Special Economic Zone (SEZ

)

Special Economic Zone
 SEZs, the new engines for export led economic growth in India, are defined as:

“Specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs”

Background
 Extremely successful Chinese format to promote exports, attract FDI and foster overall economic growth

 Shenzhen SEZ in China, started in 1981, has achieved 38% GDP growth CAGR (highest recorded so far) mainly due to:

– Liberal economic framework – Integrated infrastructure at very competitive prices

Special Economic Zone : Shenzhen
 Shenzhen SEZ is the result of vibrant economy made possible by rapid FDI since late 1970s, when it was a small village.
Shenzhen

 Since then, foreign nationals have invested more than USD 30 Billion for building factories and forming JVs.

 It is now one of the fastest growing cities in the world with home to numerous high-tech companies & also the 2nd busiest in mainland china.

SEZ
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Fiscal incentives & regulatory benefits
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Thrust on selfcertification & in-zone empowerment
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Integrated Infrastructure Self-contained & Self-managed
India provides the boldest policy framework

SEZ Scheme
 Incorporated in Exim policy on April 1, 2000  to provide an internationally competitive & hassle free environment for exports  Quality Infrastructure & Attractive fiscal package to attract investors  Units in the Zone have to be a net foreign exchange earner in 3 years  Units may be set up in SEZ for manufacturing of goods and/or rendering of Services.

SEZ Scheme contd..
 offshore banking unit may be set up in the SEZs.  All import / export operation of SEZ units to be on self-certification basis.  Sales in the Domestic Tariff Area (DTA) by SEZ units shall be subject to payment of full custom duty and import policy in force  Existing Export Promotion Zones (EPZs) were converted into SEZs viz. 8 EPZs located at Kandla & Surat (Gujarat), Cochin (Kerala), Santa Cruz ( Mumbai-Maharashtra), Falta ( WB), Madras( TN), Noida (UP) and Vishakhapatnam (AP)

SEZ ACT 2005
 To instill confidence in investors and signal the Government's commitment to a stable SEZ policy regime  to impart stability to the SEZ regime  to generating greater economic activity and employment  an act to provide for establishment, development & management of the SEZs  It extends to whole of India  for promotion of exports and for matters connected therewith or incidental thereto

SEZ ACT 2005 (contd…)
 provides for setting of SEZ's in the public, private joint sector or by State Governments. Even foreign companies can set up SEZ  SEZ could be set up – 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

Important Definitions
 Board of Approval  Authority  Unit Approval Committee  Development Commissioner  Authorized Operations  Domestic Tariff Area

Important Definitions ( contd…)
 Export: (i) taking goods, or providing services, out of India, from an SEZ, by land, sea or air or by any other mode, whether physical or otherwise; or (ii) supplying goods, or providing services, from the DTA to a Unit or Developer; or (i) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone

Important Definitions ( contd…)
 Import:
(i) bringing goods or receiving services, in a SEZ, by a Unit or Developer from a place outside India by land, sea or air or by any other mode, whether physical or otherwise; or (ii) receiving goods, or services by, Unit or Developer from another Unit or Developer of the same SEZ or a different SEZ

SEZ Framework
 Performance of the units to be monitored by a Committee headed by Development Commissioner and consisting of Customs

 Simplified compliance procedures and documentation with an emphasis on self certification

 Flexibility to keep 100% of export proceeds in EEFC account

 Full freedom for subcontracting including subcontracting abroad

 Commodity hedging permitted

SEZ Framework
 Exemption from interest rate surcharge on import finance

 SEZ unit to be positive net foreign net exchange earner within three years

 Job work on behalf of domestic exporters for direct exports allowed

 Contract farming allowed agriculture/ horticulture units

 No License required for import

SEZ Framework
 No routine examination by Customs of export & import cargo  No separate documentation required for Customs and Exim Policy  In house customs Clearance  Exemption from industrial licensing requirement for items reserved for SSI sectors  Supplies from DTA to SEZ units treated as deemed exports  Support service like banking, post office, clearing agents etc. provided in Zone Complex  Developed plots and ready to use built up space

SEZ Framework
 Investment made by individuals etc in a SEZ company also eligible for exemption u/s 88 of IT Act  Developer permitted to transfer infrastructure facility for operation and maintenance  Flexibility to the developer to set up infrastructural facilities and to collect service /user charges. The developers will also have the freedom to allocate developed plots to approved SEZ units on a purely commercial basis  Generation, transmission and distribution of power in SEZs allowed  Entry of persons to processing area of the SEZ shall be regulated by the Development Commissioner through issue of identity cards

SEZ Framework
Foreign Direct Investment  100% foreign direct investment (FDI) is freely allowed in manufacturing sector in SEZ units under automatic route, except prohibited items  No cap on foreign investments for SSI reserved items  100% FDI allowed for : townships and recreational facilities on a case to case basis, franchise for basic telephone service in SEZ

SEZ Framework
Environment  SEZs permitted to have non-pollution industries in IT, and recreational facilities like golf courses, desalination plans, hotels and non-pollution service industries in the Coastal Regulation Zone (CRZ) area  Exemption from public hearing under Environment Impact Assessment (EIA) Notification

SEZ Framework
Off-Shore Banking (OBUs)  Setting up of Off-Shore Banking Units allowed in SEZs  OBUs entitled for 100% Income-Tax exemption for 3 years & 50% for next 2 years

SEZ Framework
Companies Act  Enhanced limit of Rs. 2.4 cr per annum allowed for managerial remuneration  Regional office of Registrar of Companies (RoC) in SEZs  Exemption from requirement of domicile in India for 12 months prior to appointment as Director

Incentives & facilities offered to SEZs Units & Developers
 Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units  100% IT exemption on export income for first 5 years, 50% for next 5 years thereafter and 50% of ploughed back export profit for next 5 yrs.  Exemption from minimum alternate tax (MAT) under IT Act.  External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.

Incentives & facilities offered to SEZs Units & Developers
 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.

 Duty free goods to be utilised in 5 years.

Incentives & facilities offered to SEZs Units & Developers
 Exemption from Securities Transaction Act.  Exemption from Stamp Duty and Registration Fee  Exemption from Electricity Duty for 10 years from the date of production or rendering services  Losses will be allowed to be carried forward.  "Write off "of unrealized export bills up to 5%

Sectorwise SEZ as on Dec 2008
Sectors Aviation/Aerospace IT/ITES/Electronic Hardware/Semiconductor Textiles/Apparel/Wool Pharma/chemicals Petrochemicals & petro Multi-Product Building product/material Beach & mineral/metals Bio-tech Ceramic & glasses Engineeringe Multi-Services/Services Metallurgical Engineering Electronic prod/ind Auto and related Energy related Footwear/Leather Formal approvals 1 341 20 22 4 23 1 3 26 1 23 16 1 3 3 7 In-principle approvals 2 11 13 2214 0 53 2 0 1 10 11 4 5 2 1 12 1 9 14 5 3 1 4 Notified SEZs 181 10

Sectorwise SEZ as on Dec 2008
Sectors Gems and Jewellery Power/alternate energy FTWZ Metal/Stain. Steel/Alum/Foundary Food Processing Non-Conventional Energy Plasting processing Handicrafts Agro Port-based multi-product Airport based multiproduct Writing & printing paper mills 4 5 7 2 2 Formal approvals 10 4 7 8 4 4 1 1 3 1 1 2 2 1 In-principle approvals 4 1 8 4 2 Notified SEZs 3 2 1 3 3 1

Grand Total

552

141

274

Exports from functioning SEZs
Year Value (Rs. Crore) Growth Rate ( over previous year ) 39% 32% 25% 52% 92%

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

13,854 18,314 22 840 34,615 66,638

Current investment and Employment

Investment:

Rs. 83450 crore

Employment:

1,13,426 persons

PROCEDURE FOR ESTABLISHMENT OF SEZ
 Any person who intends to set up an SEZ, after identifying the area, will make a proposal to the state Govt. A high level authority under the chairmanship of Chief Secretary is constituted for the purpose.  State Govt with its recommendations, within 45 days, shall forward it to Board of Approval which is a 19 member inter ministerial body in the Ministry of Commerce & Industry.  While forwarding a proposal, the State Government shall commit to provide the following :
– That area in the proposed SEZ is free from environmental restrictions; – That water, electricity and other services would be provided as required; – That units would be given full exemption in electricity duty and tax on sale of electricity for self generated and purchased power; – To allow generation, transmission and distribution of power within SEZ;

PROCEDURE FOR ESTABLISHMENT OF SEZ contd…
– To exempt from State ST, octroi, mandi tax, turnover tax and any other duty/cess or levies on supply of goods from DTA to SEZ units; – That for units inside the Zone, the powers under the Industrial Disputes Act and other related labour Acts would be delegated to the Development Commissioner and that the units will be declared as a Public Utility Service under Industrial Disputes Act. – That single point clearances system and minimum inspections requirement under State Laws/Rules would be provided

 Where the Board receives & approves a proposal directly, the person shall obtain concurrence of State Government within 6 months of the approval  Board of Approval will verify the proposal with “authorized operation” allowed for that sector & will forward its decision to Central Govt. for issuing approval.  After approval, SEZ will be notified when developer submits land possession documents or land on lease for minimum 20 years and a certificate from State Govt. that land is free from all encumbrances

Requirements of minimum area of land
Type of SEZ Min. Area Area Reserved for In North East Required Processing Zone States, HP, J&K, (ha) Uttaranchal, Sikkim, Goa, UT 1000 100 100 10 10 50% Min built up area 1 Lac sq. m 50 25% 200

Multi Product Services Specific sector, SEZ in a port or Airport Hardware, software, IT Biotechnology, Gems & Jewellary, Non conventional energy resources Free trade & Warehousing

40

Min built up area 1 lac sq. m

Approval of New Units
1) Application seeking permission for setting up a Unit and other clearances, including those indicated below, shall be made to the Development Commissioner, in Form F, in 5 copies, with a copy to the Developer:– – – – – – – – – – – – – – (a) Setting up of unit in a Special Economic Zone; (b) Annual permission for sub-contracting; (c) Allotment of Importer-Exporter Code number; (d) Allotment of land/industrial sheds in the Special Economic Zone; (e) Water connection; (f) Registration-cum-Membership Certificate; (g) Small Scale Industries Registration; (h) Registration with Central Pollution Control Board; (i) Power connection; (j) Building approval plan; (k) Sales tax registration; (l) Approval from inspectorate of factories; (m) Pollution control clearance, wherever required; (n) Any other approval as may be required from the State Government.

Approval of New Units (contd…)
(2) The Development Commissioner shall get the proposal scrutinized and get it placed before the Approval Committee for its consideration. On receiving recommendation of the approval committee, the approval shall be granted, modified or rejected within 15 days. The proposals received for FDI / industries needing license under Industries Act shall be placed before the Board by the Development Commissioner for its consideration. Approval shall be granted, modified or rejected within 45 days.

(3)

Note:
• Land will be allotted by developer only after approval to the unit is given. • Entrepreneur has to submit proof of his residence & IT returns for last 3 years along with application.

Approval of New Units (contd…)
Sector specific requirements to be fulfilled by units: (a)export of high-grade iron ore, that is 64 % Fe and above, except iron ore of Goa origin and Redi origin, which would be subject to approval of Board (b)no sub-contracting or job work of polyester yarn shall be permitted in DTA or in an EOU or Units in other Special Economic Zone

Sensitive Sectors
No proposal shall be considered for :
(a) recycling of plastic scrap or waste(*) (b) enhancement of the approved import quantum of plastic waste and scrap (c) reprocessing of garments or used clothing or secondary textiles materials and other recyclable textile materials into clipping or rags or industrial wipers or shoddy wool or yarn or blankets or shawls (*)

(*): Provided that extension of Letter of Approval for an existing Unit shall be decided by the Board

Authority for each SEZ
Authority shall be responsible for development, operation & management of the SEZ for which it is constituted and will perform following functions:
(a) the development of infrastructure in the SEZ (b) promoting exports from the SEZ (c) reviewing the functioning and performance of the SEZ (d) levy user or service charges or fees or rent for the use of properties belonging to the Authority (e) Will get loans and fund from Central Government for performing its functions.

Applicability of Domestic Laws
Though several laws have been relaxed for the SEZs to promote exports, the area would still have to adhere to the following laws.

 Local labour laws  Local building bye laws if not specially laid out for SEZ  Pollution Laws  Factory Act

SUMMING UP

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