A Special Economic Zone, SEZ, is a special area which is owned and managed by a private firm, allowed for the purpose of trade, duties and tariffs to be a foreign territory. SEZs will enjoy benefits such as zero customs duties, income tax, sales tax, service tax.
Alternatively SEZ is a geographical area where economic laws that are more liberal than a country’s normal economic laws. The category ‘SEZ’ covers a broad range of more specific zone types, which includes Export Processing Zones (EPZ), Free Trade Zones (FTZ), Free Zones (FZ), Industrial Estates (IE), Urban Enterprise Zones, Free Ports and others.
The concept of SEZ was basically modeled on the concept of Export Processing Zones (EZP) that came up nearly 50 years back. The idea of EZP was to make employers to import materials that they worked on and export them back without having to pay duty.
SEZs have been implemented using a variety of institutional structures across the world ranging from fully public (government operator, government developer, government regulator) to ‘fully’ private (private operator, private developer, public regulator). In many cases, public sector operators and developers act as quasi-government agencies in that they have a pseudo-corporate institutional structure and have budgetary autonomy. SEZs are often developed under a public-private partnership arrangement, in which the public sector provides some level of support (provision of off-site infrastructure, equity investment, soft loans, bond issues, etc.) to enable a private sector developer to obtain a reasonable rate of return on the project (typically 10-20% depending on risk levels).
NEED FOR SEZ
To develop export oriented industries.
To attract global manufacturing through foreign direct investment (FDI).
To enable transfer of modern technology and create incentives for infrastructure.
For the implementation of liberal market economy.
To develop infrastructure facilities along with the growth of SEZ units.
To provide job opportunities.
To increase the GDP of a country by opening up the economy.
To create an international competitive environment for export production at low cost.
China was one of the earliest countries to implement SEZ. It created the first SEZ in the early 80’s under the government of DENG XIAPING. This is the most popular SEZ in the world. Today there are more than 3000 SEZ’s in the world spreading across 120 countries. They account for over 600 billion dollars in exports and generating close to 50 million jobs all over the world.
Following the Chinese examples, Special Economic Zones have been established in several countries, including Brazil, India, Iran, Jordan, Kazakhstan, Pakistan, the Philippines, Poland, Republic of Korea, Russia, Ukraine, United Arab Emirates, Cambodia, and North Korea.
SEZ’s AROUND THE WORLD
The most famous SEZ’s in China are Shenzhen, Xiamen, Shantou, Zhuhai and Hainan Province. Shenzhen was the first SEZ that was set up in the world providing various tax benefits and privileges for the foreign companies who were willing to invest in China. This idea was a huge success and Shenzhen’s economy grew at 28% per year from the year 1980 to 2004. According to one of the surveys Shenzhen exports accounted to $101.5 billion 13% of China’s total exports. It is China’s dealing electronics manufacturer and one of the richest cities in the country.
Russia currently has 16 federal economic zones and several regional projects under its belt. Recently in March 2010 Russia’s SEZ’s hosted 207 investors from 18 different countries. The investors included big MNC’s like Cisco, Yokohama, Rockwool and many others. The SEZ’s are completely owned and managed by the Russian State. The well known SEZ’s are Dubna, Lipetsk and Altai Krai.
Located in the south east part of South Korea Daegu-Gyeongbuk Free Economic Zone (DGFEZ) consists part of Daegu a city and parts of North Gyeongsang province. There are totally 11 special zones spreading across 39.54 square kilometers.
The SEZ’s in Philippines are called ecozones which are collection of industries meant for the promoting economic development. These ecozones are maintained by Department of Trade and Industry. There are more than 200 SEZ’s in Philippines. The well known ones are Clark Special Economic Zone (29,365 hectares) and Zamboanga City Special Economic Zone.
China is helping set up SEZ’s in Pakistan. China is helping to develop Haier-Ruba economic zone on the outskirts of Lahore. There are other China- Pakistan economic zones which are open only to Chinese investors. There are plans to setup Japanese economic zones where again it is only open for Japanese investors.
Malaysia’s first economic zone was launched in August 2009. It is East coast Economis Region SEZ. This SEZ brings about a revenue of 23 billion to the country’s GDP and helped in creating close to 220000 jobs in the East coast Economis Region SEZ.
SCENARIO OF SEZS IN INDIA
In order to increase exports and foreign investments in the country and improve the infrastructure and job opportunities, the Government of India announced in April 2000 the introduction of ‘Special Economic Zones’ strategy in India. The first Export Processing Zone was build in Kandla in 1965 to boost export from the country. That was the start of SEZ’s in India. However, it got the required impetus only after the introduction of SEZ Act 2005.
To set up a special economic zone in India, the SEZ act was announced in 2005 to define the SEZ policies. It set in place the procedures and guidelines for acquisition of land and SEZ development adopting the proper SEZ laws. More amendments were made in SEZ Act 2006 and SEZ policy 2007. This policy allows setting up of SEZ in public sector or private sector or by joint sector or even by the state governments. SEZ units of India are granted with tax discounts, fiscal incentives and lands at cheaper rates. The SEZ Board of Approval (BoA) has formulated a single window SEZ approval mechanism for the smooth functioning of SEZs.
The SEZ norms and rules are different in different parts of the world. Incentives are provided to the businesses operating under SEZ’s in the form of:-
domestic procurement of goods for growth or duty free imports
operation and maintenance of SEZ units
100% IT exemption for the first 5 years
exemption from minimum alternate tax
exemption from central sales tax
50% during the next 5 years
At the start of 2009, 811 units are in operations in 8 functional SEZ’s in India, each having average area coverage of 200 acres. 8 fully functional Export Processing Zones (EPZs) have been converted into SEZs. These SEZs present in different parts of the country in either the private or public or joint sectors or by any State Government. However, majority belongs to private sector and only 9 SEZs are being developed under the government. But this process of planning and development is under question, as the states in which the SEZs have been approved are facing intense protests, from the farming community, accusing the government of forcibly snatching fertile land from them, at heavily discounted prices as against the prevailing prices in the commercial real estate industry. Also some reputed companies like Bajaj and others have commented against this policy and have suggested using barren and wasteland for setting up of SEZs.
TYPES OF SEZS IN SEEN IN INDIA
SEZ FOR FREE TRADING & WAREHOUSING: Free trading and warehousing are special categories SEZs with an objective of improving trading and warehousing. It aims to build infrastructure for trade to assist export and import of goods and services with liberty to carry out trade dealings in free economy. In these zones, minimum 50% of the area is appropriated for developing processing regions; free warehousing and trading may be set up as part of SEZ for multiple product.
SEZ FOR MULTI-PRODUCT ZONES: Special Economic Zone for multiple product means a Special Economic Zone where different units may be set up for manufacturing and processing two or more products in one sector or one product under two or more sectors or for warehousing and trading or offering two or more services in one sector or offering services under two or more sectors.
SEZ FOR SECTOR SPECIFIC: Special Economic Zone for particular sector implies Special Economic Zone aimed only for one or more services in a sector or one or more products in a sector.
SEZ IN A PORT OR AIRPORT: These zones are built up near ports or at airports.
State wise distribution of SEZs is given below:-
Some of the major Special Economic Zones in India are as below –
Kandla Special Economic Zone
SEEPZ Special Economic Zone
Electronics and Gems and Jewellery
Noida Special Economic Zone
Software and gems & jewellery
MEPZ Special Economic Zone
Chennai, Tamil Nadu
Cochin Special Economic Zone
Falta Special Economic Zone
Falta, West Bengal
Vishakhapatnam, Andhra Pradesh
Karnataka Biotechnology and Information Technology Services
Shree Renuka Sugars Limited
Burlatti in Belgaum district
Ittina Properties Private Limited
Real estate and IT sector, covering electronics, hardware and software
Bellandur Amani Kane near Bangalore
Real Estate, IT/ITES
Chaitanaya Infrastructure Private
Real estate, IT
Navi Mumbai, Mumbai
Shipco Infrastructure Private Limited
Free Trade Ware Housing Zone
Hinduja Investments Private Limited
Doddamannugudde in Bangalore Rural district
textile and apparel sector
Looking at the benefits of SEZs, key Indian conglomerates are planning or have already ventured into the SEZ bandwagon. Some of the big names are Mahindra & Mahindra coming up with the Mahindra World City in Chennai and Reliance Industries tying up with Haryana Government and other developers like DLF and Unitech India Ltd. Other places where SEZs are coming up are Gurgaon, Navi Mumbai, Nadigram, Manesar, Nagpur, Noida, Indore, Surat, Dehradun, Kochi, Kanpur, surrounding areas of Bangalore, Pune, Goa, Hyderabad and Jaipur.
THE SPECIAL ECONOMIC ZONES ACT, 2005
The SEZ Act is a Government Policy which was introduced to provide a globally attractive and competitive platform for Indian exports. The Act caters to the establishment, development and management of special economic zones within the country for promotion of exports.
Some important dates-
1st April 2000- Policy was initiated
May 2005-Passed by the Parliament
23rd June 2005- Issued by the ministry of Law and Justice
10th Feb 2006- Came into force
The SEZ Act 2005 is given in the form of seven chapters and three schedules as highlighted below.
PRELIMINARY-The act is called Special Economic Zones Act, 2005 and extends to whole of India.
ESTABLISHMENT OF SEZ- Also deals with constitution of different authorities related to it. Appointment of developer, co-developer and notification of area where unit can be located.
CONSTITUTION OF BOARD OF APPROVAL-The Board of Approval can suspend the letter of approval of the developer and transfer the rights to another Administrator for a period of maximum 1 year.
DEVELOPMENT COMMISSIONER-The Central Government can also appoint the Development Commissioner of SEZ (one or more). He would supervise the performance/work of the Developer and the Units in a SEZ.
SINGLE WINDOW CLEARANCE-The Government may create “Approval Committee” for SEZ for approving import and export of goods and services, monitor their utilization, approve modify or rejects proposals for setting new units for manufacturing or rendering services in SEZ, etc.
SPECIAL FISCAL PROVISIONS FOR SPECIAL ECONOMIC ZONES -Goods and services exported out or imported into the country are subject to exemptions, drawbacks and concessions from customs duty, excise, securities transaction tax, sales tax, service tax and income tax.
SPECIAL ECONOMIC ZONE AUTHORITY-The Government constitutes an Authority for each SEZ which would undertake measures for the development, operation and management of that SEZ.SEZ Authority Fund is established by them to support the workings of the SEZ.
MISCELLANEOUS-There are rules formulated by Central Government regarding setting up of International Economic Service Centre and Offshore Banking Unit in SEZs. Also, there is single enforcement agency for some notified offences and courts are designated by the state governments for offences and civil suits occuring in SEZs.
SCHEDULES-In the 3 schedules there are explanations, terms and conditions and amendments pertaining to the Act are given.
SALIENT FEATURES OF SEZ ACT
It offers a comprehensive policy framework to meet the requirements of all the major stakeholders in a SEZ – the developer, operator, occupant enterprise, supplier and residents.
Earlier policies concerning EPZ/SEZ came in purview of Foreign Trade Policy and the incentives and tax benefits were conveyed by the government time-to-time via circulars and notifications. This system did not give enough confidence to the investors to commit substantial funds for setting up units in SEZ.
Also, the Act provides expeditious and single window clearance mechanism by the Board of Approval.
In fiscal terms, the Act offers a very attractive incentive package
Exemption from customs duty, excise, securities transaction tax, sales tax, service tax and income tax to both the developers and the units.
Tax exemptions for next 15 years (current unit has 7 years), that is, 100% tax exemption for 5 years, 50% for the next five years, and 50% of the export profits for the next 5 years.
100% income tax is exempted for 10 years in a period of 15 years for developers of SEZ.
Following are the provisions for infrastructure-
The establishment of free trade zones having world class trade-related infrastructure would encourage import and export of goods and make India a global trading hub.
This would enable public private participation in infrastructure development.
The “SEZ authority” in each central government SEZ would ensure development of new infrastructure and improve the existing one.
BENEFITS DERIVED FROM THE ACT
The Act has led to spectacular increase in Foreign Direct Investment (FDI) within the initial few years.
It has generated employment opportunities in the Zones to the tune of 50%. It has potential to raise the employment scenario hugely in the coming years.
It is attracting lot of foreign as well as domestic investments.
Each SEZ that has been set up by the Central Government provides superior administrative autonomy.
It has appointed single enforcement agency and special courts to ensure swift trial and inquiry for notified offences committed in Special Economic Zones.
Since the Act came into effect in February 2006, there has been spectacular increase in establishment of SEZs. There were around 212 approvals 21 states as on October 27, 2006. Until now, 34 SEZs from these requests have been notified.
The main advantages of developing SEZ units in India are:
Encourages economic growth
Attracts both domestic and foreign investments.
Creates employment opportunities in the country
Endorses the export of goods and services
Helps in setting up and running new business through the simplified procedures.
Compliance procedures and documentations are made simple and easy to adhere.
Single window clearance by both State and Central government in setting up a new SEZ or SEZ unit.
Improves infrastructure facilities
Infusion of modern technologies
Some of the key advantages of SEZ in India are as mentioned below:
Tax benefits for 15 yrs on export profit – for first 5 initial years 100%, about 50% for the next 5 yrs and for the balance 5 yrs tax relaxation on the profits ploughed back for investments.
Exemption from custom duties on all imports for the purpose of development of project like raw materials, capital goods, spares etc.
Exclusion from VAT /Central Excise duty on procurement of resources pertaining to the development of project like capital goods, raw materials, consumables, spares etc.
Freedom for 100% FDI to develop townships with education, playgrounds, recreation etc. Also there are no restrictions on the foreign ownership for such developments.
Exemption from Central Sales Tax and State Sales Tax.
Exemption from Service Tax.
Exemption from other levies that are extended by the respective State Governments.
Single window clearance by both State and Central government in setting up a new SEZ or SEZ unit. Thus we can expect early approvals, clearances and dispute resolutions from the government.
Tie ups with number of Public and Private Banks are made to offer financial assistance for business.
Proper drainage and sewage system are provided.
Easy accessibility to airport and railway stations to run the business smoothly.
Complete authority to provide and maintain services like water, electricity, security, restaurants and recreational centres etc within the zone on purely commercial basis
Generation of power, its transmission and distribution within SEZs is allowed.
Investments made in SEZ units are also eligible for Tax exemption under Section 88 of Income- tax Act, 1961.
Allows losses to be carry forwarded.
No license is required for import
The full export value of the goods can be realised and sent back to India until a 12 month period from the export date.
The SEZ’s are allowed to write-off or forego their unrealized export bills upto 5 % of their annual average realization.
THE SEZ AND EXPORT PROMOTION:
During the period of 2000, the performance of Special Economic Zones poor due to the poor export policy of India, with included huge taxes and duties. The Government of India then decided to ease the export policies of the nation to facilitate the easy growth of SEZ and to promote export of Indian goods across International destinations. This healthy environment to export created a new export oriented units (EOU) within the designated Special Economic Zones. Further these EOUs are designed in such a way that they focus specially on the growth of the Indian exports.
DISADVANTAGES OF SEZ
REGIONAL DISPARITY IN DEVELOPMENT:
More than two-third of the SEZs are located in five states only, namely Karnataka, Andhra Pradesh, Maharashtra, Tamil Nadu and Gujarat. Of the total investments for SEZs, about 90 percent have been made in these states. Also these states account for more than 85 percent of the employment generated by SEZs. Of the total exports by SEZs, Gujrat and Tamil Nadu accounted for more than 80 percent.
The development has been selective and limited to a few sectors only. 70 percent of the SEZs have been developed for IT/ITES services, about 6 percent are into textiles and 4 percent are in Biotech. Especially in the IT sector, there is no need for SEZ as India has the technological edge and a very large pool of excellent human resource. Thus the sector would have anyway performed well. Also the manufacturing sectors simply move base to SEZs for the sole reason of escaping taxes.
LOSS FOR THE NATIONAL EXCHEQUER:
The Indian SEZs were supposed to provide excellent, world class, state of the art architecture. However in reality, many SEZs have been created for accommodating only the developer. Such SEZs themselves enjoy tax benefits but build infrastructure that meets their own need only. Instead of attracting the targeted FDI, many existing units have parked themselves in these SEZs as it provides excellent business conditions as well as huge tax cuts.
Indian bureaucrats messed up the complete idea of SEZ. While they correctly recognized the potential of setting up SEZ, which would act as platform for attracting FDI, they ignored to understand the structure of SEZ. Instead of tax benefits being passed under close scrutiny and strictly controlled administrative procedures; the entire control passed onto private hands. Naturally the private players completely hijacked the SEZ concept and transformed it from being a prospective vehicle for encouraging FDI, employment and revenues, into a mode of avoiding taxes for themselves.
Financial transactions in real estate have been quite murky. They are mostly in cash, with official record showing only a part of the transactions; rest transaction is carried out below the radar. In such a case, valuation of land by the government for the sake of compensation is difficult. In most of the cases, land is purchased from farmers at a much lower price than the prevailing market price.
Also the compensation handed out for re-establishment; re-settlement etc. to the affected farmers has been paltry. Even the meagre compensation is unnecessarily delayed and middlemen, corrupt politicians and unscrupulous bureaucrats get a cut from this amount.
Possibility of the affected farmers being provided employment in the same SEZ itself is also limited as they do not possess the necessary skills.
CHALLENGES FACED BY SEZ
Agricultural lands have been siphoned off in order to set up SEZs for boosting industrial activity. As agricultural activities are not taxed in India and records are either not present or not maintained to keep track of agricultural activities, it is very difficult for the government to define agricultural land and earmark separate status for them.
Many a time political clout, police force or muscle power is used to grab fertile lands from petty farmers. The Nandigram SEZ in West Bengal is a classic example in this case.
FRICTION WITH THE GOVERNMENT:
As per the revised draft of Direct Tax Code (DTC), the income tax benefits would not be extended, for units that would come up after the end of current financial year. Thus SEZ developers, whose projects are underway, would certainly not get the tax benefits. Thus leasing to businesses will not be easy. Also many SEZ are not fully occupied. These SEZ developers would like to get their SEZs denotified. This sends a wrong signal to foreign investors, who might no longer be interested to carry out business when their benefits are taken away.
FUTURE OF SEZs
A Comparison of Benefits between SEZ and Industrial Parks / EOU / STPI
Looking at the above comparison it is clearly evident that the SEZ has a great advantage in terms of fiscal benefits, administrative protocols and physical infrastructure. However, analysis of the future structure for SEZs indicates that a very high competitive environment where customer will have many options of putting up units and the SEZ developers will face problems of land acquisition hurdles and pricing pressures.
TATA STRATEGIC GROUP GUIDELINES FOR SEZ
Tata Strategic Management Group is a leading management consulting firm in South Asia. They have come up with the a strategic model which will help SEZs in future.
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