INTRODUCTION TO SUBJECT

The world first known instance of SEZ have been found in an industrial park set up in Puerto Rico in 1947. In the 1960s, Ireland and Taiwan followed suit, but in the 1980s China made the SEZs gain global currency with its largest SEZ being the metropolis of Shenzhen. From 1965 onwards, India experimented with the concept of such units in the form of Export Processing Zones (EPZ). But a revolution came in 2000, when Murlisone Maran, then Commerce Minister, made a tour to the southern provinces of China. After returning from the visit, he incorporated the SEZs into the Exim Policy of India. Five year later, SEZ Act (2005) was also introduced and in 2006 SEZ Rules were formulated. Earlier India had export processing zones (EPZs), which were later converted in to SEZs. EPZs are industrial estates, which form enclaves from the national customs territory of a country and are usually situated near seaports or airports. Almost the entire production of such zones is normally intended for exports. An export-processing zone is different from a free port. An EPZ is normally an area within or near a port. As against this, a free port encompasses a port or whole city isolated from the rest of the country for customs purposes (examples include Hong Kong, Singapore and Dubai). Obviously a free port is also a free trade zone. Only those imports, which are meant for export processing (like capital goods, raw materials, components etc, used for production of exportable), are freely (i.e. without restrictions) allowed to a purely export processing zone. The exports from an EPZ should satisfy the condition that the export products have undergone certain specified minimum value addition by way of processing activities to become eligible for “free” export. There are no such conditions with respect to free ports, which are not export processing zones. Thus, an item, which is imported to a free port, may be re- exported even in the same condition, i.e., without any modification to the product. The condition of value addition is insisted upon to realize the objectives like increase in net foreign exchange earnings, employment generation and overall economic growth. The EPZs/SEZs provide the required infrastructure facilities freely or at concessional rates.

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After launching the SEZ Scheme in month of March 2000, a separate chapter on SEZ was added to EXIM policy for the five-year period in April 2001. SEZs are specifically delineated duty-free enclaves, deemed as foreign territory for the purposes of trade operations and application of duties and tariffs. SEZs can be set up for the manufacture of goods and the rendering of services, production, processing, assembling, trading, repair, remaking, reconditioning, reengineering including making of gold/ silver/ platinum/ jewelry and articles thereof or in connection therewith. Units for generation/ distribution of power can also be setup in the SEZs. Goods going into the SEZ area from the Domestic Tariff Area (DTA) are treated as deemed exports and goods coming from the SEZ area into DTA are treated as if the goods are being imported. The existing export promotion zones have been converted into SEZs. As a RBI Report observes, the economic rationale for establishing Special Economic Zones is not clearly laid down in trade theory. It is, however, obvious that these zones can be justified either on consideration of equity where a less developed area is accorded special tax and non-tax benefits or a consideration of efficiency, where a region has a spatial advantage in terms of cost. SEZ, as an institutional measure, supports the economic policy shift from import substitution to export promotion with a view of promoting export-led growth to facilitate larger incomes and employment. For these reasons, a large number of countries have taken initiatives to set up SEZs over the last half-century or so. India followed suit in recent year, with a view to improve its competitive position. The incentives offered under the SEZ Scheme include duty free importation and domestic procurement of goods for the development of SEZ and setting up of units, 100% Foreign Direct Investment (FDI) in manufacturing sector under the automatic route, 100% income tax exemptions for the five years and 50% tax for two years thereafter. Other incentives include sub-contracting of a part of production abroad, reimbursement/ exemption of Central Sales Tax on domestic purchases by the SEZ units and retention of 100% foreign exchange earnings in the Exchange Earners Foreign Currency (EEFC) Account. In the Exim Policy for 2002-07 as announced in March 2002, SEZs were given the following concessions: Overseas Banking Units (OBUs), which would, inter alia, be exempt from CRR and SLR requirements would be permitted to be setup in SEZs. These
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OBUs would give access to SEZ units and SEZ developers to international finance at international rates. SEZ units would be extended income tax exemptions and would be exempt from External Commercial Borrowing (ECB) restrictions and would be allowed to make overseas investment and carryout commodity hedging. SEZs would be exempted from Central Sales Tax in respect of supplies from DTA and transactions from DTA to SEZs would be treated as exports under the Indian Income Tax and Customs Act. Until March 2003, eight SEZ were established and approval has been given for setting up of 17 SEZs in the states of Gujarat, Maharashtra, Tamil Nadu, West Bengal, Orrisa, Uttar Pradesh, Andhra Pradesh, Madhya Pradesh, and Karnataka.

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