Special Economic Zones (SEZs)

Special Economic Zones (SEZs) is a geographical region that has economic laws different from a country’s typical economic laws. Here different economic laws mean hassle free laws where companies can enjoy various benefits for running their business like tax free imports, etc.
These SEZs are located within a country’s national borders usually near border so that trade is easy from these point.

SEZ in India

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, Gujarat in 1965. Inorder to overcome the absence of world-class infrastructure, unstable fiscal regime, etc  the Special Economic Zones (SEZs) Policy was announced in April 2000 in India.

• There were 7 Central Government SEZs set up prior to the enactment of SEZs Act 2005 – Kandla, Mumbai, Noida, Chennai, Kochi, Falta (West Bengal) and Visakhapatnam. Additionally, there were 11 other SEZs set up by state governments/private sector prior to enactment of SEZs Act 2005.
• The SEZ Act 2005 and  SEZ Rules in 2006  envisages key role for the State Governments in Export Promotion and creation of related infrastructure.

Who can set up these SEZs in India?

• Any private/public/joint sector or state government or its agencies can set up an SEZ for hassle free imports and exports.
• A foreign agency can also set up SEZs in India.

Prior approval is required from the respective state governments for setting up SEZ. The states satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc. After this, the proposals are sent to the ministry of commerce and industry by the state government.

Where are SEzs located in India?
Some of the functional SEZs are located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal), Noida (Uttar Pradesh), Indore (Madhya Pradesh), etc.

• Tamil Nadu has the maximum number of operational SEZs at 40. Out of these, Chennai was one of the 7 SEZs set up by the Central Government prior to the enactment of SEZs Act 2005, while 4 other SEZs were set up by the state government/private sector prior to enactment of SEZs Act 2005.
• The state having the second maximum number of SEZ is Telangana and is followed by Karnataka in the third place.

What benefits do these zones provide to businesses in India?

• Businesses are entitled for a package of incentives and a simplified operating environment.
• Duty free import of raw materials for production.
• 100% Income Tax exemption on export income for SEZ units for first 5 years, 50% for next 5 years thereafter.
• Setup of business without any license hassles and the long process involved in it.
• No license is required for imports, including second hand machineries.
• Exemption from Central Sales Tax and Service Tax.
• Single window clearance mechanism.
• External commercial borrowing by SEZ units upto US $ 500 million in a year.

But why are these SEZs allowed, if government has to give so many benefits to the businesses in these areas?
The primary motive is to attract the Foreign Investment (FDI) in the country. This can be explained by an example:
The Government needs funds for its various activities, to establish the required infrastructure and for this it will require the funds. The funds can be collected as investments from both national as well as foreign companies. So, SEZs are allowed. On the one hand the companies will get the various benefits of the hassle free laws; thereby increasing their revenue generating capacity as they can produce and trade goods at a lower price. On the other hand, the Government will get the funds needed or the investments for the economic growth. So this provides a win-win situation for both.

The main objectives of the SEZ Act 2005 in India are:

1. generation of additional economic activity
2. promotion of exports of goods and services;
3. promotion of investment from domestic and foreign sources;
4. creation of employment opportunities;
5. development of infrastructure facilities.

Some other facts about SEZs:

• The concept of SEZ’s was largely pioneered by China.
• 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.
• There were some shortcomings experienced on account of the multiplicity of controls and clearances.
• So, the Special Economic Zone (SEZ) policy was announced on April 1, 2000 in India.
• A number of meetings were held to stabilize SEZ policy regime in the country.
• The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005.
• The Act covered the main objectives given above.

With so many advantages of the SEZs, there are its drawbacks too:
The biggest drawback is the taking up of the arable land from farmers to set up these zones. As the arable land would be taken, there will be low crop production which is not a good sign for Indian economy where the large part of its GDP is dependent on agriculture.

In the latest budget 2016-17:
In case of a SEZ unit, it is proposed that if a unit commences its operations on or before 31st March 2020, it shall be eligible to claim income tax benefit under section 10AA of the Income Tax Act. Whereas, the developers of SEZs, which are not operational yet, have been given time up to 31st March 2017 to make their SEZs operational to avail income-tax benefits under section 80-IAB of the Income Tax Act.
This means that after 31st March 2020, all the companies operating in India will have to pay tax.