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A

PROJECT REPORT ON

Special Economic Zone (SEZ),


Policies and Changes

Jaipuria Institute of Management


1, Bambala Institutional Area, Pratap Nagar
Sanganer, Jaipur-302033
www.jimj.ac.in

SUBMITTED TO SUBMITTED BY

Dr. RITU SINGH YADVENDRA SHEKHAWAT


(Professor, JIMJ) (PGDM 2009-11)
ACKNOWLEDGEMENT

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.

‘ YADVENDRAA’
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 self-
contained 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.

‘Disadvantages’

• 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
Strengths

• 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

Weaknesses

• 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.
Opportunities

• 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.
‘Threats’

• 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.

Nandigram Violence

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.