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Special Economic Zone (SEZ), Policies and Changes
Jaipuria Institute of Management
1, Bambala Institutional Area, Pratap Nagar Sanganer, Jaipur-302033 www.jimj.ac.in
YADVENDRA SHEKHAWAT (PGDM 2009-11)
Dr. RITU SINGH
To all of you Friends thanks a lot for your undying support given to me. I would like to acknowledge our sincere gratitude to Dr. Ritu Singh who gave me the opportunity to work on this Report.
PREFRACE India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) 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. A Special Economic Zone is a geographically bound zones where the economic laws in matters related to export and import are more broadminded and liberal as compared to rest parts of the country. SEZs are projected as duty free area for the purpose of trade, operations, duty and tariffs. SEZ units are selfcontained and integrated having their own infrastructure and support services.
History of SEZ
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.
Role of 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, 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.
OBJECTIVE of the SEZ Act
(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.
Various SEZ Units in India: The area under 'SEZ' covers a wide range of zones, including Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Trade Zones (FTZ), Free Ports, Urban Enterprise Zones and others. Usually the goal of an SEZ structure is to increase foreign investment in the country. At present there are fourteen functional SEZs located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta and Salt Lake (West Bengal), Nodia (Uttar Pradesh), Indore (Madhya Pradesh), Jaipur (Rajasthan), etc. 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
‘SEZ Locations in India’
Source: Seminar Magazine (February 2008).
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.
Advantages and Disadvantages of SEZ.
A SEZ unit which has been set up for carrying on manufacturing, trading or service activity has both advantages as well as disadvantages. SEZ advantages are quite far more as compared to its disadvantages which are almost negligible.
Advantages of SEZ
• Allowed to carry forward losses. • No licence required for import made under SEZ units. • 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. • 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.
• 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. • No routine examination by Customs officials of export and import cargo. • Setting up Off-shore Banking Units (OBU) allowed in SEZs. • OBU's 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.
• 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 EOU's is not commensurate to the number of applications for setting up SEZ's leading to a belief that this project may not match up to expectations.
SWOT Analysis for Indian SEZs
• A large and growing domestic market. • Growing middle class with purchase power • India’s large English speaking workforce • Relatively low labour costs • An established legal redress system Worldwide acceptance of capabilities in fields like: • Pharmaceutical manufacturing & research • Clinical trials • Manufacturing auto parts • Engineering designing & consultancy, IT & ITES
• Entertainment etc
• Infrastructure bottlenecks –connecting infrastructure like Roads leading to SEZs. • Political changes • Convertibility of Currency on Capital A/c
• Inadequate institutional support • 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.
• To use SEZs to catalyse infrastructure development. • New small ports & airports are also being developed keeping SEZ concept in mind. • Realistically establish competitive advantages in SEZs; • A large NRI base who have traditionally invested less in greenfield development in India. • Lower the high transaction /behind the border costs to exporters. • Tap the advantages of WTO/increase India’s small share of world trade. • To increase investments in core strength areas like IT and software products and services.
• An alternative manufacturing base, particularly compared to Chinese SEZs.
• Loosing edge of low labour costs - many countries are competing. • The pattern of buying & selling may not continue. With relocations of industries in other third world countries, new competitors will emerge. • Prospect of even more restrictive labour laws being introduced (eg,“Reservations” for socially disadvantaged groups in private sector jobs). • The performance of SEZs will be monitored by a committee headed by the Development Commissioner and consisting of Director General of Foreign Trade (DGFT) officials and customs authorities will monitor the performance of SEZs. But with opposing interests (reducing tariffs to enhance trade for DGFT, maximising tariff revenue for customs authorities), how will these 'natural adversaries' help deliver this mandate?
• Negotiations for FTAs with many countries may erode competitiveness. • Formation of economic blocks, Effect on Government Revenues.
There are signs of an increasing rejection rate for proposals to establish SEZs. This could be linked to the difficulty in reaching agreement between key ministries involved, especially those involved in export promotion or fiscal policy. This could lead to waning business confidence in SEZs.
• Sops provided to the units in the SEZ’s could be disputed in the WTO – (eg, different tax treatment for goods specifically for export could give rise to charges of dumping)
Special Economic Zones 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 •Nandigram Violence
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 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.
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 south-west 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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