INTRODUCTIO

Special Economic Zones (SEZ) were

set up by the Government of India to THE SPECIAL ECONOMIC
augment infrastructure facilities for ZONE
ACT, 2005 (the “SEZ
export production. The Ministry of Act”)
___________________
Commerce and Industry launched the _

SEZ scheme in April 2000 to provide The policy relating to SEZs was earlier
an internationally competitive and contained in Foreign Trade Policy.
hassle free environment for export. However, to give a long term and stable
SEZs are specifically delineated duty policy framework with minimal regulation,
free enclaves and are deemed to be the SEZ Act was enacted. The Act
foreign territories for the purposes of provides the umbrella legal framework,
trade operations, duties and tariffs. The covering all important legal and regulatory
objective of setting up SEZs include aspects for the setting up of SEZs as well
making available goods and services as units operating in SEZs.
free of taxes and duties supported by
integrated infrastructure for export
production, quick approval
mechanisms and a package of
incentives to attract foreign &
domestic investments for promoting
exports.
 .

SETTING UP OF
SEZ

SEZs are notified by the Ministry of Commerce and can be set up by private developers or by

Central / State Governments or jointly by any two or more of the above. SEZs are required to

have a minimum area of 1,000 hectares of land.

INCENTIVE/ FACILITIES TO SEZ

DEVELOPER

• 100% Foreign Direct Investment (FDI) is allowed for townships with

residential, educational, recreational facilities and franchise for basic telephone

service in SEZs.

• A 10-year tax holiday (i.e. a tax holiday for any consecutive block of 10 years in

the first 15 years of operation) has been provided for undertakings involved in

developing and/or operating and/or maintaining notified SEZs before March 31,

2006.

• Duty free import/domestic procurement of goods for development, operation

and maintenance of SEZs.

• Exemption from Service Tax and/or Central Sales Tax.

• Income of an infrastructure capital fund/company from investment in a SEZ is

exempt from Income tax.

• Investment made by individuals in SEZs is also eligible for exemption under

Section 88 of Income- tax Act, 1961 (the IT Act).

• Generation, transmission and distribution of power in SEZs is allowed.

• Full freedom in allocation of space and built up area for approved SEZ units on

commercial basis.

•
Authorization to provide and maintain services like water, electricity, security,

restaurants, recreation centers, etc on commercial lines is allowed.

 ADVANTAGE
S

The SEZ Act also provides a number of incentives to units proposed to be set up in SEZs.
SEZ units may be set up for carrying on manufacturing, trading or service activity. A unit set
up in SEZ has the following facilities and incentives:

15 year corporate tax holiday on export profit – 100% for initial 5 years, 50% for the next 5
years
and up to 50% for the balance 5 years equivalent to profits ploughed back for
investment.
Allowed to carry forward No licence required for
losses. import.
Duty free import/domestic procurement of goods for setting up of the SEZ
units.
Goods imported/procured locally are duty free and could be utilised over the approval period of
5
years
.

Exemption from customs duty on import of capital goods, raw materials, consumables,
spares,
etc Exemption from Central Excise duty on the procurement of capital goods, raw
. materials,
consumable spares, etc. from the domestic
market.
Exemption from payment of Central Sales Tax on the sale or purchase of goods, provided
that,
the goods are meant for undertaking authorized
operations.
Exemption from payment of Service
Tax.
The sale of goods or merchandise that is manufactured outside the SEZ (i.e, in DTA) and which
is
purchased by the Unit (situated in the SEZ) is eligible for deduction and such sale would
be
deemed to be
exports.
The SEZ unit is permitted to realise and repatriate to India the full export value of goods
or
software within a period of twelve months from the date of
“export.
Write-off” of unrealized export bills is permitted up to an annual limit of 5% of their
average
annual
• realization.
No routine examination by Customs officials of export and import
cargo.
• Setting up Off-shore Banking Units (OBU) allowed in
SEZs.
• OBU's allowed 100% income tax exemption on profit earned for three years
and
• 50 % for next two
years.
 ADVANTAGE
S
• Exemption from requirement of domicile in India for 12 months prior to appointment
as
Director
.
• Since SEZ units are considered as ‘public utility services’, no strikes would be allowed
in
such companies without giving the employer 6 weeks prior notice in addition to the
other
conditions mentioned in the Industrial Disputes Act,
1947.
• The Government has exempted SEZ Units from the payment of stamp duty and
registration
fees on the lease/license of
plots.
• External Commercial Borrowings up to $ 500 million a year allowed without any
maturity
restrictions
.
• Enhanced limit of Rs. 2.40 crores per annum allowed for managerial
remuneration.
DISADVANTAGES

• Revenue losses because of the various tax

exemptions.
• Most players are interested in setting up SEZ’s with an eye on the real estate bounty so that they
can acquire at cheap rates and create a land bank for
themselves.
• The number of units applying for setting up EOU’s is not commensurate to the number
of
applications for setting up SEZ’s leading to a belief that this project may not match up
expectations
to
.
OPERATIONAL SEZ PROJECT
S
At present there are fourteen functional SEZs located at Santa Cruz (Maharashtra),
Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam
(Andhra Pradesh), Falta and Salt Lake (West Bengal), Nodia (Uttar Pradesh), Indore
(Madhya Pradesh), Jaipur (Rajasthan), etc. In view of the tremendous investment
opportunities and attractive incentives available to SEZs, corporate giants have now
stepped in to establish SEZs all over the country. One of the earliest examples of this is
the Mahindra World City at Chennai. The SEZ was promoted by Mahindra & Mahindra
Ltd and the Tamil Nadu Industrial Development Corporation. Mahindra & Mahindra
Ltd holds 89% equity in the same. On June 19 th
2006, Reliance Industries signed a pact
with the Haryana government for setting up of the Rs. 25,000 crore multi-product SEZ
near Gurgaon.
Special Economic Zones (SEZ)
Proposals are in the pipeline , awaiting a nod from the 19-
member Board of Approval or BoA. There is no objective
120 criteria for approval, and the same is granted on a case-
to–case basis taking into account the financial strength of
the promoter. BoA decisions are based on consensus and
not on majority. New proposals continue to be accepted
now.

106
Formal-approvals have been given till date. Formal approvals
are given only when the promoter has the land to set up the
SEZ. Without the land, only an in-principal approval is given.
Reliance’s 10,000 hectare multi-product SEZ in Haryana
(which is almost the size of Chandigarh city) has an in-
principal approval as land is yet to be secured.

6 SEZs under the old dispensation (pre-Feb-2006) are

currently functional. These include Kandla, Surat, Cochin,
Santa Cruz, Falta and Visakhapatnam. The income tax
exemption, they enjoy, is marginally lower than what the
new rules offer though they are eligible to claim the higher
exemption.

106 Large SEZ--- Gujarat Adani Port, Mundra ---is among the
five notified zones. Spread across 2,658 hectares, the first
phase of the project is to be completed in 6-9 months.

16
SEZs have been notified. Notification is the final approval
stage after which the physical work on the SEZ can begin.
About 7 SEZs are close to being notified.

Percent is the minimum area which will have to be

25
dedicated to the core manufacturing process in a multi-
product SEZ, while the rest can be used up for residential,
recreational and other infrastructure. Also known as the
processing area, it will be a bonded area (access-
controlled). For sector-specific SEZs, the minimum
processing area is 50%.
 SPECIAL ECONOMIC ZONES
(SEZs)
KOCHHAR & CO.
KOCHHAR & CO.

LARGE MULTI-PRODUCT SEZs (Services: Ministry of Commerce)

LARGE MULTI-PRODUCT SEZs
Developer Area
(hectares)
Kakinada SEZ, 4,134
Andhra
Gujarat Adani port 2,658
Gujarat Industrial Devt Corp 1,768
Mundra SEZ, Gujarat 1,082
Essar Hazira SEZ 1,100
Maharashtra Industrial Devt
1,010
Corp

LARGE SECTOR-SPECIFIC SEZs Formally approved

Developer Sector Area

(hectares)
Reliance
Petroleumand Petrochem 440
Infrastructure
MIDC Textile 383
MIDC Agro 200
MIDC Automobile &related activities 210
MIDC Textile 208
Claridges Hotels Multi-services 242
CPL infra
Pharma 200
Ahmedabad
Karnataka
Engineering &
Industrial Areas
Related 167
Devt Board
MIDC Pharma 150
Electronics,
SIPCOT
Telecom 120
(Tamil Nadu)
Hardware etc

LARGE IT/ITES SEZs Formally approved

Developer/proposed location Area

(hectares)
Infosys-Karnataka 125
MIDC- 229
Pune
Karnataka Industrial Areas Devt Board-
203
Mangalore
Sanghi Industries- 202
Andhra
Electronics Corp of TN- Chennai 159
ETL Infrastructure-Kanchipuram 105
Flextronics-Chennai 101
MIDC- 82
Pune
Tata Consultancy Services-Chennai 71

Over the course of the next year, it is anticipated that there will be investment of close to Rs
100,000 crore in about 148 SEZs proposed to be set up around the country. Apart from the
primary attraction of the tax benefits that are offered to SEZs, the Government is also
proposing to introduce fresh incentives such as single window clearance for customs and excise
duty, relaxation from various labour law regulations, allowing companies in the SEZ to
conduct board meetings via video conferencing by amending the Companies Act, 1956, thus
making SEZs the next big investment and growth opportunity for FDI in India.

Kochhar & Co., Advocates and Legal Consultants, S-454, Greater Kailash Part – II, New Delhi- 110 048
Tel: +91 11 4111 5222, 2921 5477 Fax: +91 11 2921 9656 Email: delhi@kochhar.com
Offices also in ATLANTA, BANGALORE, CHENNAI & MUMBAI