OBJECTIVES OF SEZ

To instill confidence in investors and signal the Government's 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. The Minister held a number of meetings in various parts of the country both 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). This BoA considers the applications duly recommended by the respective State Governments/UT Administration periodically. All decisions of the Board of approvals are with consensus.
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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:  "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 Zone;  Single Window clearance on matters relating to Central as well as State Governments;  Simplified compliance procedures and documentation with an emphasis on self-certification.

Special Economic Zones Establishment Procedure
A SEZ unit can be set up anywhere in India after fulfilling the following requirements.

Step-by-Step Procedure
 According to SEZ Act 2005, a Special Economic Zone can be established either jointly or severally by the Central Government, State Government, or any other person involve in the manufacturing of goods. Even a foreign company can also set up SEZ in India.

 After identifying the proper area a person wishing to establish a SEZ unit may make a proposal to the State Government.
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 Notwithstanding anything contained in sub-section (2), any person, who intends to set up a Special Economic Zone, may, after identifying the area, at his option, make a proposal directly to the Board for the purpose of setting up the Special Economic Zone:

 In case, a State Government intends to set up a Special Economic Zone, it may after choosing the area, forward the proposal directly to the Board of Approval for the purpose of setting up the Special Economic Zone:

 Every proposal under sub-sections (2) to (4) shall be made in such form and manner containing such particulars as may be prescribed.

 The State Government may, on receipt of the proposal made under sub-section (2), forward the same together with its recommendations to the Board within a fix period as may be prescribed.

 Without prejudice to the provisions contained in subsection (8), the Board may, after receipt of the proposal under sub-section (2) to (4), approve the proposal subject to such terms and conditions as it may deem fit to impose, or modify or reject the proposal.

 The Central Government may prescribe the following requirement for establishment of a Special Economic Zone, namely: The minimum area of land and other terms and conditions subject to which the Board shall approve, modify or reject any proposal received by it under sub-section (2) to (4) ; and

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 The terms and conditions, subject to which the Developer shall undertake the authorized operations and his obligations and entitlements. Provided that different minimum are of land and other terms and conditions referred to in clause (a) may be prescribed by the Central Government for a class or classes of Special Economic Zones.

If the Board, -

 Approves without any modification, the proposal received under subsection (2) to (4), it shall communicate the same to the Central Government;  Approves with modifications the proposal received under sub-section (2) to (4), it shall, communicate such modifications to the person or the State Government concerned and if such modifications have been accepted by such person or the State Government, the Board shall communicate the approval to the Central Government;  Rejects the proposal, received under sub-section (2) to (4), it shall record the reasons therefore and communicate the rejection to the Central Government, which shall intimate to the State Government or the person concerned.  The Central Government shall, on receipt of communication under clause (a) or clause (b) of sub-section (9), grant, within such time as may be prescribed, a letter of approval on such terms and conditions and obligations and entitlements as may be approved by the Board, to the Developer, being the person or the State Government concerned: Provided that the Central Government may, on the basis of approval of the Board, approve more than one Developer in a Special Economic Zone in cases where one Developer does not have in his possession the minimum area of contiguous land, as may be prescribed, for setting up a Special Economic Zone and in such cases, each Developer shall be considered as a Developer in respect of the land in his possession.

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 Any person who, or a State Government which, intends to provide any infrastructure facilities in the identified area referred to in sub-section (2) to (4), or undertake any authorized operation may, after entering into an agreement with the Developer referred to in sub-section (10), make a proposal for the same to the Board for its approval and the provisions of sub-section (5) and sub-sections (7) to (10) shall, as far as may be, apply to the said proposal made by such person or State Government.

 Every person or a State Government referred to in subsection (11), whose proposal the Board and who have approved, or which, has been granted letter of approval by the Central Government, shall be considered as a Co-Developer of the Special Economic Zone.

 Subject to the provisions of this section and the letter of approval granted to a Developer, the Developer may allocate space or built up area or provide infrastructure services to the approved units in accordance with the agreement entered into by him with the entrepreneurs of such Units.

Documents Submission
Following necessary document are required before making the final proposal for the SEZ units 15 copies of the application shall be submitted to the Chief Secretary of the State, which shall indicate:

Name and address of the applicant

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 Status of the promoter (whether private/public or joint sector/ NRIs or state government)

Project report

The documents for establishment of SEZ shall be submitted with the following details:  Location of the proposed Zone with details of existing infrastructure and that proposed to be established,

 Area of the proposed SEZ and its distance from the nearest Sea Port/Airport/Rail/Road head etc.

 Financial details and mode of financing the project and viability of the project.

Details of foreign equity, if any

 Whether the zone will allow only certain specific industries or will be a multi-product zone.

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State Government Approval

The State Government shall, forward it along with their commitment to the following to the Department of Commerce, Government of India:  That the area proposed under Special Economic Zone shall be free from any environmental restrictions;

Water, electricity and other services would be provided as required;

 Full exemption shall be given in electricity duty and tax on sale of electricity for self generated and purchased power;

 Exemption from State Sales Tax, octroi, mandi tax, turnover tax and taxes, duty, Cess, levies on supply of goods from Domestic Tariff Area to SEZ units;

 That single point clearances system and minimum inspections requirement under State Laws/Rules would be provided.

 Generation, transmission and distribution of power shall be allowed within the SEZ;

 The Zone will be declared as a Public Utility Service under the Industrial Disputes Act;

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 All powers under Industrial Dispute Act, 1947 shall be delegated to Development Commissioner.  Section 11(1) of Special Economic Zones Act, 2005 provides that "the Central Government may appoint any of its officers not below the rank of Deputy Secretary to the Government of India as the Development Commissioner of one or more Special Economic Zones" Government of India after considering the above proposals may grant inprinciple approval for setting up of SEZs. The in-principle approval shall be valid for a period of one year. However, this validity period may be extended by the Department of Commerce, as it may thinks fit. According to Section 3(7) of Special economic Zones Act, 2005, the Board of Approval may accept, modify or reject the proposal depending upon various circumstances. In case of acceptance, approval is valid for a period of 3 years within which time effective steps shall be taken by the developer to implement the project. Although, this time period can be extended the Department of Commerce depending upon various circumstances.

Brief view on approval mechanism
The Board of Approval has been constituted by the Central Government in exercise of the powers conferred under the SEZ Act. All the decisions are taken in the Board of Approval by consensus. The Board of Approval has 19 Members. Its constitution is as follows: (1) (2) (3) (4) Secretary, Department of Commerce Member, CBEC Member, IT, CBDT Joint Secretary (Banking Division), Department of Economic Affairs, Ministry of Finance Joint Secretary (SEZ), Department of Commerce Joint Secretary, DIPP Chairman Member Member

(5) (6)

Member Member

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(7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18)

(19)

Joint Secretary, Ministry of Science and Technology Joint Secretary, Ministry of Small Scale Industries and Agro and Rural Industries Joint Secretary, Ministry of Home Affairs Joint Secretary, Ministry of Defence Joint Secretary, Ministry of Environment and Forests Joint Secretary, Ministry of Law and Justice Joint Secretary, Ministry of Overseas Indian Affairs Joint Secretary, Ministry of Urban Development A nominee of the State Government concerned Director General of Foreign Trade or his nominee Development Commissioner concerned A professor in the Indian Institute of Management or the Indian Institute of Foreign Trade Director or Deputy Sectary, Ministry of Commerce and Industry, Department of Commerce

Member Member Member Member Member Member Member Member Member Member Member Member

Member Secretary

Role of State Government in Establishment of SEZ Units
State Governments play a very active role to play in the establishment of SEZ unit. Any proposal for setting up of SEZ unit in the Private / Joint / State Sector is routed through the concerned State government who in turn forwards the same to the Department of Commerce with its recommendations for consideration. Before recommending any proposals to the Ministry of Commerce & Industry (Department of Commerce), the States Government properly checks all the necessary inputs such as water,
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electricity, etc required for the establishment of SEZ units. The State Government has to forward the proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval. Representative of the State Government, who is a member of the Inter-Ministerial Committee on private SEZ, is also consulted while considering the proposal.

Administrative set up
The functioning of the SEZs is governed by a three tier administrative set up. The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce. The Approval Committee at the Zone level deals with approval of units in the SEZs and other related issues. A Development Commissioner, who is ex-officio chairperson of the Approval Committee, heads each Zone. The Board of Approval has approved once an SEZ and Central Government has notified the area of the SEZ, units are allowed to be set up in the SEZ. The Approval Committee consisting of Development Commissioner, Customs Authorities and representatives of State Government approves all the proposals for setting up of units in the SEZ at the Zone level. All post approval clearances including grant of importerexporter code number, change in the name of the company or implementing agency, broad banding diversification, etc. are given at the Zone level by the Development Commissioner. The Approval Committee periodically monitors the performances of the SEZ units and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of violation of the conditions of the approval.

Incentives and facilities offered to the SEZs

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Considering the need to enhance foreign investment and promote exports from the country, the Government of India has introduced various types of special incentives and benefits to SEZ units, which are as follows-

Customs and Excise
 SEZ Units are free to import from the domestic sources without paying any duty on capital goods, raw materials, consumables, spare, packing materials, office equipment, DG sets, etc. for implementation of their project in the zone without any license or specific approval. Good which are imported duty free could be utilized over the approval period of 5 years.

 Sales to DTA (Domestic Tariff Area) by SEZ units is always regarded as import and is subject to all normal import duties, including Countervailing Duty, SAD, etc.

 SEZ Units are free from the periodic examination by Customs of export and import cargo.

 SEZ units may sub-contract a part of their production through units in DTA/SEZ/EOU/EPZ with the permission of the customs authorities. Subcontracting may also be permitted for processing abroad with the permission of the board of approval.

Income Tax Part-1 Income Tax incentives for SEZ units
 Tax exemption for SEZ units engaged in manufacture or providing services- A new section 10AA has been introduced in the IT Act by SEZ Act, 2005 which provides that the units in SEZ which start manufacturing or producing articles/ things or which start providing services on or after
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April 1, 2005 will be eligible for a deduction of 100 percent of export profits for the first five years from the year in which such manufacture/ provision of services commences and 50 percent of the export profits for the next five years. Further, for the next five years a deduction shall be allowed of up to 50 percent of the profit as is debited to the profit and loss account and credited to the Special Economic Zone Reinvestment Reserve Account (subject to conditions).

 Tax exemption for Offshore Banking units in SEZ- A deduction in respect of certain incomes would be allowed under the new section 80LA, to scheduled banks or foreign banks having an Offshore Banking unit in SEZ or to a unit of IFSC. The deduction shall be for 100 percent of income for five consecutive years beginning from the year in which permission/ registration has been obtained under the Banking Regulation Act or the SEBI Act or any other relevant law and 50 percent of income for next five years.

 Interest received by non-residents and not ordinary residents on deposits made with an Offshore Banking Unit on or after April 1, 2005 shall be exempt from tax.

 Exemption from Minimum Alternate Tax ("MAT")- Income arising or accruing on or after April 1, 2005 from any business carried on, or services rendered by SEZ unit would be exempt from MAT under section 115JB.

 Exemption from Capital Gains- Capital gains arising on transfer of assets (machinery, plant, building, land or any rights in buildings or land) on shifting of the industrial undertaking from an urban area to any SEZ would be exempt from capital gains tax. The exemption would be allowable if within one year before or three years after such transfer:

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 Machinery or plant is purchased for the purposes of business of industrial undertaking in SEZ by the assessee.

 Assessee has acquired land or building or has constructed building for the purposes of business in SEZ.

 The original assets are shifted and establishment of the industrial undertaking is transferred to SEZ; and other specified expenses are incurred.

 The amount of exemption for capital gains would be restricted to the costs and expenses incurred in relation to all or any of the purposes mentioned above.

Part-2 Income Tax incentives for SEZ Developer

 Tax holiday for SEZ developers- A new section 80-IAB has been introduced in the IT Act vide SEZ Act, 2005 whereby a deduction of 100 percent of profits derived from the business of developing SEZ (notified on or after April 1, 2005) would be available to developer of SEZ for any 10 consecutive years out of 15 years beginning from the year in which SEZ has been notified.

 Exemption under section 10(23G) that was available to infrastructure capital fund or a cooperative bank on interest and long term capital gains investment had been extended to investment made by SEZ developers
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qualifying for tax holiday under section 80-IAB of the IT Act. However, this exemption has been withdrawn with effect from assessment year 200708.

 Exemption from Dividend Distribution Tax ("DDT")- No DDT would be payable by a developer of SEZ on dividend declared, distributed or paid on or after April 1, 2005 out of current income.

 Exemption from MAT- Any income earned on or after April 1, 2005 by a SEZ developer would be exempt from MAT under section 115JB of the Act. from Domestic Tariff Area (DTA) to SEZ.

Foreign Direct Investments
 100% FDI is freely allowed in manufacturing sector in SEZ units under automatic route, except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes.

No cap of foreign investments for SSI reserved items.

Off-Shore Banking Units (OBUs)
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Setting up of OBUs allowed in SEZs.

 OBUS are entitled for 100% income tax exemption for 3 years and 50% for next 2 years.

Banking / External Commercial Borrowings (ECBs)
 ECBs by units up to US$ 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 and freedom to make overseas payment from such account.

Exemption from interest rate surcharge on import finance.

SEZ units allowed to write-off unrealized export bills.

Exemption from interest rate surcharge on import finance.

Service Tax
 Exemption from service tax to SEZ units.

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Sales to DTA

 DTA sales can be undertaken subject to achievement of positive NFE. Net Foreign Exchange (NFE) shall be calculated cumulatively for a period of 5 years from the commencement of commercial production.

 For the purpose of calculation, the value of imported capital goods shall be amortized as follows    1st – 2nd year: 5% each year. 3rd – 5th year: 10% each year. 6th – 8th year: 20% each year.

 Exemption from capital gains on transfer of an industrial unit from urban area to a SEZ.

 Drawback or such other benefit as may be admissible from time to time on goods and services admitted from the DTA for setting up, operation and maintenance of units.

 All exports from the DTA to the Zone shall be exempt from state and local body taxes or levies as (In some states, exports made to educational institutions, hospitals, hotels, residential and / or commercial complexes, leisure and entertainment facilities or any other facilities as may be notified by the state government are not exempt).

 Developers of SEZs may import or procure goods from DTA without payment of duty for development, operation or maintenance of SEZ.
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 Exemption from Central Sales Tax (CST) on supply of goods from the DTA for development, operation and maintenance of SEZs.

 Income tax exemption for a block of 10 years in the first 15 years of operation.

 Drawback or such other benefits as may be admissible from time to time on supply of goods from DTA for development, operation and maintenance of SEZs.

 Investment income in the form of dividends, interest or long term capital gains, of an infrastructure capital company from investments made in an enterprise engaged in the development, operation or maintenance of a SEZ are exempt from tax.

Foreign investment permitted.

 Service tax exemption on services provided to a developer or to a unit located in the SEZ region.

 Any activity or transaction in the Zone, which is liable for entertainment duty under the Bombay Entertainments Duty Act, 1923 and Luxury Tax under the Maharashtra Tax on Luxuries Act, 1987 shall not be liable to such tax The fiscal benefits shall be applicable for a period of 25 years from the date of notification of the zone by the Government of India or such extended period as may be decided by the State Government

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 With respect to each Special Economic Zone all such transactions between the Zones or within the Zone or both, including the transactions of land acquisition for development of the Zone between the developer or codeveloper and land owners and land transactions between the developers or co-developers and the units, carried out after declaration of the Zone by the Government of India, shall be exempt from the following State taxes, cess and levies namely:  Purchase tax, Sales tax and Turnover tax

Specified sales (Lease tax) in respect of lease of goods

 Stamp duty for the first transaction between the Developer or codeveloper and the land-owner and the first transaction between the Developer or co-developer and the Units

 Registration fee for the first transaction between the Developer or codeveloper and the land-owner and the first transaction between the Developer or co-developer and the Units

Land assessment tax

 Electricity duty and tax (Only for sales to Units in processing area)

Water pollution cess

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Works Contract tax

State government shall –

 Provide exemption from electricity duty or taxes on sale of self generated or purchased electric power for use in processing area of an SEZ.

 Allow generation, transmission, distribution of power within a SEZ subject to the provisions of the electricity act

Exemptions in Matters Related to Environment

 SEZs permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels and non-polluting service industries in the Coastal Regulation Zone area.

 SEZ units are exempted from public hearing under Environment Impact Assessment Notification.

Company Act

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 Enhanced limit of INR 2.4 crores per annum is allowed for managerial remuneration.

 Agreement to opening of Regional office of Registrar of Companies in SEZ.

 Exemption from requirement of domicile in India for 12 months prior to appointment as Director.

Drugs and Cosmetics

Exemption from port restriction under Drugs & Cosmetics Rules.

Sub-Contracting / Contract Farming.

 SEZ units may sub-contract part of production or production process through units in the Domestic Tariff Area or through other EOU / SEZ units.

 SEZ units may also sub-contract part of their production process abroad.
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Labour Laws
Normal Labour Laws are applicable to SEZs, which are enforced by the respective State Governments. However, State Governments have been requested to simplify the procedures / returns and for introduction of a single window clearance mechanism by delegating appropriate powers to Development Commissioners of SEZ.

SEZ Approval Status
Consequent upon the SEZ Rules coming into effect w.e.f. 10th February 2006, Twenty-eight meetings of the Board of Approvals have since been held. During these meetings, formal approval has been granted to 531 SEZ proposals. There are 143 valid in-principle approvals. Out of the 531 formal approvals, 260 SEZs have been notified.

Land requirements for approved Special Economic Zones:
The total land requirement for the formal approvals granted till date is approximately 67680 hectares out of which about 109 approvals are for State Industrial Development Corporations/State Government Ventures, which account for over 20853 hectares. In these cases, the land already available with the State Governments or SIDCs or with private companies has been utilized for setting up SEZ. The land for the 270 notified SEZs where operations have since commenced involved is approximately over 31405 hectares only. Out of the total land area of 2973190 sq km in India, total agricultural land is of the order of 1620388 sq km (54.5%). It is interesting to note that out of this total land area, the land in possession of the 270 SEZs notified amounts to approximately over 314 sq km only. The formal approvals granted also works out to only around 676 sq km.

SEZs- leading to the growth of labour intensive manufacturing industry:

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Out of the 531 formal approvals given till date, 174 approvals are for sector specific and multi product SEZs for manufacture of Textiles & Apparels, Leather Footwear, Automobile components, Engineering etc.. which would involve labour intensive manufacturing. SEZs are going to lead to creation of employment for large number of unemployed rural youth. Nokia and Flextronics electronics hardware SEZs in Sriperumbudur are already providing employment to 14577 and 1058 persons. Hyderabad Gems SEZ for Jewellery manufacturing in Hyderabad has already employed 2145 persons. Majority of who are from landless families, after providing training to them. They have a projected direct employment for about 2267 persons. Apache SEZ being set up in Andhra Pradesh will employ 20, 000 persons to manufacture 10,00,000 pairs of shoes every month. Current employment in Apache SEZ is 5536 persons. Brandix Apparels, a Sri Lankan FDI project would provide employment to 60,000 workers over a period of 3 years. Even in the services sector, 12.5 million sq meters space is expected in the IT/ITES SEZs, which as per the NASSCOM standards translates into 12.5 lacks jobs. It is, therefore, expected that establishment of SEZs would lead to fast growth of labour intensive manufacturing and services in the country.

Benefits derived from SEZs
Benefit derived from SEZs is evident from the investment, employment, exports and infrastructural developments additionally generated. The benefits derived from multiplier effect of the investments and additional economic activity in the SEZs and the employment generated thus will far outweigh the tax exemptions and the losses on account of land acquisition. Stability in fiscal concession is absolutely essential to ensure credibility of Government intensions.

Exports from the functioning SEZs during the last three years are as under:

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Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Value (Rs. Crore) 13,854 18,314 22 840 34,615 66,638

Growth Rate (over previous year) 39% 32% 25% 52% 92%

Investment and employment in the SEZs set up prior to the SEZ Act, 2005:

At present, 1943 units are in operation in the SEZs. In the SEZs established prior to the Act coming into force, there are 1143 units providing direct employment to over 1.97 lakh persons; about 37% of who are women. Private investment by entrepreneurs in these SEZs established prior to the SEZ Act is of the order of over Rs. 5626.24 Crore.

Investment and employment in the SEZs notified under the SEZ Act 2005:

Current investment and employment: 

Investment: Employment:

Rs. 83450crore 1,13,426 persons

Impact of the scheme
The overwhelming response to the SEZ scheme is evident from the flow of investment and creation of additional employment in the country. The SEZ scheme has generated tremendous response amongst the investors, both in

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India and abroad, which is evident from the list of Developers who have set up SEZs:           Nokia SEZ in Tamil Nadu Quark City SEZ in Chandigarh Flextronics SEZ in Tamil Nadu Mahindra World City in 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

Special Economic Zones Terms And Conditions.

Only units approved under SEZ scheme would be permitted to be located in SEZ.  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 labour laws as may be locally applicable.

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

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 The SEZ should have a minimum area of 1000 hectares 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.

 A detailed guideline on setting up of SEZ in the Private/Joint/State Sector is given in Appendix 14-II.N of Handbook of Procedures Volume I.

Key Issues
The SEZ Act deals primarily with the following matters:  Establishment of the SEZ and the various authorities constituted in this connection.

 Appointment of the Developer, Co-developers and approval for units to be located in the notified area.

 Exemptions, drawbacks and concessions including exemptions from customs duty (on goods brought into or exported from the SEZ), excise, service tax, securities transaction tax, sales tax and income tax.

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 Offshore Banking Unit & International Financial Services Centre. Setting up of offshore banking units / International Financial Services Centre in SEZs.

 Notified Offences & Civil Suits. A single enforcement agency/officer for certain notified offences as well as the designation of courts by the state governments for such offences committed in and for civil suits arising in SEZs.

Salient Features of the SEZ Act
Governance: An important feature of the Act is that it provides a comprehensive SEZ policy framework to satisfy the requirements of all principal stakeholders in an SEZ – the developer and operator, occupant enterprise, out zone supplier and residents. Earlier, the policy relating to the EPZs/ SEZs was contained in the Foreign Trade Policy while incentives and other facilities offered to the SEZ developer and units were implemented through various notifications and circulars issued by the concerned ministries/departments. This system did not give confidence to investors to commit substantial funds for development of infrastructure and for setting up units. Another major feature of the Act is that it claims to provide expeditious and single window clearance mechanisms. The responsibility for promoting and ensuring orderly development of SEZs is assigned to the board of approval. It is to be constituted by the central government. While the central government may suo motu set up a zone, proposals of the state governments and private developers are to be screened and approved by the board. At the zone level, approval committees are constituted to approve/reject/modify proposals for setting up SEZ units. In addition, the Development Commissioner (DC) and his/her office is

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responsible for exercising administrative control over a zone. The labour commissioner’s powers are also delegated to the DC. Finally, clause 23 requires that designated courts will be set up by the state governments to try all suits of a civil nature and notified offences committed in the SEZs. Affected parties may appeal to high courts against the orders of the designated courts. Incentives: The Act offers a highly attractive fiscal incentive package, which ensures  Exemption from custom duties, central excise duties, service tax, central sales taxes and securities transaction tax to both the developers and the units;  Tax holidays for 15 years (currently the units enjoy a seven year tax holiday), i e, 100 per cent tax exemption for 5 years, 50 per cent for the next five years, and 50 per cent of the ploughed back export profits for the next five years1; and

 100 per cent income tax exemption for 10 years in a block period of 15 years for SEZ developers.

Infrastructure: Provisions have been made for:

 The establishment of free trade and warehousing zones to create world-class trade-related infrastructure to facilitate import and export of goods aimed at making India a global trading hub.

 The setting up of offshore banking units and units in an international financial service Centre in SEZs.

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The public private participation in infrastructure development.

 The setting up of a “SEZ authority” in each central government SEZ for developing new infrastructure and strengthening the existing one.

 There has been a tremendous rush to set up SEZs since the Act came into effect in February 2006. The total number of approvals and inprinciple approvals across 21 states as on October 27, 2006, was 212 and 152, respectively. As on date, 34 SEZs out of these approvals have been notified. Table 1 shows the current status of the upcoming SEZs.

Advantages
 15 year corporate tax holiday on export profit – 100% for initial 5 years, 50% for the next 5 years and up to 50% for the balance 5 years equivalent to profits ploughed back for investment.

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 approval period of 5 years.

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

 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 provided that, the goods are meant for undertaking authorized operations.

Exemption from payment of Service Tax.

 The sale of goods or merchandise that is manufactured outside the SEZ (i.e, in DTA) 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.

 “Write-off” of unrealized export bills is permitted up to an annual limit of 5% of their average annual realization.

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 No routine examinations by Customs officials of export and import cargo.

Setting up Off-shore Banking Units (OBU) allowed in SEZs.

 OBUs allowed 100% income tax exemption on profit earned for three years and 50 % for next two years.

 Exemption from requirement of domicile in India for 12 months prior to appointment as Director.

 Since SEZ units are considered as ‘public utility services’, no strikes would be allowed in such companies without giving the employer 6 weeks prior notice in addition to the other conditions mentioned in the Industrial Disputes Act, 1947.

 The Government has exempted SEZ Units from the payment of stamp duty and registration fees on the lease/license of plots.

 External Commercial Borrowings up to $ 500 million a year allowed without any maturity restrictions.

 Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration.

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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 EOUs is not commensurate to the number of applications for setting up SEZs leading to a belief that this project may not match up to expectations.

SEZ Controversy
Land, especially agricultural land is a very sensitive issue in India. There are millions of people whose livelihood depends on agricultural land. But the introduction of SEZ in India has resulted in the dispossession of agricultural land and has affected the livelihood of farmer at large. In against of this, farmers first protested to safeguard their interests through litigation and court cases challenging the establishment of SEZs. But later on, the resistance against SEZ in India became massive when political parties also joined the farmers.

Jamnagar Incidence
In November 2006, farmers from the Jamnagar District in Gujarat moved the High Court of Gujarat and later to the Supreme Court in order to challenge the setting-up of a 10,000-acre (approx. 4,000-ha) SEZ by Reliance Infrastructure. They claimed that the acquisition of large tracts of
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agricultural land in the villages of the district not only violated the Land Acquisition Act of 1894, but was also in breach of the public interest. This led the Government to “consider” putting a ceiling on the maximum land area that can be acquired for multi-product zones and decide to “go slow” in approving SEZs.

Nandigram Violence

The Nandigram violence is another famous incidence related to SEZ controversy. Nandigram is a rural area in Purba Medinipur district of the Indian state of West Bengal. It is located about 70 km southwest of Kolkata, on the south bank of the Haldi River, opposite the industrial city of Haldia. In 2007 the West Bengal government decided to allow Salim Group to set up a chemical hub at Nandigram under the SEZ policy. Farmers of that village were against it. So, on the order of the Left Front government on 14 March 2007, more than 3,000 heavily armed police stormed the Nandigram area. The main objective was to remove the protestors in order to expropriate 10,000 acres of land for a Special Economic Zone (SEZ) to be developed by the Indonesian-based Salim Group. During this incidence, police shot dead at least 14 villagers and wounded 70 more including children and women. The above given examples show the controversies associated with SEZs. No doubts that these commercial hubs started with a lot of premature praise and have now became a bone of contention which is readily exploited by the political forces to the detriment of the peasants, who fear losing their means of livelihood.

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EXPORT PROJECTION FROM SPECIAL ECONOMIC ZONES FOR THE YEAR 2008-09: Central govt. SEZs
No . 1. 2. 3. 4. 5. 6. 7. Name of the SEZ Kandla Special Economic Zone SEEPZ Special Economic Zone Noida Special Economic Zone MEPZ Special Economic Zone Cochin Special Economic Zone Visakhapatnam SEZ Falta Special Economic Zone Total Projection of exports for 2008-09 (Rs crores) 2500 13498 20000 3000 2000 800 1100 42898

.

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State Govt./Private Special Economic Zones established prior to SEZ Act
N o. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10 . 11 . 12 . Name of the SEZ Indore Special Economic Zone Surat Special Economic Zone Surat Apparel Park SEZ Jaipur Special Economic Zone Jodhpur Special Economic Zone Mahindra Industrial Park (IT) SEZ Mahindra Industrial Park (Apparel) Mahindra Industrial Park (Auto) Moradabad Manikanchan Special Economic Zone Wipro Special Economic Zone Nokia Special Economic Zone Total projection Projection of exports from 2008-09 (Rs crores) 488.5 9500 4 350 40 2209.5 201.85 191.28 30 1700 400 15060.39 30175.52

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Total export projection from SEZs
Govt. SEZs SG/Private SEZs prior to SEZ Act, 2005 SEZs notified under SEZ Act 05 Total projection 42898 30175.52 52876.96 125950.48

Sector wise breakup of Physical Exports (2007-08) from Special Economic Zones in India
Govt. SEZs State Govt/Pvt SEZs prior to SEZ Act, 2005 SEZs notified under SEZ Act. Rs(in crores) Total

Biotech Computer/ Electronic software Electronics hardware Electronics Engineering Gems and Jewellery Chemicals & Pharmaceutic als Handicrafts Plastic and rubber Leather, footwear and

2663.38 1408.53 518.71 886.81 15979.98 1069.49

1046.24 6313.34 421.87 7025.935 20.33 30.33 302.69

159.45 275.64 3399.457 343 0.15 333.23

159.45 3985.26 11121.327 518.71 1651.68 23006.065 1423.05 30.33 657.66

354.97 190.79

46.23

237.02

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sports goods Ceramics Food and Agro Industry Nonconventional Energy Trading and service Textiles and garments Tobacco related products Misc. Total

24 645.58 126.01 14073.22 1135.69 9.5 314.66 39275.31 6793.75 101.16 8.98 103.23 22167.855 431.59 5194.517 79.76

24 645.58 126.01 20866.97 1316.61 18.48 849.48 66637.682

Sector wise breakup of Physical Exports (2006-07) from Special Economic Zones in India
Central Government State Govt/Pvt sector SEZs prior to SEZ Act, 2005 175.45 Total

Zones Textile and Garments Computer Software Electronics Electronic software Electronic hardware Engineering Gems and Jewellery Chemical and

Rs. in Crore Total 1132.5 507.22 0.13 1347.24 2070.38 1259.09 11741.81 989.46

1333.87 507.22

733.44 1775.962 130.08 4327.03 63.9

0.13 2090.07 3846.342 1389.17 16068.84 1106.29

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Pharmaceutic als Plastic and rubber Handicraft Leather and sports goods Ceramics Food and Agro Industry Misc. Tobacco Biotech Trading and service Total

179.37 168.47 22.78 573.08 4667 699.92 25358.45

213.85 6.49

393.22 6.49 168.47 22.78 573.08

34.89 3.17 1670.24 9134.502

4701.89 3.17 33.4 2370.16 34614.592

SEZs: Sector wise Distribution
Sectors Formal approvals Aviation/Aerospace IT/ITES/Electronic Hardware/Semiconductor Textiles/Apparel/Wool Pharma/chemicals Petrochemicals & petro. Multi-Product Building product/material Beach & mineral/metals Bio-tech Ceramic & glasses Engineering 20 22 4 23 1 3 26 1 23 10 14 13 2 0 53 2 0 1 1 9 10 14 1 12 1 341 In-principle approvals 2 11 181 Notified SEZs

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Multi-Services/Services Metallurgical Engineering Electronic prod/ind Auto and related Energy related Footwear/Leather Gems and Jewellery Power/alternate energy FTWZ Metal/Stain. Steel/Alum/Foundry Food Processing Non-Conventional Energy Plasting processing Handicrafts Agro Port-based multi-product Airport product Writing and printing paper mills GRAND TOTAL based multi-

16 1 3 3

11

5

4 5

3 1

7 10 4 7 8 4 4

2 4 1 8 4 2

4 3 2 1 3 3 1

1 4 5 7 2 1 1 3 1 2 2

2

1

552

141

274

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SEZs: State wise Distribution
State Formal approvals Andhra Pradesh 99 Chandigarh 2 Chattisgarh 1 Delhi 2 Dadar & Nagar 4 Haveli Goa 7 Gujarat 49 Haryana 45 Himachal Pradesh Jharkhand 1 Karnataka 50 Kerala 19 Madhya Pradesh 14 Maharashtra 104 Nagaland 2 Orissa 10 Pondicherry 1 Punjab 10 Rajasthan 8 Tamil Nadu 66 Uttar Pradesh 31 Uttarankhand 3 West Bengal 24 GRAND 552 TOTAL In-principle approvals 2 2 1 3 24 25 1 25 8 4 43 4 2 5 44 16 2 8 274 Notified SEZs 57 2

11 17 3 9 1 6 34 3 7 11 18 4 13 141

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SEZ Glossary Words and Definitions
SEZ Exim words Definitions Exim words Definitions The person on whose behalf the application is made and Applicant shall, wherever the context so requires, include the person signing the application. The Board of Approval as notified by the Department of BOA Commerce. Any plant, machinery, equipment or accessories required for manufacture or production, either directly or indirectly, of goods or for rendering services, including those required for replacement, modernization, technological up gradation or expansion. Capital goods also include packaging machinery and equipment, refractories for initial lining, refrigeration equipment, Capital Goods power generating sets, machine tools, catalysts for initial charge, equipment and instruments for testing, research and development, quality and pollution control. Capital goods may be for use in manufacturing, mining, agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture and viticulture as well as for use in the services sector. An authority competent to exercise any power or to Competent discharge any duty or function under the Act or the Rules Authority and Orders made there under or under this Policy. One of the parts of a sub-assembly or assembly of which a manufactured product is made up and into which it may Component be resolved. A component includes an accessory or attachment to the component. Consumables Any item, which participates in or is required for a manufacturing process, but does not necessarily form part of the end- product. Items, which are substantially or totally consumed during a manufacturing process, will be

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deemed to be consumables. Any consumption goods, which can directly satisfy human Consumer needs without further processing and includes consumer Goods durables and accessories thereof. Any arrangement under which exports/imports from/to India are balanced either by direct imports/exports from the importing/exporting country or through a third country under a Trade Agreement or otherwise. Counter Trade Exports/Imports under Counter Trade may be carried out through Escrow Account, Buy Back arrangements, Barter trade or any similar arrangement. The balancing of exports and imports could wholly or partly be in cash, goods and/or services. A person or body of persons, company, firm and such other private or government undertaking, who develops, builds, designs, organizes, promotes, finances, operates, Developer maintain or manages a part or whole of the infrastructure and other facilities in the Special Economic Zones as approved by the central Government. Development The Development Commissioner of the Special Economic Commissioner Zone. DFRC Duty Free Replenishment Certificate. Domestic Tariff Area within India, which is outside the Special Economic Area Zones. Relation to any goods manufactured in India and exported, means the rebate of duty chargeable on any imported material or excisable material used in the Drawback manufacture of such goods in India. The goods include imported spares, if supplied with capital goods manufactured in India. EHTP EOU Excisable goods Exporter Electronic Hardware Technology Park. Export Oriented Unit. Any goods produced or manufactured in India and subject to a duty of excise under the Central Excise and Salt Act 1944 (1 of 1944). A person who exports or intends to export and holds an Importer-Exporter Code number unless otherwise
45

specifically exempted. The obligation to export the product or products covered by the license or permission in terms of Export Obligation quantity, value or both, as may be prescribed or specified by the licensing or competent authority. The Handbook of Procedures (Vol.1) and "Handbook (Vol.2)" means Handbook of Procedures (Vol.2) Handbook (Vol.1) published under the provisions of the paragraph 2.4 of the Policy. A person who imports or intends to import and holds an Importer Importer-Exporter Code number unless otherwise specifically exempted. Industrial, commercial and social infrastructure or any Infrastructure other facility for the development of the Special facilities Economic Zone as notified. ITC (HS) Classifications of Export and Import Items ITC (HS) Book. Processing or working upon of raw materials or semifinished goods supplied to the job worker so as to Jobbing complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the aforesaid process. Licensing The authority competent to grant a license under the Authority Act/Order. The period beginning on the 1st April of a year and Licensing Year ending on the 31st March of the following year. To make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, re-packing, polishing, labeling. Re-conditioning repair, remaking, Manufacture refurbishing, testing calibration, re-engineering. Manufacture, for the purpose of this Policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining. Manufacturer A person who exports goods manufactured by him or Exporter intends to export such goods. MAI Market Access Initiative
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Merchant Exporter

A person engaged in trading activity and exporting or intending to export goods. Net Foreign Exchange Earning as a percentage of NFEP exports. Notification A notification published in the Official Gazette. An Order made by the Central Government under the Order Act. An element of a sub-assembly or assembly not normally useful by itself and not amenable to further disassembly Part for maintenance purposes. A part may be a component or an accessory. An individual, firm, society, company, corporation or Person any other legal person. The Export and Import Policy, 2002-07 as amended Policy from time to time. Prescribed under the Foreign Trade (Development and Prescribed Regulation) Act, 1992 (No. 22 of 1992) or the Rules or Orders made there under or under this Policy. A notice published under the provisions of paragraph Public Notice 2.4 of the Policy. (i) basic materials which are needed for the Raw material manufacture of goods, but which are still in a raw, natural, unrefined or unmanufactured state; and (ii) for a manufacturer, any materials or goods which are required for his manufacturing process, whether they have actually been previously manufactured or are processed or are still in a raw or natural state. (RCMC) means the certificate of registration and Registration-Cummembership granted by an Export Promotion Council Membership or other competent authority as prescribed in the Certificate Policy or Handbook (Vol.1). Rules made by the Central Government under Section Rules 19 of the Act. All the tradable services covered under General Services Agreement on Trade in Services and earning free foreign exchange. Service Provider A person providing (i) Supply of a ‘service’ from India to any other

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country; (ii) Supply of a ‘service’ from India to the service consumer of any other country in India; and (iii) Supply of a ‘service’ from India through commercial or physical presence in the territory of any other country. (iv) Supply of a ‘service’ in India relating to exports paid in free foreign exchange. Special Economic Zone notified by the Ministry of SEZ Commerce & Industry, Department of Commerce. All types of vessels used for sea borne trade or coastal Ships trade and shall include second hand vessels. Standard Input Output Norms notified by DGFT in the SION Handbook (Vol.2), 2002-07/approved by Board of Approval. A part or a sub-assembly or assembly for substitution, that is ready to replace an identical or similar part or Spares sub-assembly or assembly. Spares include a component or an accessory. Specified Specified by or under the provisions of this Policy. An exporter recognized as "Export House/Trading House by DGFT/ Development Commissioner or Star Status holder Trading House/ Super Star Trading House" by the Director General of Foreign Trade. STP Software Technology Park Exports made by an exporter or manufacturer on Third-party behalf of another exporter(s). In such cases, shipping exports bills shall indicate the name of both the exporter/manufacturer and exporter(s). The Committee notified for Special Economic Zones to Unit Approval consider proposals on matters relating to Special Committee Economic Zone unit under its jurisdiction. Any wild animal as defined in Section 2(36) of the Wild Animal Wildlife (Protection) Act, 1972. The Zone Development Board notified for Special Zone Development Economic Zones to consider matters relating to Board development, operation and maintenance of SEZs.

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RECOMMENDATION
I have already mentioned that SEZ is a growth engines that can boost manufacturing, augment export and generate employment. Before 1947 India didn’t have concept of foreign trade and its simplication on the Indian economy. After 1950, when we started planning to enter foreign trade, lot of issues were there, in which exports and imports of goods was also an important issue. That time National Defence Council suggested to establish
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foreign trade section under the Ministry of Commerce. After starting 5 years plan there was awareness and Planning Commission suggested the role of exports and imports and its simplications or effect on the economic growth. In 1991 a policy was drawn which is known as EXIM Policy and a separate chapter on SEZ was added to the EXIM Policy for the 5 years plan 1997-2002. Now on the basis of report and collected data, conclusions are as followsSpecial Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs. Any private/public/joint sector or State Government or its agencies can set up Special Economic Zone (SEZ). Any foreign company can setup SEZs. State Governments will have a very important role to play in the establishment of SEZ. Representative of the State Government, who is a member of the Inter-Ministerial Committee on private SEZ, is consulted while considering the proposal. Before recommending any proposals to the Ministry of Commerce & Industry (Department of Commerce), the States must satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc. 100% FDI allowed for:  Townships with residential, educational and recreational facilities on a case to case basis,  Franchise for basic telephone service in SEZ.

 

SEZ 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. 100% foreign direct investment is under the automatic route is allowed in manufacturing sector in SEZ units except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes.
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Inter Unit Sales are permitted as per the Policy. Buyer procuring from another unit pays in Foreign Exchange.

BIBLIOGRAPHY
1) 2) 3) 4) 5) sezindia.nic.in sezindia.com thehindubusinessline.com Export Do It Yourself- Mahajan How To Export- Navi Publication
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6) How To Import- Navi Publication 7) Foreign Exchange- Jeevan Anandam 8) International Economics- Francis Cherunilam

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