SPECIAL ECONOMIC ZONESUBODH KUMAR

2013CET2155

A Special Economic Zone (SEZ) is a geographical region - economic laws more liberal & Broad

Minded

projected as duty- free areas for trade and operations.

self-contained and integrated with own infrastructure & support services.

to create a conducive atmosphere to promote investment and exports.

Within SEZs, a unit may be setup for the manufacture of goods and other activities including processing, assembling, trading, repairing, reconditioning etc.

The category ‘SEZ’ covers a broad range of specific zone types, including Free Trade Zones (FTZ)- where goods may be landed, handled,

manufactured or reconfigured, and reexported without the intervention of the customs authorities

Export Processing Zones (EPZ) Free Zones (FZ)- areas in which companies are taxed very lightly or

not at all in order to encourage economic activityIndustrial Estates (IE)- specific areas zoned for industrial activity in which infrastructure such as roads, power, and other utility services is provided to facilitate the growth of industries and to minimize impacts on the environment. Free Ports Urban Enterprise zones and others

First known SEZ - Puerto Rico, 1947

Ireland & Taiwan followed - 1960s

China made SEZs gain global currency with its largest SEZ at Shenzhen in 1980

currently 3000 SEZs in 120 countries -> US $600 Bn in exports and about 50 Mn jobs

History of SEZ

Evolution of SEZs in India

The first ever Export Processing Zone (EPZ) in Asia was set up by GoI in Kandla in 1965.

Based on the success of Kandla EPZ, in the beginning of eighties, seven more EPZs were setup in Bombay, Noida, Surat, Madras, Falta, Visakhapatnam and Cochin.

However the EPZ policy faced several problems like Limited power of zonal authorities, Absence of single window facility, Rigid custom procedures for bank guarantees, Restrictive FDI policy, procedural constraints and

severe

Thus the EXIM policy introduced a new scheme from April 1, 2000 for the establishment of the SEZs EPZs converted into Special Economic Zones (SEZs) in 2000

under a new policy of GoI.

Before SEZ act 2005, SEZs operated by provisions of foreign trade and fiscal incentives

After extensive consultation, the SEZ Act, 2005 supported by SEZ rules, came into effect on 10th Feb 2006 providing for drastic simplification of procedures and for single window clearance on matters relating to both central & state governments.

Generation of additional economic activity

Promotion of exports of goods & services

Promotion of investment from domestic &foreign sources

Creation of employment opportunities

Development of infrastructure facilities

Objectives of SEZs in India

Terms and Conditions The SEZ units shall abide by local laws, rules, regulations or

laws in regard to area planning, sewerage disposal, pollution control and the like. They shall also comply with industrial and labor laws, as may be locally applicable.

Such SEZs shall make security arrangements to fulfill all the requirements of the laws, rules and procedures applicable to such SEZs.

 The SEZ should have a minimum area of 1000hectares and at least 35 % of the area is to be earmarked for developing industrial area for setting up of processing units.

Minimum area of 1000 hectares will not be applicable to product specific and port/airport based SEZs.

Wherever the SEZs are landlocked, an Inland Container Depot (ICD) will be an integral part of SEZs.

Terms and Conditions

The applicant also has the option of submitting the proposal directly to the BOA.

Approval mechanism

Developer submits proposal

to state Govt

State Govt if approves, forward

it to Board of Approval (BOA) within 45 days

Approval

Administrative Set-up

Board of Approval is headed by the Secretary, Department of Commerce.

All the decisions are taken in the BOA by consensus.  The BOA has 19 members.

Board of Approval

Unit Approval commitee

Development Commissioner

Benefits to Indian SEZ units 15 year corporate tax holiday on export profit

Allowed to carry forward losses.

No license required for import made under SEZ units.

Duty free import or domestic procurement of goods for setting up of the SEZ units.

Goods imported/procured locally are duty free and could be utilized over the period of 5 years.

Exemption from customs duty on import of capital goods, raw materials, consumables, spares, etc.

100% - first 5 yrs

50% - next 5 yrs

Upto 50% -next 5 years equivalent to profits ploughed

back for investment

Benefits to Indian SEZ units Exemption from Central Excise duty on the procurement of capital

goods, raw materials, and consumable spares, etc. from the domestic market.

Exemption from payment of Central Sales Tax on the sale or purchase of goods.

Exemption from payment of Service Tax.

The sale of goods or merchandise that is manufactured outside the SEZ 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 realize and repatriate to India the full export value of goods or software within a period of twelve months from the date of export.

Benefits to Indian SEZ units “Write-off” of unrealized export bills is permitted up to anannual

limit of 5% of their average annual realization.

No routine examination by Customs officials of export andimport cargo.

Setting up Off-shore Banking Units (OBU) allowed in SEZs. OBU's allowed 100% income tax exemption on profit earnedfor

three years and 50 % for next two years. Exemption from requirement of domicile in India for 12months

prior to appointment as Director.

Since SEZ units are considered as ‘public utility services’, nostrikes would be allowed in such companies without givingthe employer 6 weeks prior notice in addition to the otherconditions mentioned in the Industrial Disputes Act, 1947.

Issues concerning SEZs SEZs would result in the Finance Ministry losing revenue to the

tune of over Rs.1,00,000 cr annually due to various tax concessions and exemptions.

The SEZs are mainly coming up in Maharashtra, Gujarat, Tamilnadu, Karnataka, Haryana, Orissa. There is a lack of focus on other regions of the country. This could lead to regional imbalances. For ex, no SEZ has yet come up in the North-east region which already suffers from the problem of alienation.

In India, farmers are emotional about the land that they have farmed for years and just giving it up is not something that can be easily digested. There have also been concerns about the compensation package offered to farmers whose lands have been acquired.

Issues concerning SEZs Huge tracts of agricultural and forested land will be converted

for industrial purposes for the setting up of SEZs. This can have grave impact on the ecosystem. The developers fail to follow the minimum environmental guidelines for SEZs leading to severe environmental impact.

Clusters of development - Rather than promoting the overall economic development, SEZs would result into clusters of heightened economic activity widening the already existing gap between developed and impoverished areas.

Employee Working Conditions – Since relaxed labor laws are applicable in the SEZs, workers enjoy no rights including the fundamental rights of association and protests.

Benefits

DirectForeign exchange

Employment generation

Employment of females

Skill up gradation

FDI

Tech transfers and creation

IndirectIndirect employment

Investment

Skill spillovers

Technology spillovers

Industrial growthProductive diversificationHuman developmentRevenue generation for Govt

India and China: A comparison India has more or less adopted the same China model of SEZ

development,

Chinese SEZs are mostly public funded while the Indian model encourages private sector led development.

China continues to score as it provides an attractive tax environment with world class infrastructure and a liberal labor environment. On the contrary, Democratic India, under pressure from strong labor unions failed to implement liberal labor laws.

India has significantly larger English-speaking workforce than does China. India also has an edge in a number of key knowledge based industries like software, IT enabled services etc. Indian SEZs will more likely attract investments in high end human skill based industries and services sector.

India and China: A comparison

Strong Domestic demand – In China, about 50% of SEZ sales are to the domestic market. Though India has a large domestic market, it has failed to project this to lure SEZ investors.

Decentralization of Power – In China, provincial and local authorities were made partners and stake holders be delegating powers to approve foreign investments. In India, only state Govt are allowed to set up SEZs and the powers for foreign investment approval is with Union Govt.

Key features of Special Economic Zones (SEZs) - China and India

Sl. No.

Features China India

1. Nature Manufacturing Hubs, Integrated townships with commercial, residential,

complete with all facilities

Same, except that apart from manufacturing also processing. Separate SEZ for service sector

2. Infrastructure

Government provided private developers

3. Location Strategic coastal areas Coastal and landlocked areas

4. Decision on location

government private sector

5. Size Big over 20000 hectares Small minimum of 500 hectares for multi products

Sl.

No.

Features China India

6.   Number 5 ( all operational) 579 ( formally approved)

7.   Tax Holiday Selective All, SEZ developers, units in SEZ

  Drivers Government driven, well

thought out locations

Private sector driven

9.   Government Active and Direct Passive only in giving approval

remaining by the private sector

10.   Ownership Government Private Sector

11.   land Lease from govt. need to be acquired by private

developer

12.   Labor Laws No labor laws Flexible labor laws, unions can’t be

formed. ( ESMA- essential services

maintenance act - no strike, no

lockouts)

EPZs

1. Kandla Free trade Zone (KFTZ) during 1965, followed be seven

other EPZs in the country.

2. Santa Cruz Electronic export processing zone (SEEPZ), Mumbai

3. Visakhapatnam export processing zone (VEPZ), Andhra Pradesh

4. Surat Export processing zone (SEPZ), Gujrat

5. Noida Export Processing Zone (NEPZ), Uttar Pradesh

6. Falta Export Processing Zone (FEPZ), West Bengal

7. Chennai Export Processing Zone ( CEPZ), Tamil Nadu8. Cochin Export Processing Zone ( CEPZ), Kerala

  Feature EPZs SEZs1.   Role Supplementary in

increasing exportsPrimary and dominant role in exportsIncreasing exports and improving share in world trade

2.   Nature Only export oriented activities

Integrated township with all facilities

3.   Area Norms Not specified Minimum 500 hectares for multi products and 100 hectares for single products

4 . Infrastructure Government provided Private developers5 . Range Of

ActivitiesPrimarily processing and some manufacturing

Manufacturing and IT, sector specific

6 . Value Addition Norms

Yes No

7 . Foreign Investment

Not permitted Permitted

8 . Sale To DTA Up to a specified percentage

Against foreign exchange only

9 . Domestic Banks No Yes, would operate as off-shore banking units (OBU) and the same status as if operating outside the country

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-140

100000

200000

300000

400000

500000

600000

22840 3461566638

99689

220711

315868

364478

476159494077

Exports Value in Rs. Crores

Exports Value in Rs. Crores

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13*66638 99689 220711 315868 364478 476159

589226741066 624823

827054

11014811159102

Export Performance

Total SEZs Export (Rs. in Crores)Total Export of the country except SEZ ( Rs. in Crores)

Andhra Pra

desh

Chandigarh

Chhattisg

arhDelhi

Dadra &

Nagar H

aveli

Goa

Gujarat

Haryana

Jharkhand

Karnataka

Kerala

Madhya

Pradesh

Mahara

shtra

Manipur

NagalandOris

sa

Pondicherry

Punjab

Rajasthan

Tamil Nadu

Uttar Pra

desh

Uttarakh

and

West

Bengal0

20

40

60

80

100

120

State Wse SEZ Distributi onFormal In-principle Notified Exporting SEZs (Central Govt. + State Govt./Pvt. SEZs + notified SEZs under

ArabianSea

Bayof

Bengal

Indian Ocean

Maharashtra

AndhraPradesh

Tamil Nadu

Odisha

Lakshadweep

Goa

Puducherry

Andamanand

NicobarIslands

Madhya PradeshWestBengal

Bihar

J harkhand

Uttar Pradesh

Uttarakhand

Assam

ArunachalPradesh

Nagaland

Manipur

MizoramTripura

Sikkim

Meghalaya

Rajasthan

Gujarat

Haryana

HimachalPradesh

Punjab

Delhi

Chandigarh

J ammuand

Kashmir

Daman and Diu

Dadra and Nagar Haveli

Map not to scale

Lowest (Red) to Highest (Green)

www.indzara.blogspot.com

Colour Gradient

Formally approved SEZs

Airport

based m

ultiproduct

Aviation/A

erosp

ace/A

nimation &

Gaming/ C

opper

Bio-Tech

equipment’s /

cera

mic and glass

Engineering

Food Pro

cessi

ng

Gems and Je

welry

IT/ITES/E

lectronic

Hardware

/

Metal/S

tain. Steel/A

lum/Foundry

Automotive/A

utomotive

Multi-Pro

duct

Non-Conve

ntional Energ

y

Petroch

emicals

& petro./o

il and gas

Port-base

d multi-pro

duct

Textiles/A

pparel/W

ool

Strategic

Manufactu

ring

and other allie

d mach

inery/0

50

100

150

200

250

300

350

400

Sector wise SEZ Distributi onFormalIn-principleNotifiedExporting SEZs (Central Govt. + State Govt. /Pvt. SEZs + notified SEZs under the SEZ Act, 2005)

Andhra Pra

desh

Chandigarh

Chhattisg

arh

Dadra &

Nagar H

aveli

DelhiGoa

Gujarat

Haryana

Jharkhand

Karnataka

Kerala

Madhya

Pradesh

Mahara

shtra

Manipur

NagalandOris

sa

Pondicherry

Punjab

Rajasthan

Tamil Nadu

Uttarakh

and

Uttar Pra

desh

West

Bengal0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Total area of formal approvals (in hectares)Andhra Pradesh Chandigarh Chhattisgarh Dadra & Nagar Haveli DelhiGoa Gujarat Haryana Jharkhand KarnatakaKerala Madhya Pradesh Maharashtra Manipur NagalandOrissa Pondicherry Punjab Rajasthan Tamil NaduUttarakhand Uttar Pradesh West Bengal

Andhra Pra

desh

Chandigarh

Chhattisg

arh

Dadra &

Nagar H

aveli

DelhiGoa

Gujarat

Haryana

Jharkhand

Karnataka

Kerala

Madhya

Pradesh

Mahara

shtra

Manipur

NagalandOris

sa

Pondicherry

Punjab

Rajasthan

Tamil Nadu

Uttarakh

and

Uttar Pra

desh

West

Bengal

TOTAL0

50000

100000

150000

200000

250000

300000

Employment (in number of persons)Andhra Pradesh Chandigarh Chhattisgarh Dadra & Nagar Haveli DelhiGoa Gujarat Haryana Jharkhand KarnatakaKerala Madhya Pradesh Maharashtra Manipur NagalandOrissa Pondicherry Punjab Rajasthan Tamil NaduUttarakhand Uttar Pradesh West Bengal TOTAL

Andhra Pra

desh

Chandigarh

Chhattisg

arh

Dadra &

Nagar H

aveli

DelhiGoa

Gujarat

Haryana

Jharkhand

Karnataka

Kerala

Madhya

Pradesh

Mahara

shtra

Manipur

NagalandOris

sa

Pondicherry

Punjab

Rajasthan

Tamil Nadu

Uttarakh

and

Uttar Pra

desh

West

Bengal0

5

10

15

20

25

30

Land Area vs Empoymet out of SEZsPercentage land area %age employment

Direct Employment in Special Economic Zones (As on 31.12.12)

Financial Year Employment*(number of

persons)

2010-2011 6,76,608

2011-2012 8,44,916

2012-2013 10,74,904

2013-2014

(April, 2013 to September, 2013)

11,56,677

Some Suggestive Policy Options location of SEZs must be such as to promote manufacturing exports. Encouragement for modern version of SEZs like free ports, free

coastal zones, setting up of growth poles and clusters should be encouraged.

Free ports may be far bigger than the SEZs and should offer a world class environment in terms of legal framework, regulatory procedures, infrastructure, production facilities and easy access

Offering of greater flexibility to firms in terms of plant location in the zone would encourage the investors’ participation.

The size of each SEZ should be such as to promote the efficient provision of infrastructure services, particularly the provision of power, water and other services.

Due recognition can be given to the ongoing tariff reform where the non-agricultural peak tariff is already 10 per cent.

Efficient investor friendly administration

Some Suggestive Policy Options

While providing approval, prioritization of the zones is needed according to the strategic importance of the product and development needs of the region.

On investment front, encouragement for more Greenfield FDI in the zone to supplement domestic investment would attract more private investors.

While selecting the location, it would be necessary to exclude the

agricultural lands altogether from the promotion of SEZs.

Establishment of well-balanced compensation and rehabilitation

policy to be designed for displaced people.

Maintaining a stable and fair tax regime with no special privileges

Enforcement of good governance in the SEZs with flexible labour

laws

References:

1. Aradhna Aggarwal (2005), Performance Of Export Processing Zones: A Comparative

Analysis of India,

2. Arvind Virmani (2005), China’s socialist market economy: lessons of success, Indian

Council for Research on International Economic Relations, April.

3. Edgardo Favaro (2006), Trade in Institutions and the Integration of Small States to the

World Economy, The World Bank, January 6.

4. FICCI (2002), International convention on SEZs, Theme Paper on Driving Growth through

SEZs, New Delhi.

5. Government of India, Annual Report 2005-06, Ministry of Commerce, New Delhi.

6. Foreign Trade Policy, 2004-05 to 2006-07, Ministry of Commerce, New Delhi.

7. Ministry of Commerce web site: http://sezindia.nic.in/.

8. SEZ Act 2005, Ministry of Law and Justice, New Delhi, June 23, 2005.

9. SEZ Rules 2006, Ministry of Commerce, New Delhi, February 10, 2006.

10. Various Press Releases, Press Information Bureau web site: http:// pib.nic.in/.

11. Reserve Bank of India website- www.rbi.gov.in

Thank you