemption and benefits given to SEZs. The project studies such arguments against SEZs. Finally, the study tries to scrutinize whether the SEZ scheme has in the end been beneficial to the Indian economy or not; whether the fiscal benefits availed to SEZs provide a return to the Indian exchequer.

Special Economic Zones

3. Methodology of Study
The course of action of the study was essentially by using secondary data, analysis of information gathered by other sources and the performance reports released by the Government of India. The primary data could not be accessed due to lack of time constraint involved in the project. However, the first hand interactions with SEZ developers and authorities have been significant in the build up to the study. The experience in this regard has been instrumental in understanding the concepts regarding the structure and compliances related to SEZs in India. The copies of compliance documents have been collected through primary source. Through the study, mostly the database that was used was the Laws and statutes published by the Government of India in the Official Gazette. The Special Economic Zone Act, 2005 and the Special Economic Zones Rules, 2006, in conjunction with the amendments and notifications regarding the same, form the essence of the study. The other materials that have been accessed are the performance reports released by the Commerce and Industry Department of the Government of India. Along with official documents, reports and previous studies on the issue by other author have been referred to get an overview about the Industry and the functioning of the same. Such reports have help analyse the performance of SEZs in India and the viability of the scheme introduced by the Government. The regular publications in newspapers and magazines have helped in creating awareness about the SEZ policy. The articles in such publications helped in knowing about the developments in the SEZ environment, and the perception and opinions of Industry veterans regarding the issue.

Special Economic Zones

4. Literature Survey
The SEZ policy has been a matter of debate for quite some time now. There have been contrasting opinions given on the effectiveness of the policy. However, few major studies have been done to get to the core of the claims. This is in conformity with the fact that as of now only 130 SEZs are operational, and it would take time before the SEZs are completely developed, and then their true colours show up. According to Dr. R. Shashi Kumar1, For all of Indias achievements, the country is still wrestling with high poverty and unemployment rates...there is great interest within India to promote the export-oriented manufacturing sector through Special Economic Zones or SEZs. According to Aradhna Aggarwal2, employment generation potential of zones is rather large... Zones have proven to be particularly beneficial to female employment. Zones contribution as an engine for promoting new knowledge, technologies and innovations through technology transfers and technology creation has however been quite limited till now, she adds. As per the sezindia website, the Special Economic Zones (SEZs) Policy was announced 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, There are several limitations of the existing literature: First, in the absence of a comprehensive framework some effects are over emphasized while others are neglected. Second, the analysis is often supported by patchy evidence. Third, very few studies evaluate the effectiveness of SEZs, as an investment destination, and recovery of the costs involved in making them. Fourth, zones are not a static phenomenon. The economic conditions in which they operate change over time and affect their characteristics, an example of which would include the recent Global downturn. Finally, few academic studies are available on Special Economic Zones in India. Most of the available studies are narrow in scope and are based on procedural aspects instead of broad surveys.

1 2

SEZs In India: Concept, Objectives And Strategies (2008); Dr. R. Shashi Kumar, Bangalore University Impact of Special Economic Zones on Employment, Poverty and Human Development (2007) by Aradhna Aggarwal. Working Papers of Indian Council for Research on International Economic Relations

Special Economic Zones

5. Introduction to SEZ
Some of the earliest references of export processing zones (EPZ) date back to thirteen century in Spain. As per the ILO report, The Free Zone Consortium of Cadiz was founded in 1929. In Spain a free zone was set up before the First World War, but it took off only after the Second World War. In recent times, the first export processing zone (EPZ) was set up in 1959 at Shannon, in Ireland. These zones are known by different names such as Free Trade Zones (FTZ), Industrial Free Zone, Export Processing Zones (EPZ), Bonded Free Zones, Maquiladoras (Mexico) and Special Economic Zones (China). India was the first country to establish EPZ, at Kandla, in the Asia Pacific region in 1966. The proposal for setting up the Kandla Free Trade Zone (KAFTZ) was mooted in 1961, with the objective of facilitating the development of the Kutch region, to ensure greater utilization of Kandla Port and to create employment opportunities in the KandlaGandhidham area. With a view to create an environment for achieving rapid growth in exports, The Government of India (GoI) announced a Special Economic Zone in the Export -Import Policy 2000. Special Economic Zones (SEZs) are specifically delineated duty-free enclaves treated as a foreign territory for the purpose of industrial, service and trade operations, with exemption from customs duties and a more liberal regime in respect of other levies, foreign investment and other transactions One of the earliest and the most famous Special Economic Zones were founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s. The most successful Special Economic Zone in China, Shenzhen, has developed from a small village into a city. In the late 1990s, when the then Commerce Minister of India, late Murasoli Maran, visited the special economic zones (SEZs) in China, he was motivated by the success of Chinese SEZs. Accordingly, The Government of India (GoI) first introduced the concept of SEZ in the

Murasoli Maran

Special Economic Zones


Export -Import Policy 2000 with a view to provide an internationally competitive and hassle free environment for exports. Since the performance of EPZs fell far short of expectations due to various reasons, the SEZs were conceived as a much larger and more efficient form and the EPZ scheme was replaced with the SEZ scheme. All the existing eight Export Processing Zones located at Kandla and Surat (Gujarat), Cochin (Kerala), Santa Cruz (Maharashtra), Falta (West Bengal), Madras (Tamil Nadu), Visakhapatnam (Andhra Pradesh) and Noida (Uttar Pradesh) were converted into Special Economic Zones. Further, in order to provide a significant thrust to the policy, the government enacted the Special Economic Zones Act 2005. The Act became operative in February 2006 after the SEZ rules were framed and notified.

Special Economic Zones


6. Raison D'tre SEZs in India

The History of SEZs in India suggests that the seeds of the basic concept of Special Economic Zone (SEZ) were sown in the mid sixties. Further, the basic model of the present day Indian Special Economic Zone was structured with the establishment of the first Export Processing Zone (EPZ) at Kandla in the year 1965. Several other Export Processing Zones were set up at various parts of India in the subsequent years. The lack of good Government of India economic policy and inefficient management soon became the detrimental factors for the success of these Export Processing Zones. Thus, the performance of these Export Processing Zones of India fell short of expectations. The modern day Special Economic Zone came in to existence because the economic reforms incorporated in the early 1990s did not resulted in the overall growth of the Indian economy. The SEZ policy of India was devised to act as a catalyst to promote the economic growth attained in the early 1990. The economic reforms incorporated during the 1990s did not produce the desired results. The Indian manufacturing sector witnessed a sudden dip in the overall growth of the industry, during the second-half of 1990s. The History of SEZs in India suggests that red tape, lengthy administrative procedures, rigid labour laws and poor physical infrastructural facilities were the main cause of deterioration of Foreign Direct Investments (FDI) inflow in to India. Further, the Indian markets were not mature enough to facilitate easy entry of Foreign Institutional Investors (FIIs) in to the Indian economic system. Furthermore, the legal framework of Indian economy was not strong enough to prevent misuse of Indian markets by the foreign investors. Thus, the lack of investor friendly environment in India prevented growth of Indian industry, in spite of implementation of liberal economic policy by the central government. This resulted in the formation of a much larger and more efficient form of their predecessors with world-class infrastructural facility. The present day Special Economic Zone policies of India are well complimented by the provisions of the Acts and Rules of Special Economic Zone. A number of meetings were held across India for the formulation of - 'The Special Economic Zones Act, 2005', which was subsequently passed by Parliament in May 2005. The SEZ Act, 2005 and SEZ Rules became effective on and from 10th February 2006. The SEZ Act 2005 defines the key role for the State Governments in Export Promotion and creation of infrastructural facilities. A Single Window SEZ approval mechanism has been facilitated through a 19

Special Economic Zones


member inter-ministerial SEZ Board of Approval or BOA. And the decision of the SEZ Board of Approval is binding and final.

Special Economic Zones


7. About SEZs
What is SEZ?
Special Economic Zone is a delineated duty-free, license free, entrepreneurial friendly & environmentally conducive enclave deemed to be foreign territory dedicated to foreign trade.

What is special?
The word "Special" mainly means special economic systems and policies. That is, the central government gives SEZs special policies and flexible measures, allowing SEZs to utilize a special economic management system. Special tax incentives for foreign investments in the SEZs Greater independence on international trade activities Economic characteristics are represented as "4 primacies": Constructions primarily rely on attracting and utilizing foreign capitals; Primary economic forms are Sino-foreign joint ventures and partnerships as well as wholly foreign-owned enterprises; Products are primarily export-oriented; Economic activities are primarily driven by market. SEZs are listed separately in the national planning (including financial planning) and have province-level authority on economic administration.

Objectives of SEZ scheme

The main objectives of SEZ scheme can be briefly stated as: generation of additional economic activity promotion of exports of goods and services; promotion of investment from domestic and foreign sources; creation of employment opportunities;

Special Economic Zones


development of infrastructure facilities;

Unlike most of the international instances where zones are primarily developed by Governments, the Indian SEZ policy provides for development of these zones in the government, private or joint sector. This offers equal opportunity to both Indian and international private developers. The salient features of the Special Economic Scheme include: No License required for import Manufacturing, trading or services activities allowed Full freedom of subcontracting

Features of Special Economic Zones

Single window clearance no routine examination of export import cargo by customs authorities Financial incentives like tax holidays, duty free imports and exports High quality infrastructure Strategic location and market access

Special Economic Zones


8. Statutory Overview Acts & Rules

The Special Economic Zones are primarily governed by the Special Economic Zones Act, 2005 and the Special Economic Zones Rules, 2006. In addition, the notifications and instructions issued by the Ministry of Commerce & Industry also affect the regulatory framework for SEZs.

8.1 Overview of the Special Economic Zones Act, 2005

Previously Special Economic Zones in India were governed by Chapter X-A of the Customs Act, the Special Economic Zones Rules, 2003, and the Special Economic Zones (Customs Procedures) Regulations, 2003 and Chapter 7 and 7A of Foreign Trade Policy. However, w.e.f. 10th February, 2006 the activities relating to Special Economic Zones are guided by the provisions contained in the Special Economic Zones Act, 2005 and the Special Economic Zones Rules, 2006. After the enactment of the Special Economic Zones Act, 2005 Chapter X-A of the Customs Act, the Special Economic Zones Rules, 2003, and the Special Economic Zones (Customs Procedures) Regulations, 2003 are not in operation. Special Economic Zones Act 2005 consists of 8 chapters, 58 sections and 3 schedules. The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act. (Section 51) Birds eye view of the Special Economic Zones Act, 2005 Chapter I II III IV V VI Sections 1-2 3-7 8-10 11-12 13-25 26-30 Title Preliminary Establishment of SEZ Constitution of Board of Approval Development Commissioner Single Window Clearance Special Fiscal provisions for SEZ

Special Economic Zones



31-41 42-58

Special Economic Zone Authority Miscellaneous Enactments Modifications of the Income Tax Act-1961 Amendments to certain Enactments

The First Schedule The Second Schedule The third schedule Part I

Part II

Amendments to the Banking Regulation Act,1949 Amendments to the Indian Stamp Act,1899

Part III

8.2 Overview of the Special Economic Zones Rules, 2006

The policy relating to special economic zones is contained in Special Economic Rules, 2006 notified in the Gazette of India, Extraordinary No. GSR 54 (E), dated 10.2.2006. The SEZ Rules, as amended up to July, 2010 contain 8 chapters, 78 rules, 20 forms - A to K and 4 Annexure. Birds eye view of the Special Economic Zones Rules, 2006 Chapter I II III IV Rules 1-2 3-16 17-21 22-46 Title Preliminary Procedure for establishment of SEZ Procedure for establishment of an unit Terms and conditions subject to which entrepreneur and developers shall be entitled to exemptions, drawbacks and concessions Conditions subject to which goods may be removed from a SEZ to DTA Foreign Exchange earning-Requirements and Monitoring




Special Economic Zones



55-69 70-78

Appeal Miscellaneous

9. Structure & Types of SEZ

In order to understand the structure of an SEZ, we would first need to be acquainted wit the people associated with SEZs.

9.1 Persons Involved with SEZ

In terms of the act, a Developer means a person who, or a State Government which, has been granted by the Central Government a letter of approval and includes an Authority and a Co-Developer3. To put it in simple words, a developer is the person who develops an SEZ; that is to say, provides the infrastructural4 facilities in the SEZ which are utilized by Units for generated for their activities and generated foreign exchange earnings for the nation. The units, therefore, are the operating entities in the SEZ. An SEZ may consist of one or more units. It is to be understood, that the Developer and unit may or may not be the same person. The developer is not required to develop the SEZ all by himself. He is allowed to lease part of the SEZ to others, who have the opportunity to develop the SEZ themselves, and enjoy the status of a Developer. Such a person is termed as a Co- Developer.

9.2 Types of SEZ

SEZ for multi-product means a SEZ where Units may be set up for manufacture of two or more goods in a sector5 or goods falling in two or more sectors or for

3 4

Section 2(g) of SEZ Act, 2005 infrastructure means facilities needed for development, operation and maintenance of a Special Economic Zone and includes industrial, business and social amenities like development of land, roads, buildings, sewerage and effluent treatment facilities, solid waste management facilities, port, including jetties, single point moorings, storage tanks and interconnecting pipelines for liquids and gases, Inland Container Depot or Container Freight Station, warehouses, airports, railways, transport system, generation and distribution of power, gas and other forms of energy, telecommunication, data transmission network, information technology network, hospitals, hotels, educational institutions, leisure, recreational and entertainment facilities, residential and business complex, water supply, including desalination plant, sanitation facility; 5 Sector means one or more products or one or more services falling under a category such as engineering, textiles and garments, pharmaceuticals and chemicals, handicrafts, gem and jewellery, electronics hardware and software, including information technology enabled services and biotechnology;

Special Economic Zones


trading and warehousing or rendering of two or more services in a sector or rendering of services falling in two or more sectors. SEZ for specific sector means a SEZ meant exclusively for one or more products in a sector or one or more services in a sector. SEZ in a port or airport means a SEZ in an existing port or airport for manufacture of goods in two or more goods in sector or goods falling in two or more sectors or for trading and warehousing or rendering of services. Free Trade and Warehousing Zone means a Special Economic Zone wherein mainly trading and warehousing and other activities related thereto are carried on. The Free Trade & Warehousing Zones (FT & WZ) is a special category of Special Economic Zones with a focus on trading and warehousing. This scheme aims at creation of world class infrastructure for warehousing to bolster the integrated zones as international trading hubs.

9.3 Parts of SEZ

Processing Area - The processing area is demarcated for setting up Units for activities, being the manufacture of goods or rendered services. This is the area where the prime activity of an SEZ is carried on. Non Processing Area- It is the area where complimentary infrastructure is provided in the SEZ for the functionality of the SEZ. Developer may allot the land in the non processing area for business and social purposes such as Educational institutions, Hospitals, Hotels, Recreation facilities, Residential and business complexes, etc. Domestic Tariff Area means the whole of India (including the territorial waters and continental shelf) but does not include the areas of the Special Economic Zones. In other words, in respect to SEZs, it is the rest of India.

Special Economic Zones


10. Facilities/ Incentives available to SEZs

The core reason for formation of SEZ is to promote exports from the country. For this purpose, a variety of incentives are given to entrepreneurs to set up SEZs or a unit in SEZs, which can be availed if they manage to get export earnings. The major incentives and exemption that are available are:

10.1 Incentives to Units

The incentives and facilities offered to the units in 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 Act6. External commercial borrowing by SEZ units up to 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.

10.2 Incentives to Units

The major incentives and facilities available to SEZ developers include:

The exemption from Minimum Alternate Tax has been withdrawn from SEZs in the Finance Bill, 2011.

Special Economic Zones


Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. Income Tax exemption on income derived from the business of development of the SEZ in 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).

10.3 Detail of Facilities/ Benefits to Special Economic Zones

Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by: a) a Unit in a Special Economic Zone; or b) a Developer; shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule as detailed below:


Enactments 1. The Agricultural Produce Cess Act, 1940 (27 of 1940). 2. The Coffee Act, 1942 (7 of 1942). 3. The Mica Mines Labour Welfare Fund Act, 1946 (22 of 1946). 4. The Rubber Act, 1947 (24 of 1947). 5. The Tea Act, 1953 (29 of 1953). 6. The Salt Cess Act, 1953 (49 of 1953).

Special Economic Zones 7. The Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (16 of 1955).


8. The Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957). 9. The Sugar (Regulation of Production) Act, 1961 (55 of 1961). 10. The Textiles Committee Act, 1963 (41 of 1963). 11. The Produce Cess Act, 1966 (15 of 1966). 12. The Marine Products Export Development Authority Act, 1972 (13 of 1972). 13. The Coal Mines (Conservation and Development Act, 1974 (28 of 1974). 14. The Oil Industry (Development) Act, 1974 (47 of 1974). 15. The Tobacco Cess Act, 1975 (26 of 1975). 16. The Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978). 17. The Sugar Cess Act, 1982 (3 of 1982). 18. The Jute Manufactures Cess Act, 1983 (28 of 1983). 19. The Agricultural and Processed Food Products Export Cess Act, 1985 (3 of 1986). 20. The Spices Cess Act, 1986 (11 of 1986). 21. The Research and Development Cess Act, 1986 (32 of 1986).

Special fiscal provisions for Special Economic Zones

Considering the need to enhance foreign investment and promote exports from the country, the Government of India has introduced various types of special incentives and benefits to SEZ units which are as follows CUSTOM DUTY Every Developer and the entrepreneur is entitled to o exemption from any duty of customs, under the Customs Act, 1962 or the Custom Tariff Act, 1975 or any other law for the time being in force, on goods imported into, or service provided in, a Special Economic Zone or a Unit, to carry on the authorised operations by the Developer or entrepreneur- Sec 26(1)(a) of the Special Economic Zones Act,2005

Special Economic Zones


o exemption from any duty of customs, under the Customs Act, 1962 or the Customs Tariff Act, 1975 or any other law for the time being in force, on goods exported from, or services provided, from a Special Economic Zone or from a Unit, to any place outside India- Sec 26(1)(b) CENVAT o Every Developer and the entrepreneur is entitled to exemption from any duty of excise, under the Central Excise Act, 1944 or the Central Excise Tariff Act, 1985 on goods brought from Domestic Tariff Area to a Special Economic Zone or Unit, to carry on the authorised operations by the Developer or entrepreneur. SERVICE TAX o exemption from service tax under Chapter-V of the Finance Act, 1994 on taxable services provided to a Developer or Unit to carry on the authorised operations in a Special Economic Zone; CENTRAL SALES TAX o Every Developer and the entrepreneur is entitled exemption from the levy of taxes on the sale or purchase of goods other than newspapers under the Central Sales Tax Act, 1956 if such goods are meant to carry on the authorized operations by the Developer or entrepreneur. SECURITIES TRANSACTION TAX o Securities Transaction Tax means tax leviable on taxable securities transaction. Every Developer and the entrepreneur shall be entitled to exemption from the securities transaction tax leviable under section 98 of the Finance (No. 2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre. STAMP DUTY o Proviso (3) to Section 3 of Indian Stamp Act, 1899 has been inserted vide Special Economic Zones Act 2005 Third Schedule Part III. PROVIDED that no duty shall be chargeable in respect of- (3) Any instrument executed, by, or, on behalf of, or, in favour of the Developer, or Unit or in connection with the carrying out of purposes of the Special Economic Zone.

Special Economic Zones INCOME TAX


o Exemption To New Units In SEZ - Sec 10 AA of Income Tax Act, 1961 provides for exemption to newly established units in Special economic zones on or after 01.04.2005. 100% of Profits from export will be available for 5 consecutive years and 50% of Profits from exports for further 5 assessment years. For eleventh to fifteenth assessment year deduction of 50% of Profits for as credited to Special Economic Zone Re-investment Reserve Account will be available. This Special reserve can be utilized for Acquiring machinery or plant within three years. o Exemption to Developer of Special Economic Zones - Exemption to developer of Special Economic Zones will be available under Sec 80- IAB of the Income Tax Act in respect of developers of SEZ notified on or after 01.04.2005. A deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years will be available. The assessee has the option of claiming the said deduction for any 10 consecutive assessment years out of 15 years beginning from the year in which a SEZ has been notified by the Central Government o Exemption from Dividend distribution tax - Sec 111-O (6) provides that no tax on dividends would be chargeable in respect of the total income of an undertaking or enterprise engaged in: a) developing a SEZ, b) developing and operating a SEZ or c) developing, operating and maintaining a SEZ o Exemption from Capital Gains- Capital gains arising on transfer of assets (machinery, plant, building, land or any rights in buildings or land) on shifting of the industrial undertaking from an urban area to any SEZ would be exempt from capital gains tax. The exemption would be allowable if within one year before or three years after such transfer. FOREIGN DIRECT INVESTMENTS o 100% FDI is freely allowed in manufacturing sector in SEZ units under automatic route, 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 of foreign investments for SSI reserved items. OFF-SHORE BANKING UNITS (OBUS) o Setting up of OBUs allowed in SEZs.

Special Economic Zones


o OBUS are entitled for 100% income tax exemption for 3 years and 50% for next 2 years. BANKING / EXTERNAL COMMERCIAL BORROWINGS (ECBS) o ECBs by units up to US$ 500 million a year allowed without any maturity restrictions. o Freedom to bring in export proceeds without any time limit. o Flexibility to keep 100% of export proceeds in EEFC account and freedom to make overseas payment from such account. o Exemption from interest rate surcharge on import finance. o SEZ units allowed to write-off unrealized export bills. o Exemption from interest rate surcharge on import finance. EXEMPTIONS IN MATTERS RELATED TO ENVIRONMENT o 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. o SEZ units are exempted from public hearing under Environment Impact Assessment Notification. COMPANIES ACT o Enhanced limit of INR 2.4 crores per annum is allowed for managerial remuneration. o Agreement to opening of Regional office of Registrar of Companies in SEZ. o Exemption from requirement of domicile in India for 12 months prior to appointment as Director. DRUGS AND COSMETICS o Exemption from port restriction under Drugs & Cosmetics Rules. o Sub-Contracting / Contract Farming. o SEZ units may sub-contract part of production or production process through units in the Domestic Tariff Area or through other EOU / SEZ units.

Special Economic Zones


o SEZ units may also sub-contract part of their production process abroad.

Special Economic Zones


11. Authorities under SEZ Act

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 performances 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.

11.1 Board of Approval

Board of approval is apex body in department. Board has the duty to promote and ensure orderly development of SEZ. The Special secretary to Government of India in Ministry of Commerce and industry, Department of Commerce is chairperson of Board. The Board consists of 18 members and a nominee of each state government concerned.7

Major Functions of Board

Granting of approval or rejecting proposal or modifying such proposals for establishment of the Special Economic Zones; Granting approval of authorized operations to be carried out in the Special Economic Zones by the Developer;

Notification No SO (195(E) dated 10/02/2006 and 314(E) dated 13/03/2006

Special Economic Zones


Granting of approval to the Developers or Units (other than the Developers or the Units which are exempt from obtaining approval under any law or by the Central Government) for foreign collaborations and foreign direct investments (including investments by a person resident outside India), in the Special Economic Zones for its development, operation and maintenance; Granting of approval or rejecting of proposal for providing infrastructure facilities in a Special Economic Zone or modifying such proposals; Granting, notwithstanding anything contained in the Industries (Development and Regulation) Act, 1951, a license to an industrial undertaking if such undertaking is established, as a whole or part thereof, or proposed to be established, in a Special Economic Zones; Suspension of the letter of approval granted to a Developer and appointment of an Administrator Disposing of appeals Performing such other functions as may be assigned to it by the Central Government.

11.2 Development Commissioner

Each Zone is headed by Development Commissioner who is also heading approval committee The Central Government may appoint any of its officers not below the rank of Deputy Secretary to the Government of India as the Development Commissioner of one or more Special Economic Zones8. Every Development Commissioner shall take all steps in order to discharge his functions under this Act to ensure speedy development of the Special Economic Zone and promotion of exports there from9. In case of West Bengal, the Development Commissioner of Falta Special Economic Zone is the Zonal Development Commissioner who looks after matters relating to various SEZs in Eastern India. Similarly, the zonal Development Commissioners for various zones have been notified as per Annexure-III of the SEZ Rules, 2006.

Major functions of Development Commissioner

Guide the entrepreneurs for setting up of units in the Special Economic Zone

8 9

Sec 11 of Special Economic Zones Act, 2005 Sec 12(1) of Special Economic Zone Act, 2005

Special Economic Zones


Ensure and take suitable steps for effective promotion of exports from the Special Economic Zone Ensure proper co-ordination with the Central Government or State Government Departments concerned or agencies with respect to, Monitor the performance of the Developer and the Units in a Special Economic Zone Discharge such other functions as may be assigned to him by the Central Government under this Act or any other law for the time being in force; and Discharge such other functions as may be delegated to him by the Board.

11.3 Approval Committee

Approval committees give approval for setting up a unit in Special Economic Zones. The committee consists of: The Development Commissioner in charge of the SEZ Two officers of the Central Government to be nominated by that Government Members Two officers of the Central Government to be nominated by that Government to represent the Ministry or Department dealing with revenue One officer of the Central Government to be nominated by that Government to represent the Ministry or Department dealing with Economic affairs (financial services); Two officers of the State Government concerned to be nominated by that State Government and Representative of the Developer concerned

Powers and functions of Approval Committee

Approve the import or procurement of goods from the Domestic Tariff Area, in the SEZ for carrying on the authorised operations by a Developer; Approve the providing of services by a service provider, from outside India, or from the Domestic Tariff Area, for carrying on the authorised operations by the Developer, in the Special Economic Zone;

Special Economic Zones


Monitor the utilisation of goods or services or warehousing or trading in the Special Economic Zone; Approve, modify or reject proposals for setting up Units for manufacturing or rendering services or warehousing or trading in the Special Economic Zone Allow, on receipt of approval foreign collaborations and foreign direct investments (including investments by a person outside India) for setting up a Unit; Monitor and supervise compliance of conditions subject to which the letter of approval or permission, if any, has been granted to the Developer or entrepreneur; and Perform such other functions as may be entrusted to it by the Central Government or the State Government concerned, as the case may be.

12. Setting up of SEZ

According to the amended rules, the developer needs to make a proposal to set up an SEZ in Form A and be submit it to the concerned Zonal Development Commissioner as specified in Annexure-III of the SEZ Rules, 2006, who, within a period of fifteen days, shall forward it to the Board with his inspection report, State Governments recommendation and other details. The Co- developer needs to apply in form A1.

12.1 Requirements for forming SEZ

Area is a major restraint for developing SEZs. The following are the area requirements to be fulfilled by SEZs: S.No Minimum Area Minimum Processing for Specific Area 10 State(s) Multi Product 1000 200 50% hectares hectares Specific Sector/ 100 hectares 50 50% Multi Service hectares (specific sector) SEZ Type Minimum Area

1 2


Specific States mean Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir, Goa or a Union Territory.

Special Economic Zones


3 4 5 6 7

Electronic Hardware and Software Handicrafts Bio Technology/Non conventional energy Gems and Jewellery Sector Free Trade and warehousing Zone

10 hectares 10 Hectares 10 hectares 10 hectares 40 hectares

10 hectares 10 Hectares 10 hectares 10 Hectares 40 hectares

Built up processing area of 1 lakh sq mtr 50% Built up processing area of 40000 sq mtr. Built up processing area of 50000 sq mtr. Built up processing area of 1 lakh sq mtr

The maximum area of an SEZ is allowed to be 5000 hectares. However, the Central Government may consider on merit the clubbing of contiguous existing notified Special Economic Zones notwithstanding that the total area of resultant Special Economic Zone exceeds 5000 hectares. The Central Government, while notifying any area as a Special Economic Zone or an additional area to be included in the Special Economic Zone and discharging its functions under this Act, shall be guided by the following: Generation of additional economic activity Promotion of exports of goods and services; Promotion of investment from domestic and foreign sources; Creation of employment opportunities; Development of infrastructure facilities; and Maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign States.

In case of a Special Economic Zone relating to information technology, the following facilities shall be ensured, namely: Twenty-four hours uninterrupted power supply at stable frequency in the Zone Reliable connectivity for uninterrupted and secure data transmission Provision for central air-conditioning system A ready to use, furnished plug and pay facility for end users.

Special Economic Zones


Developer should have legal possession and irrevocable rights to develop the said area as SEZ and area should be free from all encumbrances. Where the Developer has leasehold rights over the identified area, the lease shall be for a period not less than twenty years. The identified area shall be contiguous and vacant and it shall have no public thoroughfare. A Developer was earlier permitted to allot land in the nonprocessing area for business and social purposes. The SEZ Amendment Rules have amended the above condition to the effect that no vacant land in the non processing area shall be leased for business and social purposes to any person except a Codeveloper approved by the Board. Further, it has been provided that a Developer or Codeveloper may lease completed infrastructure along with vacant land appurtenant thereto. The Developer or Co-Developer shall have at least 26% of the equity in the entity proposing to create business, residential or recreational facilities in a Special Economic Zone in case such development is proposed to be carried out through a separate entity or a special purpose vehicle being a company formed and registered under the Companies Act, 1956.

12.2 Letter of approval & Notification

The Central Government shall, within thirty days of the communication received by it may grant a formal letter of approval in the cases where land is in possession of the developer and in-principle approval in other cases. The letter of approval of a Developer shall be valid for a period of three years within which time at least one unit has commenced production and the Special Economic Zone become operational. However, the Board may, on an application by the developer or the co-developer, extend the validity period. The Developer shall furnish to the Central Government, particulars with regard to the identified area with a certificate from the concerned State Government or its authorized agency stating that the developer(s) have legal possession and irrevocable rights to develop the said area as SEZ and that the said area is free from all encumbrances. After the submission of details as required and other details, if any, required by the Central Government and on acceptance of the conditions specified in the Letter of Approval, the Central Government shall notify the identified area as a Special Economic Zone.

Special Economic Zones


12.3 Proposal for approval of Unit

A consolidated application seeking permission for setting up of a Unit and other clearances, including those indicated below, shall be made to the Development Commissioner, in Form F, in five copies, with a copy to the Developer: a) Setting up of unit in a Special Economic Zone; b) Annual permission for sub-contracting; c) Allotment of Importer-Exporter Code number; d) Allotment of land/industrial sheds in the Special Economic Zone; e) Water connection; f) Registration-cum-Membership Certificate; g) Small Scale Industries Registration; h) Registration with Central Pollution Control Board; i) Power connection; j) Building approval plan; k) Sales tax registration; l) Approval from Inspectorate of Factories; m) Pollution control clearance, wherever required; n) Any other approval as may be required from the State Government.

Special Economic Zones


General Requirements for getting approval

Net foreign exchange earning requirement- The proposal meets with the positive net foreign exchange earning requirement. The Unit shall achieve Positive Net Foreign Exchange to be calculated cumulatively for a period of five years from the commencement of production which is: o Free on Board value of exports, including exports to Nepal and Bhutan against freely convertible currency, by the Unit, less o Sum total of the value of all imported inputs11 used for authorized operations and the value of all imported capital goods amortized at the rate of 10% per year. Availability of infrastructure - Availability of space and other infrastructure support applied for is confirmed by the Developer in writing, by way of a provisional offer of space Environmental norms - The applicant undertakes to fulfil the environmental and pollution control norms. Proof of residence - The applicant submits proof of residence of the proprietor or the partners of partnership firms or Directors of the Company, as the case may be, to the satisfaction of Development Commissioner; Income tax returns - The applicant submits the Income tax returns, along with annexures, of the Proprietor or Partners, or in the case of a company, audited balance sheet for the last three years

12.4 Letter of Approval to a unit

On approval of a proposal, Development Commissioner shall issue a Letter of Approval in Form G, for setting up of the Unit. The Letter of Approval shall specify the items of manufacture or particulars of service activity, including trading or warehousing, projected annual export and Net Foreign Exchange Earning for the first five years of operations, limitations, if any on Domestic Tariff Area sale of finished goods, byproducts and rejects and other terms and conditions, if any, stipulated by the Board or


Inputs mean raw materials, intermediates, components, consumables, parts and packing materials;

Special Economic Zones


Approval Committee. An entrepreneur holding Letter of Approval shall only be entitled to set up a Unit in processing area of the Special Economic Zone. The Letter of Approval shall be valid for one year within which period the Unit shall commence activity. Upon a request by the entrepreneur, further extension may be granted by the Development Commissioner for valid reasons. The Letter of Approval shall be valid for five years (which maybe extended for another five years at a time by the Development Commissioner) from the date of commencement of production or service activity and it shall be construed as a license for all purposes related to authorized operations

12.5 Conditions for Exemptions, Drawbacks and Concessions

Bond-cum-Legal Undertaking - The Unit shall execute a Bond-cum-Legal Undertaking in Form H, with regard to its obligations regarding proper utilization and accountal of goods, including capital goods, spares, raw materials, components and Consumables including fuels, imported or procured duty free and regarding achievement of positive net foreign exchange earning. The Developer and Co-Developer shall execute in Form D with regard to their obligations regarding proper utilization and accountable of goods, including goods procured or imported by a contractor duly authorized by the Developer or Co-Developer as the case may be. The value of the Bond-cum-Legal undertaking shall be equal to the amount of effective duties leviable on import or procurement from the Domestic Tariff Area. Where the value falls short on account of requirement of additional goods, the Unit or the Developer shall submit additional Bond-cum-Legal Undertaking. Accounts - very Unit and Developer shall maintain proper accounts, financial year wise, and such accounts which should clearly indicate in value terms the goods imported or procured from Domestic Tariff Area, consumption or utilization of goods, production of goods; exports, sales or supplies in the domestic tariff area of goods or transfer to Special Economic Zone or Export Oriented Unit or Electronic Hardware Technology Park or Software Technology Park Units or Bio-technology Park Unit, as the case may be, and balance in stock. Annual Report - The Unit shall submit Annual Performance Reports in the Form I, to the Development Commissioner. Quarterly Report - The Developer shall submit Quarterly Report on import and procurement of goods from the Domestic Tariff Area, utilization of the same and

Special Economic Zones


the stock in hand, in Form E to the Development Commissioner and the Specified Officer.

12.6 Other Conditions & Compliances

When a Developer does not utilize the goods or services on which exemptions, drawbacks, cess and concessions have been availed, he shall refund the amount availed Import of duty free material for setting up any facility in the non-processing area of the SEZ shall be as approved by the Board and import of no duty free material shall be permitted for operation and maintenance of such facilities A return of Defective goods to DTA can be allowed only on refund of the export entitlement The Unit shall account for the entire quantity of goods imported or procured duty free. However, at no point of time the Unit shall be required to co-relate every import consignment with its export or transfer or sales in DTA or supply to bonded warehouses and goods held as stock. If the goods admitted are utilized for purposes other than for the authorized operations or if the Unit or Developer fails to account for the goods as provided under these rules, duty shall be chargeable on such goods as if these goods have been cleared for home consumption. Sale in DTA o On payment of Customs duties o Bill of Entry for home consumption along with invoice and packing list filed with the Authorized Officers o Surplus power generated in the SEZ may be sold in the DTA on payment of duty on raw materials o Duty on used capital goods levied on the depreciated value o Temporarily removals may be allowed for certain specified goods or with prior approval of Authorised officer without payment of duty

Special Economic Zones


13. Developments in SEZ scheme

Removal of caps on SEZ
The empowered Group of Ministers on Special Economic Zones, headed by the Defence Minister, Mr Pranab Mukherjee, decided on 23.08.2006 to remove the existing cap of 150 for the number of SEZs that can be established within the country.

No SEZ on prime agriculture Land

Land being a state subject, the Centre has directed the states that mainly waste and barren land and if necessary single crop agricultural land alone should be acquired for the SEZ. It has been further clarified that if perforce a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, the same should not exceed 10% of the total land required for the SEZs.

Area limit revised

The government has decided not to apply an area limit of 5,000 hectares for special economic zones (SEZs) if two or more such zones are merged, clearing the way for big SEZs in the country. As per the SEZ (second amendment) rules published in the Gazette of India in 2010, the Centre may consider on merit the clubbing of contiguous (adjoining) existing notified SEZs notwithstanding that the total area of resultant zones exceeds 5,000 hectares. This is in line with the permission given by the empowered group of ministers (eGoM) on SEZs in the earlier UPA regime to Adani Groups Mundra SEZ in February this year to merge its three SEZs into a single 6,100-hectare entity. The amended rules make room for more such mergers to happen, said Hitender Mehta, an expert in the Assocham committee on SEZs while welcoming the move. Developers can now set up two or more zones side by side, respecting the individual caps, and later merge them into a much larger special zone.

13.1 Minimum Alternate Tax (MAT) Finance Bill, 2011

Among the proposals specific to exporters in Budget 2011-12, the most controversial is the imposition of Minimum Alternate Tax on Special Economic Zone developers and

Special Economic Zones


units. One objective of the SEZ scheme is to ensure a stable policy framework, based on which investors can make a decision to invest in establishing SEZs or setting up SEZ units. Changing the rules of the game for developers or units who have already committed funds upsets the financial calculations that guided the investment decision. It is another matter if the government makes it clear that newcomers will be subject to taxes. MAT will also be applicable to the developer of Special Economic Zone (SEZ) as well as the units located in the SEZ. Currently, SEZ developers and units are exempt from levy of MAT under Section 115 JB of the Income Tax Act. MAT will be levied at 18.5% of adjusted book profits of SEZ developers and SEZ units if tax computed under normal provisions is less than 18.5% of adjusted book profits. Also, dividend distributed by the SEZ developer on or after 1 June 2011 will be subject to Dividend Distribution Tax (DDT). Such dividend will be exempt from tax in the hands of the recipient shareholders 12. But withdrawing concessions for parties who have already committed funds undermines credibility of the government and imposes unforeseen costs on the investors. The change in exemption rules has brought criticisms from all corners of the industry. Till today, it was zero. Suddenly, out of the blue, tax of 20-21% is being imposed on you, commerce secretary Rahul Khullar pointed out, ...if the MAT (minimum alternate tax) ends up altogether discouraging both foreign and domestic investments, what are we achieving? he asked. While taxes of 20-21% on profits may not hurt big software companies, they will make life hard for manufacturing companies who have to deal with Chinese competitors who often pay much lower taxes and bills, Chintan Patel (head for the real estate, industrial and hospitality advisory services of Ernst & Young), said. It is quite clear that the move has not been welcomed by the industry, which apart from a vent in the trust of developers in the government, may also play a role in reducing the positive impact of SEZs on the economy, and even beating the purpose for their formation.


Budget 2011 India Impact and Reaction of Real Estate Industry; budget 2011 analysis by Tej kohli foundation

Special Economic Zones


14. Position of SEZs in India

14.1 Performance so far
The response to the SEZ policy has been tremendous. Several proposals have been received from 21 states and 3 union territories involving investors from both India and abroad. As per the latest records13, approvals have been granted for 581 proposals and 154 in principle approvals been given by the Board of Approval. 373 SEZs have been notified. A majority of these SEZs are for IT/ITES, Biotech, Multiproduct, Pharma/ Chemicals, Engineering and Textiles among others. Close to 130 SEZs, with 3,139 units, are currently operational in the country. The total employment generated in SEZs in 3.5 lakh 14. An investment of Rs. 1.95 lakh crore has been made in SEZs, Minister of State for Commerce and Industry Jyotiraditya Scindia said in a written reply to the Lok Sabha15. Over the past few years, SEZs have become crucial for Indias exports, with the share of SEZs in Indias total exports increasing from 4.7% in FY04 to 26.1% in FY10. Exports from SEZs have increased at a CAGR of 58.6% between FY04 and FY10, while the countrys merchandise exports have increased at a CAGR of 19.3% during the same period. Growth in exports from SEZs was 121% in FY10 compared with a marginal increase of 0.6% in total exports from India. Exports from SEZs for the first three quarters of FY11 were estimated at INR 2,231.3 billion, showing a 47% growth over previous fiscal.


As per the website of SEZ: sezindia.nic.in. However, 374 SEZs have been notified as on February 17, 2011, while approval granted for 582 proposals. 14 Data as on 30.6.2008. Source: earlier record from sezindia.nic.in 15 The Hindu, New Delhi, March 7, 2011 edition

Special Economic Zones Exports from the functioning SEZs during the last three years are as under: 16
Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Value (Rs. Crore) 13,854 18,314 22 840 34,615 66,638 99,689 2,20,711 Growth Rate ( over previous year ) 39% 32% 25% 52% 93% 50% 121.40%


Exports from SEZs in India

Value (Rs. Crore) 250,000 200,000 93% 150,000 100,000 50,000 52% 39% 32% 50% Growth Rate 140% Rs. 220711 cr 120% 121.40%

80% 60% 40% 20%


2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Infosys SEZ, Pune


Source: http://sezindia.nic.in

Special Economic Zones


14.2 SEZs in India

The details of the various SEZs in India, divided Sector wise is as follows17:

Sectors IT/ITES/Electronic Hardware/Semiconductor Pharma/chemicals Bio-tech Engineering Multi-Product Textiles/Apparel/Wool Multi-Services/Services FTWZ Gems and Jewellery Others GRAND TOTAL

Formal In principle Approval 352 11 23 4 33 0 21 10 23 55 19 13 16 13 11 10 13 4 70 34 581 154

Notified SEZs 232 20 18 16 15 12 8 6 6 40 373

Formal Approval

Notified SEZs
IT/ITES 3% 4% 16% Pharma Bio-tech 62% Engineering Multi-Product



Bio-tech Multi-Product



Pharma Engineering






Sector Wise Distribution of SEZs


Source: sezindia.nic.in

Special Economic Zones


The details of the SEZs in India, in various States of India are as follows:
State Andhra Pradesh Chandigarh Chhattisgarh Delhi Dadra & Nagar Haveli Goa Gujarat Haryana Himachal Pradesh Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Nagaland Orissa Pondicherry Punjab Rajasthan Tamil Nadu Uttar Pradesh Uttarakhand West Bengal Grand Total Formal 109 2 2 3 4 7 45 45 0 1 57 28 14 104 2 11 1 8 10 70 33 3 22 581 In-principle 5 0 2 0 0 0 13 17 3 0 9 0 7 38 0 3 1 7 11 19 5 0 14 154 Notified SEZs 74 2 0 0 1 3 29 34 0 1 36 17 6 63 1 6 0 2 8 57 20 2 11 373

Formal Approvals
21% 44% 29% 6% North East West South

Notified SEZs

North 36% East West



Zone Wise Distribution of SEZs

Special Economic Zones


15. Criticism
Land Acquisition
Land, especially agricultural land is a very sensitive issue in India. There are millions of people whose livelihood depends on agricultural land. But the introduction of SEZ in India has resulted in the dispossession of agricultural land and has affected the livelihood of farmer at large. In against of this, farmers first protested to safeguard their interests through litigation and court cases challenging the establishment of SEZs. But later on, the resistance against SEZ in India became massive when political parties also joined the farmers. The biggest challenges faced by SEZs in todays scenario are the taking away of agricultural land from the farmers. The farmers are allegedly being paid disproportionate money which is not in lieu of the current land prices. It could be seen in the case of farmers from Kalinganagar in Orissa where the money given was disproportionate to as high as 1:10 with respect to the market rates. Few examples of incidences relating to SEZs are cited below: Jamnagar Incidence - In November 2006, farmers from the Jamnagar District in Gujarat moved the High Court of Gujarat and later to the Supreme Court in order to challenge the setting-up of a 10,000-acre (approx. 4,000-ha) SEZ by Reliance Infrastructure. They claimed that the acquisition was in breach of the public interest. Nandigram Violence - Nandigram is a rural area in state of West Bengal. In 2007 the West Bengal government decided to allow Salim Group to set up a chemical hub at Nandigram under the SEZ policy. So, allegedly, more than 3,000 heavily armed police stormed the Nandigram area. The main objective was to remove the protestors who were against it in order to expropriate 10,000 acres of land for the SEZ. In light of above, the Centre has directed the states that mainly waste and barren land and if necessary single crop agricultural land alone should be acquired for the SEZ. It has been further clarified that if perforce a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, the same should not exceed 10% of the total land required for the SEZs.

Misuse of Land

Special Economic Zones


Misuse of land while creating infrastructure in the non-processing area, such as housing, commercial and shopping complexes etc., is often termed as an argument against SEZs. The concept of developing a non-processing area in SEZs is to provide support facilities to the SEZ processing area and the employees working therein. The authorised activities are to ensure that world class infrastructure is set up to facilitate the operation of manufacturing and service units in the SEZ. The scheme envisages that the SEZ Developer would be responsible for providing all civic amenities and infrastructure including roads, sewerage systems, open spaces, green spaces, education facilities, power, water supply and housing etc. Only those authorized operations that are approved by the Board of Approval would be eligible for tax exemptions. In order to regulate usage of SEZ area by the developers, precautions have been taken by way of assessing the size requirement of infrastructural facilities like housing, commercial spaces, recreational amenities etc. based on the employment generation potential of the SEZ and granting approvals by the Board of Approvals.

Fresh Investment
Another area of concern often cited was on shifting of domestic industries into SEZs. The objective of the Special Economic Zone Policy being generation of fresh investment and employment, conversion of any DTA unit or even 100% EOU or STPI unit is not allowed. In order to ensure that such conversions do not occur, the SEZ Act and Rules stipulate that SEZs can be set up only on vacant land. Further, the use of second hand capital goods from the DTA has also been made in line with the provisions of the 10AA of the Income Tax Act, which allows only 20% of used plant and machinery. Studies on SEZs have revealed the fact that there is no evidence to support the view that such relocation of units from other schemes or DTA to SEZs is actually happening.

Financial Losses
That the Government would be incurring tax losses on account of the direct and indirect tax incentives being given to SEZs is yet another apprehension expressed from time to time. However according to the GoI, evidence of employment and investment generated by the private sector SEZs show that in the long run, the benefits accrued from SEZs would far outweigh the tax losses to the Government which are notional in nature. Since there are duty remissions provided for all exports and tax exemptions are available for infrastructural projects outside the SEZ, the loss of revenue cannot be attributed to only due to the fiscal incentives given under the SEZ Scheme. Unless suitable incentives are given, no developer would come forward to invest in such mega projects without any return. In any event, the direct and indirect tax income accruing to the Central/State Governments in times to come due to the increased economic

Special Economic Zones


activities in the SEZs and the surrounding areas would be far higher than the estimated tax loss

Special Economic Zones


16. SWOT Analysis of SEZ Policy

Skilled Manpower knowing English Worldwide acceptance of capabilities in fields like Pharmaceutical manufacturing & research, Clinical trials, Manufacturing auto parts, Engineering designing & consultancy, IT & ITES, etc Financial & other institutional Networks like Stock Exchanges, Insurance Companies, Educational Institutes Acceptability to industry about tax incentives, leading to greater exports from SEZs.

Infrastructure bottlenecks connecting infrastructure like Roads leading to SEZs. Inadequate institutional support Political changes Red Tape Inappropriate locations Long gestation period 4 to 5 years in absence of infrastructure development. Social bottlenecks resistance from local people and land owners Threats in developing SEZs Loosing edge of low labour costsmany countries are competing. With relocations of industries in other third world countries, new competitors will emerge. Prospect of even more restrictive labour laws being introduced. Formation of economic blocks Fluctuation in international economy may lead to drop in exports.

To use SEZs to catalyze infrastructure development. New small ports & airports are also being developed keeping SEZ concept in mind. Lower the high transaction /behind the border costs to exporters. To increase investments in core strength areas like IT and software products and services. An alternative manufacturing base particularly compared to Chinese SEZs.

Special Economic Zones


17. Findings & Conclusion

The SEZs could drastically improve the economic activity in the country, make the countrys export competitive and globally noticeable, be net foreign exchange earner and provide immense employment opportunity. But this should not be done at the cost of bringing down the agricultural activities, Land grabbing and real estate mafia should be properly regulated so that the common man is not the net sufferer to get the net foreign exchange earner up and running. As compared to china where majority of the SEZs were setup by the government, similar may be adopted in India, if not fully it should be a public-private partnership and regulatory bodies should be properly managed to weed out fallacies. To be economically viable SEZs should be approved over a particular larger land area for rapid economic growth in the area and for it to be profitable and self sustainable. Relaxed Tax norms, Labour laws and DTA regulations will surely attract foreign investment and major industries to setup industries in the SEZs making it profitable and meeting its desired results. The Director General of the Council for SEZ and 100 per cent export-oriented units, Mr L.B. Singhal, said that just prior to 2000, when the SEZ policy was announced, exports from the then free trade zones were only Rs 8,000 crore, which shot up to Rs 34,789 crore in 2006-07 and have been recorded at Rs. 220711 crore for 2009-1018. He said the benefits derived from functioning SEZs were self-evident from the investment, employment, exports and infrastructural developments additionally generated. The benefits derived from multiplier effect of the investments and additional economic activity in the SEZs and the employment created thus would far counterbalance the putative loss arising out of tax exemptions. Legal bottlenecks are holding back development in SEZs as well. Many SEZ developers have stranded development because of such limitations. In a first hand experience to a certain type of case, it has been observed that many developers in West Bengal have not received refund for Stamp Duty paid for registration of land in SEZs, while SEZs are exempt from stamp duty, and those who have paid are eligible for a refund of the same.


Panel to discuss removal of tax sops for SEZs, Business Line Article (2008). (Data for 2010 has been updated in the same)

Special Economic Zones


Such duty was paid 3-4 years ago, and the applications for the same are hovering in the red tape hierarchy in government offices. The potential of SEZs cannot be questioned. They have already proved their worth especially in countries like China. The question remains is that of management and prevention of misuse of the policy, through integrated authority and control over the functioning of SEZs.

Special Economic Zones


18. Bibliography
The Special Economic Zones Act, 2005; Government of India, Ministry Of Commerce And Industry, Published in the Gazette of India The Special Economic Zones Rules, 2006; Government of India, Ministry Of Commerce And Industry, Published in the Gazette of India Extraordinary Amendments to the Special Economic Zones Rules, 2006; Government of India, Ministry Of Commerce And Industry, Published in the Gazette of India Extraordinary Instructions issued by the Department of Commerce (SEZ Division) Information available on official website of SEZs sezindia.nic.in Impact of Special Economic Zones on Employment, Poverty and Human Development (2007), Aradhna Aggarwal. Working Papers of Indian Council for Research on International Economic Relations A Handbook on Special Economic Zones (2007), The Institute of Chartered Accountants of India The Hindu Newspaper, New Delhi; March 7, 2011 edition The website www.infodriveindia.com/exim Developing Private SEZs PricewaterhouseCoopers in India (2005); Sreekumar Chatra,

SEZs In India: Concept, Objectives And Strategies (2008); Dr. R. Shashi Kumar, Bangalore University Budget 2011 India Impact and Reaction of Real Estate Industry; Budget 2011 Analysis by Tej kohli foundation SEZ (Special Economic Zone) - An Overview, Challenges and Future; Neeraj Mishra (2008)

Special Economic Zones