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SEZ_s

SEZ_s

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Published by api-3727090
sez in india document ...2007 2006
sez in india document ...2007 2006

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Published by: api-3727090 on Oct 15, 2008
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05/09/2014

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Introduction

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone
(EPZ) model in promoting exports, with Asia\u2019s first EPZ set up in Kandla in 1965. With a view
to overcome the shortcomings experienced on account of the multiplicity of controls and
clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view
to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was
announced in April 2000.

This policy intended to make SEZs an engine for economic growth supported by quality
infrastructure complemented by an attractive fiscal package, both at the Centre and the State
level, with the minimum possible regulations. SEZs in India functioned from 1.11.2000 to
09.02.2006 under 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 signal the Government\u2019s commitment to a stable SEZ
policy regime and with a view to impart stability to the SEZ regime thereby generating greater
economic activity and employment through the establishment of SEZs, a comprehensive draft
SEZ Bill prepared after extensive discussions with the stakeholders. A number of meetings were
held in various parts of the country both by the Minister for Commerce and Industry as well as
senior officials for this purpose. The Special Economic Zones Act, 2005, was passed by
Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005. The draft
SEZ Rules were widely discussed and put on the website of the Department of Commerce
offering suggestions/comments. Around 800 suggestions were received on the draft rules. 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:

(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;

It is expected that this will 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 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 Administration are considered by
this BoA periodically. All decisions of the Board of approvals are with consensus.

The SEZ Rules provide for 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.

The SEZ Rules provide for:
\u2022
Simplified procedures for development, operation, and maintenance of the Special
Economic Zones and for setting up units and conducting business in SEZs;
\u2022
Single window clearance for setting up of an SEZ;
\u2022
Single window clearance for setting up a unit in a Special Economic Zone;
\u2022
Single Window clearance on matters relating to Central as well as State Governments;
\u2022
Simplified compliance procedures and documentation with an emphasis on self
certification.

The term SEZ has acquired a multi-headed persona in a very short time. It has ignited passions
across the country. There are people who are either against SEZs or with SEZs. Very few, mostly
the unaffected and the uninformed, have no opinion about the matter. But, otherwise, it has
people sharply divided across regions, professions, languages and political affiliations.

But the time has probably come to redefine the popular meaning of an SEZ. Over time, the term
has come to denote a special, designated area that\u2019s exempt from the local tax regime and some
economic laws, for attracting foreign investment. SEZs included other designated areas as well,
such as free trade zones or even export processing zones. For instance, the Indian government
has converted some of the existing EPZs in the country into SEZs \u2013 such as Falta in West
Bengal, Kandla ands Surat in Gujarat, Santa Cruz in Mumbai, Cochin in Kerala. SEZs are
typically owned by the government, or by the private sector or can even be in the joint sector.

Indian policymakers' ongoing fascination with special economic zones was inspired by China's roaring success with these enclaves of galvanised production. New Delhi has sanctioned close to 200 SEZs. Guess how many SEZs China has since kicking off the policy in 1979? Exactly six: Shenzhen, Zhuhai, Shantou, Xiamen, Hainan and Pudong.

Is India getting something wrong in its SEZ policy, or should we merely conclude that India will
soon be 33 times as successful as China?

China\u2019s success in attracting oodles of foreign direct investment and becoming one of the top exporting countries of the world hinged on the careful implementation of its SEZ policy. More than two decades later, India, too, is trying to tread on the same ground.

There are, however, certain fundamental differences in the Indian and Chinese approaches to
SEZs, which make it difficult to say for sure that Indian SEZs will be able to recreate the Chinese
magic. Size, location, flexible labour laws and stable policies are the factors primarily
responsible for making Chinese SEZs attractive to foreign investors.

In India, it is the fiscal sops being offered to developers and units which are the primary driving
force. The Chinese government started building SEZs way back in 1979. The idea behind the
SEZs was to experiment with liberal policies in certain ear-marked regions while insulating the
rest of the economy from their influence. The government identified huge tracts of land, near the
coastal region, and started building mega cities with all required infrastructure.

Stringent labour laws applicable in China were relaxed in the regions and foreign investors were wooed with sops and the promise of stability. Though India had a head-start in the direction by building its first export processing zone in 1969 with certain minimum infrastructure and fiscal sops (seven more followed later), it could not muster enough political will to build full-fledged SEZs with foreign territory status in the matters of international trade till the turn of the century.

In \u201900, former trade minister late Murasoli Maran announced that India should try to replicate the
Chinese success story in SEZs and announced an SEZ policy. However, when five years later the
SEZ Act was passed by Parliament and rules were framed, what India had was a policy very
different from China\u2019s.

As opposed to five mega SEZs built by the Chinese government (the largest being Shenzhen
built over 49,500 hectares), India opened its doors to private players and allowed sector-specific
SEZs to develop on just 10 hectares of land. As a result, India has as many as 28 operational
SEZs with about 200 more having received approvals. The economies of scale, which seems to
have worked so well in China by reducing production costs, may not have the same effect in
Indian SEZs.

In China, the government chose the location for SEZs with a lot of thought with all five located
near the coastal region. This makes it easier for SEZ units to export their products and import
inputs. In India, SEZs are being built all over the country, wherever land can be acquired by
developers. This has also led to allegations of land-grabbing and conversion of productive
agricultural land by developers. This had led the Centre to make it mandatory that all proposals
should have a certificate from the state government notifying that the land being used is non-
agricultural for at least 90%.

Flexibility in labour laws, which played an important role in attracting foreign investors, is
absent in Indian SEZs. This is one of the prices India is having to pay for the advantages of a
federal democratic government.

India has, however, tried to make up for all the disadvantages by offering attractive fiscal sops.
Tax holidays for SEZs in India are longer and steeper than those given by China. This had given
rise to some dissent from the finance ministry which had complained that the fiscal loss would be
immense.

However, the commerce ministry\u2019s argument that the gains would be larger than the losses had
prevailed. One has to now wait and see whether the interest shown by Indian companies in
Indian SEZs translates into more jobs, exports and revenue for the country. While some foreign
investment is also flowing in, it is not clear yet whether SEZs will be able to attract large-scale
FDI as in China. It is too early for anyone to pass a judgement on Indian SEZs. One can only

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