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BUSINE S S BRIEFIN G

SpEcIal EcoNomIc ZoNES IN INdIa
OppOrtunities and Challenges
Research & Business analytics Group, India, cushman & Wakefield

November 2008 | a c&W India publication

coNTENTS
1 Executive Summary 2 dawn of Special Economic Zone 3 Thrust of India’s SEZ Initiatives 4 activities within SEZ 5 police(ing) The Zone 6 SEZ development Stance: an analysis 7 Zonal distribution of SEZs 8 Sectoral distribution of SEZs 9 Export Break-Up 10 Employment Generation 11 Investments 12 Real Estate projections 13 Vantage SEZs & challengers 14 Where It Stands… 15 conclusion

Ex E cUTIVE SU mmaRy
The concept of Special Economic Zones (SEZ) in India can be traced as far back as the 1960s. India’s leap towards a more structured approach towards SEZs is however only very recent. Taking their hints from various international case studies, the Indian SEZs are a mix of formats with the main aim being the creation of an environment for accelerated industrial production. With the SEZ policy set in place, the process of notification and approvals of SEZs has been swift with the key demand driver being IT/ITeS sector followed closely by manufacturing and multi- product SEZs. The extended periods of tax holidays and the corresponding retraction of benefits from IT parks have made the IT/ITeS SEZ especially attractive for occupiers. In spite of a fairly long period of existence of the SEZ policy, India is still in the process of devising new means and ways of streamlining procedure of approvals and developments. This paper evaluates the SEZ growth story up till now and how the saga would unfold in the future, keenly observing, the trends, the policies and approaches and the challenges India faces with SEZ.

daWN oF SpEcIal EcoNomIc ZoNE
Seeds of the present day SEZ model in India can be traced way back to 1965, when Asia’s first Export Processing Zone was set up at Kandla in Gujarat. The Industries Development and Regulation Act (IDRA) in 1951 laid the foundations but had kept the licensing requirements stringent, requiring multi-level clearances by a number of agencies. Early 1960s and 1970s witnessed planned targets which were not met or failed to be even implemented. The scenario, instead led to some more restrictive set of regulations and reservations instead of making it less accessible and thereby defeating the purpose of the regulation.

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By the early 1980s, deregulations and economic reforms were being slowly introduced to liberalise trade, industrial and financial policies. In July 1991, India launched a major economic reforms program, opening up the economy to trade, foreign investment and more private sector participation. While setting the same, there were many limitations and hindrances in the path with factors such as control regulations, securing multi-level clearances, infrastructural inadequacies or unattractive fiscal incentives etc. With a view to surmount the shortcomings, the SEZ Policy was announced in April 2000 thus bringing SEZs into existence. SEZ is a region with minimum possible regulations and control mechanisms, more liberal support policies with quality infrastructure as well as attractive fiscal packages from both the Centre and the respective States where they are situated. SEZs cover in its fold a range of more specific zone types, like Free Trade Zones, Export Processing Zones, Free Zones, Industrial Estates, Free Ports, Urban Enterprise Zones, etc. Initially the Foreign Trade Policy Guidelines regulated the SEZs in India which was abandoned in February 2006. The main intent of the SEZ Policy was to provide an internationally competitive environment for exports and attract investment from foreign and domestic sources, be it in infrastructure or productive capacity, generating additional activity in the economy and creating opportunities for employment. Though the Government of India announced the SEZ scheme in April 2000, the Special Economic Zones Act, 2005 was brought into effect along with the Special Economic Zones Rules, 2006 from February 10th, 2006. The Act and the Rules together replaced the previous applicable legislations and rules governing the operations of SEZ and provided for a single legislation.

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THRUST oF INdIa’S SEZ INITIaTIVES
The world’s fastest growing economies, India and China, have a varied approach towards the Special Economic Zones (SEZs). China made an early move to set up SEZs in 1980s, two decades before India announced the SEZ policy. The SEZ framework in China was instituted to promote manufacturing sector and strategically planned at the coast line, in contrast to the approach that India followed. In India, the SEZ Act broadly specified the SEZ types - which either catered to a specific sector/ industry or is broadly categorised to identify the nature of activities intended to be carried out in the SEZ. Basic categories of SEZs were identified and classified as multi-product, sector specific, port based and warehousing zones. The Act also laid down the maximum and minimum area limits for each category of SEZs based on the nature of industry or on geographical parameters.

THRUST oF INdIa’S SEZ INITIaTIVES

Type of SEZ multi-product SEZ SEZ for a specific sector / One or more services / port or airport IT/Bio-technology/Non-conventional energy including solar energy equipments/cells/Gems and Jewellery Free trade and Warehousing

Requirements 1,000 hectares and maximum 5,000 hectares but reduced to 200 hectares in select states* 100 hectares but reduced to 50 hectares in select states* 10 hectares with minimum built up processing area: IT/ITES:100,000 sq.m, Gems & Jewellery:50,000 sqm, Biotech/Non conventional energy:40,000 sqm 40 hectares with minimum built up processing area of 100,000 sq.m,

*Select states include Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir, Goa. Source: Ministry of Commerce, Govt of India

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It further provided for activities within an SEZ under broad heads of - manufacturing or trading and services. Further within these categories, selected types of industries and activities are listed.

acTIVITIES WITHIN SEZ
acTIVITIES WITHIN SEZ

Manufacturing / Trading apparel, Garments & leather automobile & auto components Engineering - light, Heavy & application pharmaceuticals Food processing Telecom Equipment computer Hardware & micro- electronics consumer Electronics & appliances Gems & Jewellery Wood, Rubber, plastic & leather products Handicrafts
Source: Ministry of Commerce, Govt of India

Service IT enabled services & Biotechnology R&d Services Health care Financial Services Knowledge Services Entertainment, leisure & Recreation Sports & Related activities organised Retail Business Services Warehousing & Trade Related Services

India leads the count with around 250 notified SEZs with the list continuing to expand; China has only about six SEZs but on a much larger scale, which are in no way comparable to India. This made the Chinese SEZs leverage onto the scale and infrastructure more successfully. However, the Indian government is promoting the SEZs at relatively small scale, with minimum of 10 hectares of area, permitting private participation and attractive tax incentives, all of it which has made this proposition attractive for developers to build SEZs across India.

polIcE(ING) THE ZoNE
With the sector sizing up attractive investment and attention from various quarters, manning the system and reducing the operational frictions has become vital. For providing a platform for removing the structural impediments and easing the complicacies involved, the SEZ Rules were framed for: • Simplified procedures for development, operation, and maintenance, and also for setting up units and conducting business in SEZs; • Single window clearance for setting up an SEZ or setting up a unit in SEZ; • Single Window clearance on matters relating to Central as well as State Governments; • Simplified compliance procedures and documentation with an emphasis on self certification. • Different minimum land requirement for different class of SEZs.

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• Demarcating the processing and non processing zones wherein the processing area would comprise of the SEZ units and the non-processing area will host the supporting infrastructure. While the SEZ Rules smoothened the operational formalities, the SEZ Act further demarcated the areas for foraying the SEZ domain. The Act provides for setting up of SEZs either jointly or severally by the Central Government, State Government, or any person (including a private or public limited company, partnership or proprietorship): • for manufacture of goods; or • for rendering services; or • for both manufacturing of goods and for rendering services; or • as a Free Trade and Warehousing Zone. It further envisaged the role of the State Governments in Export Promotion and creation of related infrastructure with a Single Window SEZ approval mechanism through a 19 member interministerial SEZ Board of Approval. The Act provides for certain fiscal and non fiscal incentives both to the SEZ units and developers. Key fiscal incentives for developers/ SEZ units include: • exemption from customs duty; • exemption from excise duty; • drawback or such other benefits (as may be admissible from time to time) on goods brought from the Domestic Tariff Area (DTA) into a SEZ by the Developer or Unit to carry on the authorized operations; • exemption from service tax; • exemption from the securities transaction tax in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre (IFSC); • exemption from levy of Central Sales Tax and Local sales tax/ VAT • exemption from Minimum Alternate Tax • Tax Holiday o For SEZ units -100% of export profits for the first five years, 50% of the export profits for the next five years, upto 50% 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) for the following five years. o For SEZ Developers- 100% profits derived for 10 years, Exemption from Dividend Distribution Tax The policy and fiscal incentives were the prime motivators for the SEZ developments in India. With the tax holidays for both developers and units, SEZs became an attractive investment destination. Moreover, the exemptions from duties and lesser governmental interference further facilitated in attracting investments in the segment.

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SEZ dEVElopmENT STaNcE: aN aNalySIS
With the policy initiatives and reforms, the SEZs soon took dominance cutting across segments and sector. Prior to the SEZ Act 2005, 19 SEZs across 9 states were operational in India. Of which seven were Government EPZ which were later converted to SEZs. After the SEZ Policy came into effect, formal approvals have been granted to 513 SEZ proposals, out of which, 250 SEZs have been notified as on August 2008.
opERaTIoNal SEZ (pRIoR To SEZ acT 2005)

State andhra pradesh Gujarat

SEZ Vishakhapatnam SEZ Kandla SEZ Surat SEZ Surat

Category multi-product multi-product multi-product apparel multi-product multi-product Electronics, Gems & Jewellery Gems & Jewellery Handicrafts

Kerala madhya pradesh maharashtra Rajasthan

cochin SEZ Indore SEZ SEEpZ – SEZ Jaipur SEZ Jodhpur

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opERaTIoNal SEZ (pRIoR To SEZ acT 2005)

State Tamil Nadu

SEZ madras SEZ mahindra city, chennai mahindra city, chennai mahindra city, chennai Sriperumbudur

Category multi-product IT, Hardware & Bioinformatics apparel & Fashion accessories auto ancillaries Telecom Equipment, R&d and Services multi – product multi-product Gems & Jewellery Software development & IT enabled services

Uttar pradesh West Bengal

NoIda SEZ Falta SEZ manikanchan SEZ Salt lake Electronic city, Kolkata

Source: Ministry of Commerce, Govt of India

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ZoNal dISTRIBUTIoN oF SEZ S
Formal approvals
7% 34% 17% 44% 22%

In principle approvals
14% 28%

Notified SEZs
5% 16%

42% South West East North South West

20% East North South West

51% East North

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

ZoNal dISTRIBUTIoN oF SEZ S

Zones: South State andhra pradesh Karnataka Kerala pondicherry Tamil Nadu Total Formal Approvals 94 48 16 1 60 219 14 27 42 129 In-Principle Approvals Notified SEZs 3 9 1 56 23 8

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

ZoNal dISTRIBUTIoN oF SEZ S

Zones: West State dadra & Nagar Haveli Goa Gujarat madhya pradesh maharashtra Rajasthan Total Formal Approvals 4 7 45 13 95 8 172 9 6 36 10 61 3 22 4 35 5 69 In-Principle Approvals Notified SEZs

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

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ZoNal dISTRIBUTIoN oF SEZ S

Zones: North State chandigarh delhi Haryana Himachal pradesh punjab Uttar pradesh Uttaranchal Total 8 29 3 86 31 Formal Approvals 2 2 42 17 2 8 4 2 12 2 39 In-Principle Approvals Notified SEZs 2 1 20

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

ZoNal dISTRIBUTIoN oF SEZS

Zones: East State chattisgarh Jharkhand Nagaland orissa West Bengal Total Formal Approvals 1 1 2 9 23 36 4 13 19 4 8 13 In-Principle Approvals Notified SEZs 2 1

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

A study of the SEZ developments across the four zones of India – East, West, North and South indicates that South India accounts for highest approvals with 219 formal approvals. However, the state-wise analysis points out that Maharashtra has received the highest formal approvals at 95. West India dominates with 61 in-principle approvals with Maharashtra, leading with 36 approvals followed by Haryana, 17 and Tamil Nandu with 14 approvals. South India accounts for highest number of notified SEZs standing at 129. Southern States of Andhra Pradesh leads with 56 notifications followed by Tamil Nadu at 42.

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SEcToRal dISTRIBUTIoN oF SEZ S

Formal approvals
21% 5% 4% 4%

In principle approvals
9% 41% 9% 2% 3% 4% 18%

Notified SEZs

5% 4% IT/ITES Textiles pharma 62% multi product Bio Tech others 1% IT/ITES Textiles pharma 38% multi product Bio Tech others

4% 66% IT/ITES Textiles pharma multi product Bio Tech others

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

Sectoral Distribution Analysis mainly points out the SEZ concentration being accounted by mostly IT/ITES sector. 513 Formal Approvals were granted, with IT/ITES sector accounting for 322 approvals. Moreover, IT/ITES/Electronic Hardware/Semiconductor had the highest number of approvals (including formal, in-principle and notified) standing at 499 approvals. Multi-product category is gaining momentum with 52 In-principle approvals. Total In-principle approvals granted stood at 138. As many as 250 SEZs were granted notifications with a major share of IT/ ITES accounting for 165 approvals.

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ExpoRT BREaK-Up
ExpoRT BREaK-Up

Exports from Special Economic Zones Exports from SEZs established by central Government Exports from private/State Govt. Special Economic Zones established/notified prior to SEZ Act Exports from SEZs notified under the SEZ Act, 2005 Total Exports
Source: Ministry of Commerce, Govt of India 

00-0 (INR Crores) 25358.45 9134.47 121.64 34614.56 

00-0 (INR Crores) 39275.11 22167.44 5195.1321 66637.6821 

00-0 (Proj.) (INR Crores) 42898 30175.32 52876.96 125950.48

Sector wise Exports (%) in 2007-08 from SEZs
31% 2% 6% 17%

2%1% 1%2%
Textile & Garments Electronic software & hardware Gems and Jewellery Plastic, rubber, leather, sports goods & ceramics Other (Biotech, Non Conventional Energy, Tobacco, Handicrafts & Misc)

2% 36%
Computer software Engineering Chemical and Pharmace uticals Food & Agro Industry Trading & Services

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

EmploymENT GENERaTIoN
As on June 2008, about 199,330 persons were employed in seven SEZs established by the Central Government. Direct Employment in Private/State Govt. SEZs which came into force prior to SEZ Act, 2005 stood at 48,988 persons. 100,885 direct employments were created in notified SEZs.

INVESTmENTS
Investment in ST/pVT/ SEZs
25%

Investment in Motified SEZs
8%

Investment in Government SEZs
19% 14%

75% Investment made FdI inv. made
Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

92% Investment made FdI inv. made
Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

67% Investment made FdI inv. made
Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

Fovt. investment (developers)

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Liberal policy norms and fiscal incentives augmented higher investments in the sector making it an attractive destination. As on March 2008, investments to the tune of INR 69,538.451 crores were made in Notified SEZs of which INR.29,618.7 crores is by the developers on infrastructure development. Total investment made in Govt. SEZs were at INR.4,529.22 crore including FDI of INR.865.5 crores (Including INR.629.73 crores Govt. investment).Investment made in 12 State/ Private SEZs stood at INR. 3,690.44 crores (of which INR.979.84 crores was FDI).Investment proposed in notified SEZs stands at INR. 331,140.6 crores.

REal ESTaTE pRoJEcTIoNS
SEZ developments have a significant impact on the real estate scenario in India. The minimum land requirement of 10 hectares has fuelled the supply with a number of developers in fray to tap this segment. IT/ITES/Electronic Hardware/Semiconductor had the highest number of approvals (including formal, in-principle and notified) standing at 499 approvals and also account for a major share in the SEZs of relatively smaller sizes. Of the 513 Formal Approvals granted, IT/ITES sector accounts for 322 approvals and about 165 approvals as notified SEZs.
oFFIcE SpacE SUpply & dEmaNd IN 2007

20

million Sq.ft.

10

Hyderabad

Bangalore

Kolkata

mumbai

NcR

chennai

demand
Source: Cushman & Wakefield Research

Supply

In 2007, of the seven major cities of India, Office Space demand was highest in Bangalore standing at 13.6 million sq.ft due to the continued demand for Grade A developments while the supply was 9.02 million sq.ft. The supply was less due to the excess supply in 2006 being carried over from the previous year in certain peripheral locations as Whitefield and Electronics City. Supply was higher than the demand in Pune (7.80 million sq.ft), NCR (11.53 milion sq.ft) and Chennai (10.01 million sq.ft).

pune

0

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SEZ SUpply 2007-09

10 8 million Sq.ft 6 4 2 Hyderabad Kolkata mumbai NcR Bangalore chennai pune 0

2007

2008

2009

Source: Cushman & Wakefield Research

Total SEZ Supply in 00 City Bangalore chennai Hyderabad Kolkata NcR mumbai pune Total Supply (Million sq. ft.) 14.48 12.39 4.88 4.10 17.80 11.78 10.16 SEZ Supply (Million sq. ft.) 6.66 3.87 2.2 1.7 1.75 1.44 4.14 SEZ as % of Total Supply 46% 31% 45% 41% 10% 12% 41%

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

SEZ supply is expected to be highest in Bangalore at 6.66 million sq.ft and Pune at 4.14 million sq.ft in 2008. About five of the ten notified SEZs in Bangalore are likely to account for 2.5 million sq.ft by 2008. Moreover, supply demand scenario in Bangalore is expected to be in equilibrium by the end of 2008. In 2007, SEZ space supply was the highest in Bangalore at 2.92 million sq.ft. followed by Chennai at 2.42 million sq.ft and Pune, 2.19 million sq.ft. About 72% of the total SEZ supply in Bangalore was pre committed in 2006. Chennai currently has three IT SEZs and an additional 1 million sq.ft is expected in 2008. Approximately 31% of total supply is accounted by IT SEZs in Chennai. In 2007, SEZ supply in NCR was relatively less but with new projects getting both formal approvals and notifications and by 2009, NCR is expected to have the highest SEZ supply at 8.66 million sq.ft followed by Chennai at 8.3 million sq.ft. Bangalore witnessed highest absorption of

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over 3.2 million sq.ft in 2007 with areas -Whitefield and Outer Ring Road attributing maximum absorption and pre-commitments for 2008 are expected to be over 5.9 million sq.ft.
SEZ pRIcING

120 100 80 60 40 20 Hyderabad Kolkata mumbai NcR Bangalore chennai pune 0

INR / Sq.ft. / month
Source: Cushman & Wakefield Research

SEZ commanded the highest price of Rs.110 per sq.ft/ month in Mumbai followed by NCR at Rs.65 per sq.ft/ month. In Bangalore, prices stood at Rs 48 per sq.ft/ month. Rentals in Bangalore are likely to strengthen with the limited availability of ready to move in supply during the year.

VaNTaGE SEZS & cHallENGERS
India being primarily an agrarian economy, social issues formed the core concern while framing stringent and radical economic legislations. The Second Five Year Plan of India with emphasis on industrial developments paved the door for newer productive sectors in order to maximize longrun economic growth. Major policy initiatives and landmark legislations to accelerate industrial developments and promotion of export oriented units soon became prime determining factors. For over three decades, export processing zones were present in India with stringent legislations policies governing their operations. India’s SEZ policy was announced in 2000 and the Act implemented after many deliberations has been an issue of several criticisms since its inception following the special status and privileges granted to accelerate the growth momentum of the economy. Main advantages which SEZs stands to reap can be highlighted as follows: • Flexible Labour norms and issues with lesser interferences from the Government and various labour unions. • Infrastructure at par with international levels with class amenities in both industrial and civic areas. • Incentives and benefits by way of exemption with respect to customs duty, sales tax, excise duty, income tax relief, etc. • Lower operational costs due to the various benefits.

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• Flexible Government policy with regard to clearances, approvals, etc. • Helps in integration of various processes as a unit dealing in various business activities can engage in related business within the sector. • Easier accessibility to various inputs and reduction of logistics complications. The segment with vast potential was in need of a breather to support its existence and survival in the fast changing and competitive scenario. Though SEZs are associated with major activities in the economy, the sector is faced with a number of challenges in its way ahead. The SEZ policy of India has faced both criticisms as well as praise since its implementation. On the one hand with the liberal policies and several incentives both fiscal and non-fiscal, the segment grew in leaps and bounds generating more employment, attracting foreign investments and creating class infrastructure but on the other hand is faced with criticisms with regard to exploitation of the weaker sections of the society and defying the underlying purpose of the Act. With various business activities brought within the scope of SEZs, number of applications to set up SEZs has seen a tremendous rise. But granting approvals to a significant number of projects can entail serious imbalances in government revenues due to the various incentives and relief ’s awarded to the units in the segment. There is need to implement changes with regard to issues like minimum area as very small units or zones are not feasible and do not lead to economies of scale. Besides, there are vital issues like acquisition of land for setting up SEZs are of major concern today. Proper feasibility study along with necessary rehabilitation programme for the people who would be displaced from their habitations needs tremendous caution. Issue and cases like the Nandigram in West Bengal need to be looked into or else it may severely affect the balance of the region and poise serious problems. Acquisition of agricultural land should be avoided and proper and fair market value should be awarded to the landholders to reduce frictions and work out models so that the appreciation and future benefits can be transferred or shared with the land holders fearing displacement. Also, withdrawal of approvals as in Goa wherein the State Government decided to scrap the 12 SEZs and further recommended de-notification of 3 notified SEZs comes in the purview. The issue has brought into perspective the extent to which the respective state governments has powers to regulate SEZs which are located therein and whether the state has any powers to repeal or award a ruling beyond the SEZ Act’s provisions. Emulating and replicating a model similar to international trends is not viable from the Indian socio- economic and political perspective. The scene in the international spectrum may be much different from the ground realities in India. Though SEZs operate with liberal policy regimes and as free trade zones, certain policy guidelines and regulations vital to the region, the SEZ has to abide. Moreover, the country’s international trade relations and standing are also vital determining factors. Then there are also factors like the positioning of the SEZ, status imparted and location issues in comparison to emerging hubs and regions and accessibility to various inputs which are also key deciding factors and poses as serious challenges to the development of the SEZs in a region.

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The challenges go beyond the mere recognition of a SEZ. The regulatory control over material movement to an SEZ location has been a primary bottleneck for most construction schedule. The lack of permanent SEZ supervisors or other officials also lead to delays of construction and material movement into and within the sites. Yet another condition which hampers development is the physical inspection of material while entering or exiting an SEZ site, the lack of automation in the process makes it more labour intensive and subject to errors. Further more, all SEZs have a designated time of entry and exit of material which is restrictive in nature causing inadvertent delays in delivery. The challenges in the construction process can be recounted as below:
VaNTaGE SEZS & cHallENGERS

SEZ PROCESS SEZ OFFICER less possibility of establishing a Single point of contact

CHALLENGES FACED The Govt. appointed SEZ officer for a SEZ site does not remain permanent throughout the project tenure. Processes get disrupted if the particular SEZ officer changes during mid – way of the procurement cycle of any goods. This in turn delays procurement. Additional time spent on building rapport with the new SEZ officer.

Availability of the SEZ officer

Irregular working time of the SEZ officer / SEZ officer not being available in some days of the week have posed challenges during situations when goods have arrived at site and have not been able to be cleared on time. The time taken for goods clearances is directly influenced by the rapport shared by the developer and the officer.

Rapport with the SEZ officer SEZ GOODS PROCUREMENT procedure for the procurement of goods into a SEZ.

The entire procurement procedure should be completed no later than 45 days from the date of the aRE* form. In case the procedure exceeds 45 days due to unavoidable circumstances, the fiscal benefits cannot be availed. If goods are imported or procured are found to be defective / found damaged / unfit for use after import or procurement, and the same has to be sent out of the SEZ to the supplier for repair / replacement by not paying taxes, a long drawn procedure is followed, which causes time delays. If goods imported or procured are found excessive / remain unutilised in the project, and the same has to be destroyed without payment of taxes, a long drawn procedure is followed, which causes time delays. If goods imported or procured require further processing by a sub – contractor, elaborate procedures are involved in seeking approval on the input – output ratio of the processing involved, which causes time delays. also, goods sent for processing from a SEZ unit shall be returned within 120 days from the date of removal, failing which the duty already exempted shall be recovered.

Incoming goods – imported / procured from domestic Tariff area

Excess Goods procured

Semi – finished goods that require further processing

construction Scrap / debris

Elaborate procedures are involved in removal of the debris / scrap outside the site.

ARE* - I referred to in notification number 40/2001 - Central Excise (NT) dated the 26th June, 2001

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WHERE IT STaNdS…
Prior to the SEZs, the STPIs had a dominant position with a number of parks being set up across the country. STPIs too like the SEZs had a number of incentives but with the nearing of the end of its tenure of income tax reliefs, the segment is witness to a lesser activity.
STpI & SEZS dIFFERNTIaToRS

STPI (Software Technology Park of India) 100% Export oriented Units (EoU) Software development of IT-enabled services forms in India Either a single unit or a group of units in a building or development No minimum area defined Trading not permitted Income tax completely exempted up to 2010

SEZ (Special Economic Zone) primary objective is exports of goods and services Specifically delineated duty free enclaves, deemed to be foreign territory for the purpose of trade, operations and duties, taxes and tariffs Can be either product specific or generic minimum size of SEZs is 10 hectares (25 acres) Trading permitted 100% of profit exempted for first 5 years; 50% for the next 5 years; 50% of reinvested profits for next 5 years from income tax 100% customs duty exemption on goods exported and imported into or service provided in an SEZ

100% customs duty exemption on capital goods, hardware and software (imported/ exported)

100% central Excise Tax (cST) reimbursement in goods complete exemption of central Excise Tax (cST) on sale or purchase of goods sourced from dTa (domestic Tariff area) Service Tax is exempted in respect of export of Taxable services dTa permitted upto 50%of FoB* value of export subject to condition defined amortisation of capital Goods is allowed over a period of 8 years
FOB* - Free on Board

100% exemption on services provided to SEZ unit or developer No limit to dTa sales amortisation of capital Goods is allowed over a period of 10 years

More thrust today is to set up and operate SEZs. Though the Indian SEZs are similar in certain basic respects pertaining to liberal policies, functioning, etc to the global SEZs, but its focus areas in India is more oriented on services with IT/ITES accounting for a significant share in the SEZ pie. Manufacturing too is fast catching up. Beside the IT/ITES segment, multi product SEZ which has accounted for the highest in-principle approvals with their larger scale and size will soon dawn a newer avenue for SEZ growth. SEZs with world class infrastructure and facilities has spurred development with removal of infrastructural constraints and easy access to various facilities. SEZ has augmented the real estate activities in India with a number of real estate projects of significant size kicking off. The spur is not only in the commercial office space supply but has also pushed the residential and retail properties to a new high. The commercial office space supply were the prime beneficiaries with class infrastructure at their disposal. The sector has attracted and is attracting investments from both the domestic and foreign entities.

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SEZs in India have a long way to thread as the real pace is yet to pick up. Though SEZ concept in India is at the initial stages, more experimentations are expected with regard to formats, policy issues,etc. With more approvals and notifications and more activities being brought within the scope of the SEZs, more reforms being introduced to the segment to facilitate development of the core sectors, the demand to set up SEZs are relatively high and it has further propelled India as the most favoured and attractive business destinations.

coNclUSIoN
‘The Old Order Changeth, yielding place to new’ - an excerpt from one of Lord Alfred Tennyson’s poems aptly describes the current state of India SEZ Policy. In India there have been many successfully implemented tax incentive regimes such as the EOUs, EPCG, EPZs, STPI, etc., and Special Economic Zone (SEZ) is geared towards bringing another gamut of inducements for the economy. However, when compared to previous initiatives, the SEZ policy is characteristically different. Recognising their inability to provide for physical infrastructure, the Government has turned towards the private sector for bringing in the infrastructure foundation over which the entire SEZ policy has been based. Thus SEZs will not only be giving very deep ended tax incentives to the various sectors, they will also become almost independent conclaves which will nurture and grow investments in the country. Incentives are also extended to the SEZ developers, operators and occupiers making it an economically viable proposition for all sections involved in the process. While on one hand, private participation has been extremely encouraging, on the other hand there are a few concerns stemming out of the unprecedented enthusiasm for SEZs. In certain instances, such as in the IT/ ITES sector, an over supply situation is expected in the next 18-24 months due to the fact that maximum number of approved/ notified IT/ITeS SEZs far outweigh that for other sectors. The expected supply of IT/ITeS specific SEZs is 47 million sq.ft. by 2009. Multi -sector SEZs seem to be slower off the blocks - possibly plagued by real estate acquisition challenges. While the IT/ ITeS sector is clearly the faster moving, space consuming, employment generating segment of the Indian economy, it does put India on a lop-sided path of over-dependence and onedimensional growth. The other major sector which is likely to benefit from the SEZ policy would be the manufacturing sector. As per recent estimates approximately 44 SEZs spread across approximately 294, 000 acres is likely to come up for this sector. This is expected to give the much needed boost to the sector going forward. Another trend which we may witness in the coming years would be the de-notification of some SEZs. It stems from the fact that SEZ developers could evaluate the market conditions to find it unviable to develop the SEZ, there will be a natural inclination to develop products that have higher marketability or are more financially viable. The de-notification provision would give the developer an exit route.

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On the developer side, the story is expected to unfold as one of consolidation where we expect larger real estate developers/ funds to acquire smaller sized SEZ or small SEZ developers, primarily because of the fact that an SEZ is a perpetual entity and its operations have to be managed, thus in case of developers who are not keen on managing the operations and would want to exit smaller SEZs once they are developed. An auxiliary trend which is likely to happen is that large SEZs are likely to develop into mini -townships. While such trends are already proposed by some IT /ITeS SEZs, essentially promoting the concept of walk-to-work, most developers would take the opportunity to develop residential, retail and also hospitality services in the same SEZ so as to provide corporate occupiers and employees a holistic solution towards a better work-life balance. The economic emphasis on SEZs leaves us to answer the vital question of the fate of the IT/ Software Parks under the STPI (Software Technology Parks of India) Scheme. The fact is that most of the large space occupiers are expanding or setting up new operations in the SEZs, and clearly, the supply of IT Parks outstrips the IT/ ITeS SEZs. In the event the STPI Scheme is extended, the IT Parks will be able to sustain for a bit longer, but in the medium to long term they will eventually face usage obsolescence, leading to high vacancies. The occupiers’ profile of the IT Parks will change with the SME sector looking towards continuing occupation of these IT Parks, until they have the wherewithal to set up operations in the SEZs. It is important for local development authorities to plan ahead to look at alternate permitted usages of these IT Parks, enabling the IT Parks to rejuvenate themselves.
About Research & Business Analytics Group Cushman & Wakefield is committed to collation of high quality base data and assembling detailed statistics for the major India markets on a regular basis. This commitment to quality research provides a strong foundation for all of our services. customized, analytical reports are also developed to meet the specific research needs of owners, occupiers, and investors. Through the delivery of timely, accurate, high quality research reports on the leading trends, markets and business issues of the day, we aim to assist our clients in making pertinent and competitive property decisions. In addition to producing regular reports such as global rankings and local quarterly updates available on a regular basis, Cushman & Wakefield also provides customized studies to meet specific information needs of owners, occupiers and investors. For more information: Tanuja Rai pradhan associate director - India Research & Business analytics Group +(91 124) 469 5555 tanuja.pradhan@ap.cushwake.com Author of the report: amrita datta ashim Bhanja chowdhury Disclaimer This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. Cushman & Wakefield is the world’s largest privately held commercial real estate services firm. Founded in 1917, it has 227 offices in 59 countries and more than 15,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within four primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, valuation services, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners; and Consulting Services, including business and real estate consulting. A recognised leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at cushmanwakefield. com/knowledge. ©2008 Cushman & Wakefield all Rights Reserved Anurag Mathur managing director, India Tel: +91 80 4046 5555 E-mail: anurag.mathur@ap.cushwake.com For more information on Cushman & Wakefield, contact :

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