1.

INTRODUCTION

Considering the need to enhance foreign investment and promote exports from the country
and realising the need that a level playing field must be made available to the domestic
enterprises and manufacturers to be competitive globally, the Government of Indias annual
EXIM policy of 2000 announced SEZs in India. Apart from new SEZs, the erstwhile Export
Processing Zones / Free Trade Zones are also converted into SEZs. Special Economic Zone
Act was passed in 2005 and Special Economic Zone Rules in 2006.

The main obstacles to the Industrial growth in India have been poor infrastructure,
administrative interference, uncongenial tax laws and unfavourable labour laws and all these
collectively driving away foreign investments. But with the SEZs providing solutions to each
of these, there is enormous growth potential for Indian industry; manufacturing and service
alike. With all the ingredients of SEZs, Indian businesses will sooner become globally
competitive.

In India, SEZs are engines of economic growth, supported by world class infrastructure and
attractive fiscal benefits. In particular SEZs can be helpful for small and mid-sized businesses
which cannot afford to set up huge infrastructure on their own.

In this age of Globalization, there is a need for every nation in the world to perform well
economically. With the improvements in science and technology and the raising standards of
living worldwide, ensuring economic development assumes primary importance in the
policies of every nation

facilities for efficient production of goods and services and in order to make them globally
competitive in terms of price and quality. Some of these facilities can be used by all
industries throughout the nation. But sometimes, some facilities cannot be given on account
of reasons like the geographical extent and the possibility of misuse.

For Example: If a country wants to give subsidized power to a specific industry, it cannot do
so throughout the nation as keeping a check on whether the subsidized power is going to the
right people or not is a Herculean task.

Various facilities can be offered in this area without the fear of them being misused and also,
no resistance from WTO (or any other trading partner / nation) is encountered on account of
the scheme not being a national policy, but only limited to a small area demarked for the
purpose. This is where the concept of Economic Zones comes in.
 2. MEANING, DEFINITION & CONCEPT

DEFINITION: Specifically delineated duty free enclave and shall be deemed to be foreign
territory for the purposes of trade operations and duties and tariffs EXIM Policy 2000,
Chapter 9 Para 30EXIM Policy 2000, Chapter 9 Para 30

MEANING: SEZ is a geographical region with different economic laws than a countrys
typical economic laws, with the main goal of attracting foreign investment. In economic
terms, SEZ is specifically delineated duty-free enclave and shall be deemed to be foreign
territory for the purposes of trade operations and duties & tariffs. Countries which have
experimented with this concept are China (with great success), UAE, Malaysia, India, Jordan,
Poland, Kazakhstan, Philippines, Russia and to some extent North Korea.

Apart from Central government, any private/ public/ joint sector or State Government can set
up an SEZ. Before recommending any proposal to department of commerce, the State must
satisfy themselves that they are in a position to supply basic inputs like water, electricity etc.

SEZs have potential to play a key role in economic development of a country, as they did for
China.

CONCEPT OF SEZs:

1. Duty free areas with Integrated Infrastructure

2. High Point - Preferential Policy framework with a package of incentive

3. Benefits of local advantages within an international business environment

4. Business Infrastructure combined with social facilities

5. Development, Administration and Operation to be undertaken by private sector to enable a

hassle free operating environment

6. Envisaged as areas of excellence to enable global companies to derive domestic advantages

for doing business.
 3. EPZ TO SEZ

The first EPZ in India was set up in Kandla, Gujarat in 1965. The Santacruz EPZ in Mumbai
came into operation in 1973. However, the EPZ policy was deficient by several factors like
limited power of zonal authorities, absence of single window facility within the zone, rigid
custom procedures for bonding and bank guarantees, restrictive FDI policy, procedural
constraints and severe infrastructural deficiencies.

During 1991-2000, wide-ranging measures were initiated by the Go I for revamping and
restructuring EPZs. This phase was thus marked by progressive liberalization of policy
provisions and relaxation in the severity of controls and simplification of procedures. Focus
had been on delegating powers to zone authorities, providing additional fiscal incentives,
simplifying policy provisions and providing greater facilities.

The EXIM Policy (1997-2002) introduced a new scheme from April 1, 2000 for
establishment of the Special Economic Zones (SEZs) in different parts of the country.

As per the policy-

1. SEZs are permitted to be set up in the public, private, joint sector or by the State
Governments with a minimum size of 1000 hectares.

2. The number of incentives both fiscal and non-fiscal has also been extended to the units
operating in SEZs.

3. Development Commissioners have been given the labour commissioner's powers. SEZ
policy is thus the most significant thrust towards ensuring the success of export processing
zones.

4. From November 1, 2000 the Export Processing Zones at Kandla, Santa Cruz (Mumbai),
Cochin and Surathave been converted into SEZs.

5. In 2003, other existing EPZs namely, Noida, Falta, Chennai, Vizag were also converted
into SEZs. As on June 2005, 53 SEZs have been approved by the Government of India out of
which 11 SEZs are functional and the rest 42 SEZs are under establishment.
 4. OBJECTIVES & SAILENT FEATURES OF SEZ

OBJECTIVES OF SEZ :

The Central Government, while notifying any area as SEZ shall be guided by the following: -
The main objective of the SEZ scheme according to the finance and commerce ministries is
to create delineated, duty -free zones with world class infrastructure, internationally
competitive production environment and fast track clearance system for attracting private
investments, especially foreign direct investment (FDI) for setting up export oriented unit.

The broad objectives of the SEZ policy are:

a) Generation of additional economic activity

b) Promotion of exports of goods and services;

c) Promotion of investment from domestic and foreign sources;

d) Creation of employment opportunities;

e) Development of infrastructure facilities; and

f) Maintenance of sovereignty and integrity of India, the security of the State and friendly
relations with foreign states.

g) Attracting foreign investment.

h) Foreign exchange earnings

i) Technology transfers.

SALIENT FEATURES:

A designated duty free enclave and to be treated as foreign territory for trade
operations and duties and tariffs
No license required for import
Manufacturing, trading or service activity allowed
SEZ unit to be positive net foreign exchange earner within three years
Performance of the units to be monitored by a Committee headed by Development
Commissioner and consisting of Customs
No fixed wastage norms
Full freedom for subcontracting including subcontracting abroad
Duty free goods to be utilized in 5 years
Job work on behalf of domestic exporters for direct exports allowed
Contract farming allowed agriculture/ horticulture units
 No routine examination by Customs of export & import cargo
No separate documentation required for Customs and Exim Policy
In house customs Clearance
Support service like banking, post office, clearing agents etc. provided in Zone
Complex

5. SPECIAL ECONOMIC ZONES IN INDIA

The SEZ policy framework is the most visionary, ambitious and far-reaching initiative of the
Government of India (GOI) so far designed to transform fundamentally the 'Foreign Direct
Investment (FDI) Landscape' for all times to come. It is designed to provide complete
business freedom to large multinational companies, which are seeking to globalize their
production bases.

The central and distinctive anchors of the SEZ policy framework in India cover the following
themes:

100% tax break/holiday for ten years up to 2010 (in other countries, tax reliefs are
regulated).
Unrestricted access to domestic markets (with payment of applicable duties/taxes).
The permissible economic activity in SEZ is vast and it covers trading, servicing,
reconditioning, labelling, repacking etc
100% foreign ownership automatically cleared in the manufacturing sector. The
Chinese SEZs for long have insisted on the joint venture with local partners.
100% foreign investment automatically cleared in the manufacturing sector.

CHARACTERISTICS OF INDIAN SEZ:

There are certain distinct characteristics of the Indian SEZ model, which have been illustrated
below.

1. International experiences show that Govt. have largely developed special economic zones
and have invested the necessary funds to create zone infrastructure. As an extension,
Government has also had taken the principal responsibility for marketing these zones
internationally. Unlike this the primary thrust of the Indian SEZ model is to facilitate 'private
sector led' SEZ's. This has opened up possibilities for developing SEZ's in the private sector
and joint sector.

2. Keeping in view learning from other countries, the Indian SEZ model also envisages a
minimum size of 1000 ha for all green-field SEZ's. As highlighted earlier, a minimum critical
mass or size is necessary to give rise to the desired economic multiplier. The combined
utilized area under all EPZs and FTZs in India is 2100 acres i.e. less than 1000 hectares, the
minimum size stipulated for green field SEZ. The simultaneous conversion of existing EPZS
I FTZs into SEZs provides an opportunity to test and fine tune the SEZ policy before being
finally applied to green field SEZs.

3. Experience of comparable countries shows that decisions such as location selection,

number of SEZ's be promoted and the focus for investment attraction have largely been
influenced by national govt. In the Indian SEZ model, states are being encouraged to take
these choices while the central govt. is largely focusing on policy-making and facilitation.
This has resulted in a number of proposals from states for developing SEZs. Since much of
the funding for SEZ's is envisaged through private sector/banks, soundness of the business
model, competitive differentiation and market forces would be the key determines of bank
ability of these projects.

6. INCENTIVE/ FACILITIES TO SEZ DEVELOPER

1. Developer of SEZ may import / procure goods without payment of duty for the
development, operation and maintenance of SEZ.

2. Income tax exemption for a block of any 10 years in 15 years at the option of developer.

3. Income Tax exemption also extended to Investor's in SEZs u/s 10 (23) G of IT Act

4. Exemption from Service Tax

5. 100% FDI permitted to develop township within the SEZ with residential areas, markets,
playgrounds, clubs, recreation centres etc.

6. Generation, Transmission and Distribution of Power in SEZs allowed.

7. Full freedom in allocation of developed plots to approved SEZ units on purely

8. Commercial basis and complete authority to provide services like water, electricity,
security, restaurants, recreation centres etc. on commercial lines.

9. Develop Standard Design Factory (SDF) building in exiting Special Economic Zones.

10. Infrastructure facility permitted to be transferred for operations & management (O&M)
along with income-tax exemptions u/s 80-I-A of IT Act.
 7. ADVANTAGES & DISADVANTAGES TO SEZ UNITS

SEZ has the following facilities and incentives: 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.

Regulatory Advantage:

100% FDI allowed through automatic approval

No sectoral restrictions

Sales to hinterland of India (DTA) permitted with incentives on achieving Positive Net

Foreign Exchange (NFE)

Sub-contracting allowed to units in DTA

All SEZ activities on self certification basis

100% FDI permitted in real estate within SEZ

Public Utility status to in-zone units thus preventing flash-strikes by workers

Thrust on one-stop clearance and single-point interface for all matters relating to SEZ with
powers of various government departments delegated to DC

Access to cheaper global capital through International Financial Services Center / Offshore
Banking Units in SEZ

Fiscal advantage:

ESZ units may import or procure from the domestic sources, duty free, all their
requirements of capital goods, raw materials, consumables, spares, packing materials, office
equipment, DG sets etc. for implementation of their project in the Zone without any license
or specific approval.

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

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

Domestic sales by SEZ units will now be exempt from SAD.

Domestic sale of finished products, by-products on payment of applicable Custom duty.

Domestic sale rejects and waste and scrap on payment of applicable Custom duty on the
transaction value.
Income / service / normal sales Tax:

Physical export benefit

100% IT exemption (10A) for first 5 years and 50% for 2 years thereafter.

Reinvestment allowance to the extend of 50% of ploughed back profits

Carry forward of losses

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

Exemption from Service Tax to SEZ units.

Banking/Insurance/External Commercial Borrowing:

Setting up Off-shore Banking Units allowed in SEZs. OBUs allowed 100% Income Tax
exemption on profit for 3 years and 50 % for next two years.

External commercial borrowings by units up to $ 500 million a year allowed without any
maturity restrictions.

Freedom to bring in export proceeds without any time limit

Flexibility to keep 100% of export proceeds in EEFC account. Freedom to make overseas
investment from it.

Commodity hedging permitted.

Exemption from interest rate surcharge on import finance.

SEZ units allowed to write-off unrealized export bills.

DISADVANTAGES:

Revenue losses because of the various tax exemptions and incentives.

Many traders are interested in SEZ, 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 to expectations.
 8. CHALLENGES & OPPORTUNITIES IN SEZs DEVELOPMENT:

CHALLENGES:

1. SEZ projects manifested with multidimensional project risks

Inadequate Social and Economic Analysis

Availability of Land

Location- Insistence near a Port

Rehabilitation of the Displaced

Infrastructure constraints- External & Internal

Cluster Vs Isolated

Financial Challenges- Fungibility, Revenue Forecasting

Multi-disciplinary policies and multiple authorities

Human Resources

2. Economic cycles may impact the occupancy of the zone and consequently its viability

Holding on to un-leased lands

Impacts of the Global Economy- Manufacturing & Services

3. Inadequate experience of developers to successfully manage and execute all aspects

of setting up an SEZ

Zeal for Non Processing area development- Epitome of real Estate Development.

Industrial Development is a different ball game.

Getting carried away by the boom in Services Sector

OPPORTUNITIES:

1. Huge Investments including FDI

2. High Employment Potential- Skilled & Un-skilled

3. Regional Social & Economic Development

4. Technology Transfer

5. Adoption of Global Best Practices

6. Improvements and additions to Infrastructure

7. Increasing Competitiveness

8. Fresh Boom in Manufacturing and Engineering

9. Development of Globally Competitive Human Resources

10. Reduce Income Inequalities and Disparities

9. PROBLEMS OF SEZ

The rationale for SEZs is supposed to be that there are huge infrastructure and institutional
problems with India, so in order to win on exports growth, the way out is to create enclaves
with good infrastructure (particularly urban infrastructure) and generous tax treatment. The
government seems to be ready with generous tax concessions, but no relaxations to labour
law are proposed.

Does it make sense to undertake distortionary policies which artificially prop up exports, e.g.
by tools such as export subsidies, tax breaks, or manipulation of exchange rates? Economic
growth is accentuated by openness, not by faking exports. So I am not enthusiastic about
doing SEZs "in order to boost exports". We need a sound, well-run country, which will (by
the way) import a lot and export a lot.

What about the fiscal implications? The generous tax treatment of SEZs constitutes a threat
to the high tax buoyancies that we have been seeing. If a lot of SEZs come up, and if they
succeed, we could see two possibilities. On one hand, existing output could relocate from
the taxed zone to the untaxed zone.