Special Economic Zones (SEZs)

India was one of the first countries in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports. Asia's first EPZ was set up in Kandla in 1965. With a view to attract larger foreign investment in India, the Special Economic Zones (SEZs) Policy was announced in April 2000. This policy was intended to make SEZs an engine for economic growth supported by quality infrastructure and by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations. The functioning of the SEZs in India is guided by the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes.

To instill confidence in investors and to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill was prepared in consultation with the stakeholders. The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 and received Presidential assent on the 23rd of June, 2005. After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to Central as well as State Governments. The main objectives of the SEZ Act are:

• generation of additional economic activity;
• promotion of exports of goods and services;
• promotion of investment from domestic and foreign sources;
• creation of employment opportunities; and
• development of infrastructure facilities

Hardware Manufacturing Facility, Mahindra World City inTamil Nadu

The SEZ Act, 2005 envisages key role for the State Governments in export promotion and creation of related infrastructure. A single window SEZ approval mechanism has been provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administrations are considered by the BoA periodically. All decisions are taken with consensus

The Act is expected to trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities.

The salient features/provisions of the SEZ Rules are given below:

• Different minimum land requirement for different class of SEZs;
• Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created;
• Simplified procedures for development, operation and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs;
• Single window clearance for setting up of an SEZ;
• Single window clearance for setting up a unit in a Special Economic Zones;
• Single window clearance for matters relating to Central as well as State Governments;
• Simplified compliance procedures and documentation with an emphasis on self certification.

Based on consultations and suggestions received, certain amendments to the Rules were notified on 10th August 2006. Subsequently, a list of authorized operations for which exemptions would be available, for use by the Board of Approval while approving authorized operations to be undertaken by SEZs, were also notified on 27th October 2006.

Nokia SEZ Complex in Tamil Naidu

With a view to attract larger investments including FDI, a number of tax and other fiscal incentives have been offered to units in the SEZs

Box 6.1 : Fiscal Incentives for SEZ Units

• Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
• 100 per cent Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50 per cent for next 5 years thereafter and 50 per cent of the ploughed back export profit for next 5 years.
• Exemption from Minimum Alternate Tax under section 115JB of the Income Tax Act.
• External commercial borrowing by SEZ units up to US $ 500 million a year without any maturity restriction through recognized banking channels.
• Exemption from Central Sales Tax, Service Tax, State Sales Tax and other levies as extended by the respective State Governments.

Besides the incentives provided to SEZ Units, with a view to attract private sector investments in infrastructure development, a number of fiscal incentives in the form of tax exemptions are available to SEZ developers also. The major tax exemptions available to SEZ developers are given in the Box below:

SEZ Approval Status

Consequent upon the SEZ Rules coming into force w.e.f. 10th February, 2006, nine meetings of the Board of Approvals have been held. As of present, there are 234 valid formal approvals and 162 in-principle approvals. Out of the 234 formal approvals, notifications have already been issued in respect of 63 SEZs.

The fact that these 234 formal approvals given for setting up SEZs are spread over 19 States/UTs show that these are not concentrated in any particular region, but all over the country. The total land area in the 234 formally approved SEZs is about 33800 hectares, out of which 17800 hectares approximately are for the 60 approvals given for State Industrial Developmen

Corporations/State Government Ventures. In all these cases, either the land was already available with the State Governments or SIDCs or was in possession of the private companies setting up the SEZs.

Region-wise and Sector-wise SEZ Approvals

The Region-wise and Sector-wise SEZ approvals are shown in the following graphs:

Box 6.2 : Tax Exemptions to SEZ Developers

• Exemption from Customs/Excise duties for development of SEZs for authorized operations approved by the Board of Approval.
• l Income Tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.
• l Exemption from Minimum Alternate Tax under Section 115 JB of the Income Tax Act.
• l Exemption from Dividend Distribution Tax under Section 115 O of the Income Tax Act.
• l Exemption from Central Sales Tax (CST) and Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Benefits derived from SEZs

The benefits derived from multiplier effect of the investments, additional economic activity in the SEZs and the employment generated thereof are estimated to far outweigh the tax exemptions and the losses on account of land acquisition. Stability in fiscal concessions is absolutely essential to ensure credibility of the Government intentions. Benefits derived from the SEZs are evident from the investment, employment, exports and infrastructural developments additionally generated/expected to be generated. The benefits expected to be generated include:

• Investment of the order of Rs.100,000 crore including FDI of US $ 5-6 billion by the end of December 2007, and
• 500,000 direct jobs by December 2007.

At present, 1016 units are in operation in the SEZs, providing direct employment to over 1.79 lakh persons; about 40 per cent of whom are women. Private investment by entrepreneurs in the SEZs established prior to the SEZ Act is of the order of over Rs. 4400 crore. In the 63 notified SEZs which have come up after 10th February 2006, investment of Rs. 13,435 crore has already been made in less than one year. These SEZs have so far provided direct employment to 18,457 persons

Apparel Manufacturing Facility, Mahindra World City inTamil Nadu

Export Performance

The exports from the existing SEZs during the last three years are as under:

Exports from SEZs

Impact of the Scheme

The SEZ Scheme has generated tremendous response amongst the investors, both in India and abroad. This is evident from the fact that several prominent private sector developers have come forward for establishing SEZs. Some such prominent SEZs which have recently come up are:

• Nokia SEZ in Tamil Nadu
• l Quark City SEZ in Chandigarh
• Flextronics SEZ in Tamil Nadu
• Mahindra World City SEZ, Tamil Nadu
• Motorola, DELL and FoxConn
• Apache SEZ (Adidas Group) in Andhra Pradesh
• Divvy's Laboratories, Andhra Pradesh
• Rajiv Gandhi Technology Park, Chandigarh
• ETL Infrastructure IT SEZ, Chennai
• Hyderabad Gems Limited, Hyderabad

Expected investment and employment from SEZs by 2009

With the 63 notified Special Economic Zones, it is expected that total investment of overRs. 50,000 crore and 15 lakh additional jobs will be created by December 2009. If the 234 formal approvals become operational, it is expected that total investment of Rs. 3,00,000 crore and 4 million additional jobs will be created by December 2009.

Export Oriented Units (EOUs)

The Export Oriented Units (EOUs) Scheme is complementary to the SEZ scheme which was introduced in early 1981. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. 2037 units were in operation under the EOU scheme as on 31st March, 2006.

Export Performance

The Export Oriented Units (EOUs) scheme, introduced in early 1981, is complementary to the SEZ scheme. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. As on 31st December 2006, 2168 units are in operation under the EOU scheme.

Exports during 2005-06 from EOUs were of the order of Rs.47425.87 crore as compared to the export of Rs.37488.38 crore during 2004-05 registering a growth of 26.51 per cent.

Export Performance of EOUs

(Rs crore)

EOUs are mainly concentrated in textiles and yarn, food processing, electronics, chemicals, plastics, granites and minerals/ores

Box 6.3 : Recent Policy Changes in the EOUs Scheme (w.e.f. 7th April, 2006)

• Procurement and export of spares/components up to one and half percent of the FOB value of exports will be allowed to the same consignee/buyer of the export article within the warranty period. The exports of such spares/components could be effected separately from the capital goods.
• In order to facilitate the smooth functioning of the EOU units, the Development Commissioners will fix time limits for finalizing the disposal of matters relating to EOUs.
• New units engaged in export of Agriculture/Horticulture/Aqua-Culture products have been now allowed to remove capital goods inputs to the DTA farm on producing bank guarantee equivalent to the duty foregone on the capital goods/input proposed to be taken out.
• The EOU units in Textile Sector are allowed to dispose off the left over material/fabrics up to 2 per cent of Cost Insurance Freight (CIF) value of imports, on consignment basis. Recognizing that settling the accounts for every consignment is complex and time consuming it has been decided to allow disposal of left over material on the basis of previous year's imports.