Special Economic Zone

A Boon or A Curse

SPECIAL ECONOMIC ZONES IN CHINA & INDIA

Introduction - Historical background - From ancient times Harappan, Roman to mediaeval times and later - Small fenced-in areas specializing in manufacturing for exports fenced- Modern times Free ports Aden, Singapore, Hong Kong Difference - Modern version of export zones starting from Puerto Rico (USA), Shannon International Airport in Ireland in 1959 - India Kandla in 1965. EPZs in Taiwan, S. Korea and other countries - Since 1979, most extensive, large and successful SEZs in (China) - After early start, India slow in following up

Fundamentals of SEZs
 SEZs (special economic zones) are fundamentally different from the traditional free zones.  They are much larger in size; offer broader range of activities such as  a single-window management, single streamlined procedures,  duty-free privileges, duty also access to the domestic market on a dutydutypaid basis.

Fundamentals of SEZs
 Whether the enclave is termed an EPZ, FTZ or SEZ, the cardinal factors are
      appropriate infrastructure and transport facilities, low factor cost, flexible labour laws, convertibility of currency, stable legal and administrative regime, and a commitment to the canons of an open economy

Fundamentals of SEZs
 Look at Chinese SEZ-Shenzhen SEZ SEZ Total Area of Shenzhen 1,952.84 sq. kms  Area of SEZ - 395.81 square kilometers  Harbouring 3.5 million people  $30 billion in FDI,  3 million employment  Equipped with the state-of-the-art infrastructure state-of-the Effective port facilities,  Simplified procedures,  Fully flexible labour policy in terms of hiring and firing.

Shenzhen SEZ

Shenzhen SEZ

Shenzhen SEZ

Fundamentals of SEZs
 Look at Jebel Ali Free Trade Zone in Dubai
 Area - 100 sq km  Home to over 1,600 companies from 85 countries  Triggered the economy and development of Dubai

Jebel Ali Free Trade Zone

Jebel Ali Free Trade Zone

Subic Bay Freeport Philippines

Subic Bay

Strategic Location
 Easily accessible by land, air and sea. Practically half of the worlds container fleet passes by its doorway.

Rehabilitated Marine Terminal at the NSD (Naval Supply Depot) Part of the rehabilitation is the widening of the marine terminal apron by 12 meters (each side).

The new container terminal at the Cubi Point. Around two million cu.m. of earth was moved to construct the 30-hectare container yard. Specifications: 2 berths; Depth: 13 meters; Length: 560 meters.

The Subic Bay International Airport, the gateway to Subic Bay Freeport, is a modern, international airport with 10,000 sq. m passenger terminal, capable of handling 700 passengers at any given time and featuring the very latest technology for security and comfort.

Subic Bay Tourism

Main objectives of the SEZ Act

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

SEZ Act, 2005

 Passed by Parliament in May 2005  Received Presidential assent on 23rd June 05  Came into effect on 10th Feb 06 supported by the SEZ Rules

Tax Incentives

Tax Incentives
 Direct Tax Benefit to Developers
 U/s 80-IAB 80-

 100% tax holiday for 10 consecutive years out of block of 15 years  Profit & gains derived from business of developing SEZ notified on or after 1st April 2005  Transferee Developer can also claim deduction for balance period of 10 years on Operation & Maintenance income

Tax Incentives
 Direct Tax benefits for Developers

 Minimum Alternative Tax provisions not applicable  Exemption from Dividend Distribution Tax

Tax Incentives
 Direct Tax Benefits to Units - 10AA  100% of profits and gains derived from the export for five Consecutive Years from which business commences.  50% of for further five A.Y. and  50% of the profits ploughed back for the next five A.Y.

Tax Incentives
 Direct Tax benefits for Units
 Minimum Alternative Tax provisions not applicable  Capital gain tax exemption on relocation to SEZ  TDS
 No deduction of tax at source by OBU on interest on deposits / borrowings from non non resident or person not ordinarily resident.

Tax Incentives  Indirect Tax

 Exemption from payment of Import duty  Exemption from payment of Excise duty  Exemption from payment of CST and VAT on purchase from DTA  Exemption from Service tax

SEZ Act, 2005

 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 are considered by this BoA periodically.

Section 7 of SEZ Act, 2005

 Exemption from taxes, duties or cess Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by, (i) a Unit in a Special Economic Zone; or (ii) a Developer; shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule
Contd.

The Zone Administrator

Development Commissioner
 Sec.11 Development Commissioner
 Central Govt. may appoint  Development Commissioner [DC]  Assistants to DC

 Sec.12 Functions of Development Commissioner

 Guiding the entrepreneur to establish SEZ;  Taking suitable steps to promote exports;  Ensuring proper co-ordination with the Central Govt. and State coGovt.;  Monitoring the performance of the Developer and the units in SEZ; etc.

Schedules to the SEZ Act, 2005

THE FIRST SCHEDULE (Enactments) 1. The Agricultural Produce Cess Act, 1940 (27 of 1940). 2. The Coffee Act, 1942 (7 of 1942). 3. The Mica Mines Labour Welfare Fund Act, 1946 (22 of 1946). 4. The Rubber Act, 1947 (24 of 1947). 5. The Tea Act, 1953 (29 of 1953). 6. The Salt Cess Act, 1953 (49 of 1953). 7. The Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (16 of 1955). 8. The Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957). 9. The Sugar (Regulation of Production) Act, 1961 (55 of 1961). Contd.

Schedules to the SEZ Act, 2005

10.The Textiles Committee Act, 1963 (41 of 1963). 11.The Produce Cess Act, 1966 (15 of 1966). 12.The Marine Products Export Development Authority Act, 1972 (13 of 1972). 13.The Coal Mines (Conservation and Development Act, 1974 (28 of 1974). 14.The Oil Industry (Development) Act, 1974 (47 of 1974). 15.The Tobacco Cess Act, 1975 (26 of 1975). 16.The Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978). 17.The Sugar Cess Act, 1982 (3 of 1982). 18.The Jute Manufactures Cess Act, 1983 (28 of 1983). 19.The Agricultural and Processed Food Products Export Cess Act, 1985 (3 of 1986). 20.The Spices Cess Act, 1986 (11 of 1986). 21.The Research and Development Cess Act, 1986 (32 of 1986).

Schedules to the SEZ Act, 2005

 The Second Schedule: Incorporates modification to the Income Tax Act, 1961, as applicable to SEZs.  The Third Schedule: Incorporates amendments to Insurance act, 1938, Banking Regulations Act, 1949 and Indian Stamp Act, 1899

SWOT Analysis

SWOT Analysis for Indian SEZs

 Strengths:  Skilled Manpower knows English  Worldwide acceptance of capabilities in fields like  Pharmaceutical manufacturing & research  Clinical trials  Manufacturing auto parts  Engineering designing & consultancy, IT & ITES  Entertainment etc etc  Financial & other institutional Networks like Stock Exchanges, Insurance Companies, Educational Institutes  Attraction of a large Indian market:  growing middle class with purchase power

SWOT Analysis for Indian SEZs

 Weakness: Weakness:  Infrastructure bottlenecks connecting infrastructure like Roads leading to SEZs.  Political changes  Convertibility of Currency on Capital A/c  Red Tape  Labour reforms  Zones by & large are still zones not smart cities.  Inappropriate locations  Long gestation period 4 to 5 years in absence of infrastructure development.

SWOT Analysis for Indian SEZs

 Opportunities: Opportunities:  An alternative manufacturing base, particularly compared to Chinese SEZs.  Services SEZs do not require movement of input and output physically and hence, surrounding infrastructure may not matter much.  For multi-product SEZs, almost 23 ports are multiavailable. Most of them are likely to be EDI compliant.  New small ports & airports are also being developed keeping SEZ concept in mind.

SWOT Analysis for Indian SEZs

 Threats: Threats:
 Loosing edge of low labour costs - many countries are competing.  Formation of economic blocks, Effect on Government Revenues.  Negotiations for FTAs with many countries may erode competitiveness.  The pattern of buying & selling may not continue. With relocations of industries in other third world countries, new competitors will emerge.

Major Issues

Major Issues
 Land Acquisition  Role of State Govt. in Land Acquisition  Compensation Packages to land owners  Rehabilitation packages for displaced farmers  State Govt.s commitment to create infrastructure  Time frame for operationalisation  Control over SEZs MoC or MoF  Amendments to Laws and Rules

How to evaluate whether one should set up SEZ / SEZ Unit ?

SEZ Developer
 Viable commercial proposition  Active support of State Govt.  Proximity to Port  Financial soundness  Capacity to attract FDI  Generation of employment  Availability of skilled labour in the nearby area and social infrastructure

SEZ Unit
 Commercial viability  Selection of a right SEZ  Location,  Area,  Facilities,  Benefits,  State policies,  Infrastructure, etc.

SEZ Unit
 Credentials of Developer  Proper information about formalities / availability / cost estimates etc.  Product should be capable of maintaining demand in the overseas market for a sustainable period.  Availability of required labour in the nearby area  Overall serious commitment to EXPORTING. EXPORTING.

Discussion Issues
          Single window clearance +VE Net Foreign Exchange (NFE) Authorized Operations Ports, Airports, Container yards, Freight Stations Dedicated Corridors Enabling Enactments SEZs a Foreign Custom Territory Service Tax Services to DTA not an Import Stamp Duty Under whose preview