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Submitted by: Prankur Sharma (2009B3A4622P)

[Submitted in partial fulfilment of the course: International Trade and Balance of Payments (ECON 372)]

INTRODUCTION Background SEZs(Special Economic Zones) are specifically developed duty-free zones meant for trade operations. Currently the SEZ Act, 2005 provides for the establishment, development and management of SEZs for the promotion of exports and for matters connected to commerce with other countries. India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (also known as Special Economic Zone) model in promoting exports, with Asia's 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. Special Economic Zones Act, 2005 To instil 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. 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: 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

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:

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

APPROVAL MECHANISM AND ADMINISTRATIVE SET UP OF SEZS Approval mechanism The developer submits the proposal for establishment of SEZ to the concerned State Government. 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. 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 with Secretary, Department of Commerce as its Chairman. 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. Each Zone is headed by a Development Commissioner, who is ex-officio chairperson of the Approval Committee. Once an SEZ has been approved by the Board of Approval and Central Government has notified the area of the SEZ, units are allowed to be set up in the SEZ. All the proposals for setting up of units in the SEZ are approved at the Zone level by the Approval Committee consisting of Development Commissioner, Customs Authorities and representatives of State Government. All post approval clearances including grant of importer-exporter 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 performances of the SEZ units are periodically monitored by the Approval Committee and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act,1992 in case of violation of the conditions of the approval. FACILITIES AND INCENTIVES OFFERED TO THE SEZs The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:-

Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units

100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% 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 upto US $ 500 million in a year without any maturity restriction through recognized banking channels

Exemption from Central Sales Tax Exemption from Service Tax Single window clearance for Central and State level approvals Exemption from State sales tax and other levies as extended by the respective State Governments

The major incentives and facilities available to SEZ developers include:

Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA

Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act

Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act Exemption from dividend distribution tax under Section 115O of the Income Tax Act Exemption from Central Sales Tax (CST) Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act)

CONDITIONS TO APPLY FOR SEZ Any individual, co-operative society, company or partnership firm can file an application for setting up of Special Economic Zone. The application is to be made in Form-A to the concerned State Government and the Board of Approval (BOA) in the Department of Commerce, Government of India. However the application would be considered by the BOA only when the State Government recommendation is received.

Minimum area requirements for setting up a SEZ are as follows: Multi Sector SEZ Sector Specific SEZ FTWZ IT/ITES/handicrafts SEZ Bio-technology/ non-conventional energy/gems and jewellery Sector 1000 hectares 100 hectares 40 hectares 10 hectares

Once the BOA gives formal approval and the concerned Development Commissioner gives an inspection report certifying the contiguity and vacancy of the area, the area is notified as SEZ. CURRENT STATUS AND PERFORMANCE OF THE SEZs IN INDIA In addition to seven Central Government Special Economic Zones (SEZs) and 12 State/Private Sector SEZs set up prior to the enactment of SEZ Act, 2005, formal approval has been accorded to 585 proposals out of which 381 SEZs have been notified. A total of 143 SEZs have commenced export. Exports from the functioning SEZs during the last eight years are as under: Year 2003-2004 2004-2005 2005-2006 2006-20007 2007-2008 2008-2009 2009-2010 2010-2011 Value (Rs. Crore) 13,854 18,314 22 840 34,615 66,638 99,689 2,20,711 3,15,867 Growth Rate ( over previous year ) 39% 32% 25% 52% 93% 50% 121% 46%

Land is a State subject. Land for SEZs is procured as per the policy and procedures of the respective State Governments. As per information available in respect of 381 SEZs, 82.3%

of land is waste/barren/dry/industrial, 15% of land is single crop and 2.7% of land is double crop. As on 30th June, 2011, the total direct employment in SEZs was 7, 14,412 persons. RECENT ISSUES RELATED TO SEZs Profitability of SEZs SEZs will continue to enjoy tax exemptions only till 31 March 2014, when the 10-year deadline for exemption set in place by the Special Economic Zones Act, 2005, expires. For an entrepreneur or a small businessman who have invested in a special economic zone (SEZ) project, there is bad news. The Union budget for 2010-11 imposed the Minimum Alternate Tax (MAT) of 18.5% on the book profits of SEZ developers and units, making SEZs not as profitable as they used to be. Moreover, the proposed Direct Taxes Code, which is to be implemented , doesnt specify any exemptions that SEZs enjoy at present. SEZs will continue to enjoy tax exemptions only till 31 March 2014, when the 10-year deadline for exemption set in place by the Special Economic Zones Act, 2005, expires. However, under section 10AA, exemptions on SEZs will be extended if the occupier begins manufacturing or producing articles or products or provides any service from the SEZ unit on or before 31 March 2014. Several realty firms have sought the governments nod to shelve their special economic zone (SEZ) projects amid continued tax uncertainties. They have requested for withdrawal of inprinciple approval granted to them earlier, citing economic (in realty market) slowdown, Direct Tax Code (DTC), imposition of minimum alternate tax (MAT) as the reason for the same. Revamp of SEZ Policy The commerce ministry has proposed revamp of the SEZ policy to address issues concerning land acquisition and boost exports with a view to bridge the widening trade deficit.

In a draft discussion paper, the ministry said that special economic zones (SEZs) could act as a potent instrument to increase the countrys shipments and attract more foreign direct investment (FDI). Given this scenario there is no option for India other than promoting enhanced exports and FDI growth. Given the very encouraging performance over the last five years, the SEZ programme is a promising instrument for achieving both these objectives, it said. Proposing to review all land-related aspects of the SEZ policy, the discussion paper said that land availability for SEZs has become a constraint accentuated by fairly onerous requirements of minimum size, contiguity, pre-dominantly non-double cropped land and noncompulsory acquisition. The Land Acquisition Act would possibly make the process of meeting land requirement even more challenging, it added. These factors call for a review of all land-related aspects of the SEZ policy so as to assess their underlying rationale and reasonableness, it said. The paper said that there is a need to review aspects, like minimum area criteria for SEZs, vacancy and contiguity norms and processing/non-processing zone stipulations. It further pointed out that in the present context, the companies are facing considerable difficulty in acquiring 1,000 hectare of contiguous land. The paper proposed that the minimum area requirement for multi-product SEZ may be reduced to 250 hectares from the present 1,000 hectares. Similarly, for multi-services and sector-specific tax-free enclaves, it proposed to reduce the minimum land area to 40 hectares from 100 hectares each. During the April-October(2011) period, Indias trade deficit touched $93.7 billion, up from $72 billion in the corresponding period last fiscal. Exports from SEZs in 2010-11 stood at Rs. 3.15 lakh crore, an increase of 43% over the same period last year.

CONCLUSION Traditionally SEZs are created as open markets within an economy that is dominated by distortionary trade, macro and exchange regulation and other regulatory governmental controls. SEZs are believed to create a conducive environment to promote investment and exports. And hence, many developing countries are developing the SEZs with the expectation that they will provide the engines of growth for their economies to achieve industrialisation. Studies commissioned by the Department of Commerce have shown that SEZs have created a significant local area impact in terms of direct as well as indirect employment, emergence of new activities, changes in consumption pattern and social life, human development facilities such as education, healthcare etc. Setting up of Single Window Clearance Mechanism, fiscal benefits and duty concessions, simplification of rules and procedures are some of the steps taken for speedy operationalisation of SEZs. Policy makers need to revise the policy on special economic zones (SEZs) and focus on promoting them as destinations for domestic and global investors to set up manufacturing and service facilities. If there is an already functional SEZ unit and is making profits, the additional tax burden which will be imposed may not bite that much and it may be able to sustain it. However, if there is an under-construction SEZ and are unlikely to get possession before 31 March 2014 or its not possible for it to start operations on or before this date, it should get ready to pay more tax.