Special Economic Zones (SEZ) in India.
Introduction
A Special Economic Zone in short SEZ 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.
Within SEZs, a units may be set-up for the manufacture of goods and other activities including processing, assembling, trading, repairing, reconditioning, making of gold/silver, platinum jewellery etc.
As per law, SEZ units are deemed to be outside the customs territory of India. Goods and services coming into SEZs from the domestic tariff area or DTA are treated as exports from India and goods and services rendered from the SEZ to the DTA are treated as imports into India.
Benefits of SEZ
Apart from providing state-of-the-art infrastructure and access to a large well-trained and skilled work force, the SEZ also provides enterprises and developers with a favourable and attractive framework of incentives which include 100% income tax exemption for a period of five years and an additional 50% tax exemption for two years thereafter. Similarly, 100% FDI is also provided in the manufacturing sector. Exemption from industrial licensing requirements and no import license requirements is also given to the SEZ units.
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), Noida (Uttar Pradesh), Indore (Madhya Pradesh), Jaipur (Rajasthan), etc.
Attractive incentive and great investment opportunities have attractive many business tycoons to step into the SEZ all over the country. The first step was taken by the Mahindra World City at Chennai. The SEZ was promoted by Mahindra & Mahindra Ltd and later on by the Tamil Nadu Industrial Development Corporation. Mahindra & Mahindra Ltd holds 89% equity in the same. Later on, Reliance Industries also signed a pact with the Haryana government for setting up of the Rs. 25,000 crore multi products SEZ near Gurgaon in 2006.
Obligations under SEZ Unit
It is compulsory for every SEZ units in India to achieve positive net foreign exchange earning as per the formula given in paragraph Appendix 14-II (para 12.1) of Handbook of Procedures, Vol.1. For this particular purpose, a legal undertaking is required which has to be executed by a separate unit of the Development Commissioner. The is responsible for providing periodic reports to the Development Commissioner and Zone Customs as provided in Appendix 14-I F of the Handbook of Procedures, Vol.1
Role of State 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.
History of SEZ’s
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 MurlisoneMaran, 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.
Terms and Conditions
Only units approved under SEZ scheme would be permitted to be located in SEZ.
- The SEZ units shall abide by local laws, rules, regulations or laws in regard to area planning, sewerage disposal, pollution control and the like. They shall also comply with industrial and labour laws as may be locally applicable.
- Such SEZ shall make security arrangements to fulfill all the requirements of the laws, rules and procedures applicable to such SEZ.
- The SEZ should have a minimum area of 1000 hectares and at least 35 % of the area is to be earmarked for developing industrial area for setting up of processing units.
- Minimum area of 1000 hectares will not be applicable to product specific and port/airport based SEZs.
- Wherever the SEZs are landlocked, an Inland Container Depot (ICD) will be an integral part of SEZs.
- Detailed guidelines on setting up of SEZ in the Private/Joint/State Sector is given in Appendix 14-II.N of Handbook of Procedures Volume I.
Advantages & 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
· 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.
· Allowed to carry forward losses.
· No licence required for import made under SEZ units.
· 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
Administrative Setup of SEZ’s
The functioning of SEZs is governed by a three-tier administrative set-up. The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce. The Approval Committee at the Zone level deals with approval of units in the SEZs and other related issues.
Board of Members - SEZ units
1. | Secretary, Department of Commerce | Chairman |
2. | Member, CBEC | Member |
3. | Member, IT, CBDT | Member |
4. | Joint Secretary (SEZ), Department of Commerce | Member |
5. | Joint Secretary, DIPP | Member |
6. | Joint Secretary, Ministry of Science and Technology | Member |
7. | Joint Secretary, Ministry of Small Scale Industries and Agro and Rural Industries | Member |
8. | Joint Secretary, Ministry of Home Affairs | Member |
9. | Joint Secretary, Ministry of Defence | Member |
10. | Joint Secretary, Ministry of Environment and Forests | Member |
11. | Joint Secretary, Ministry of Law and Justice | Member |
12. | Joint Secretary, Ministry of Overseas Indian Affairs | Member |
13. | Joint Secretary, Ministry of Urban Development | Member |
14. | A nominee of the State Government concerned | Member |
15. | Director General of Foreign Trade or his nominee | Member |
16. | Development Commissioner concerned | Member |
17. | A professor in the IIM’s or the Indian Institute of Foreign Trade | Member |
18. | Director or Deputy Sectary, Ministry of Commerce and Industry, Department of Commerce | Member Secretary |
Board of Approval
The Board of Approval has been constituted by the Central Government in exercise of the powers conferred under the SEZ Act. All the major decisions are taken by the Board of Approval. The Board of Approval has 19 Members which are as follows:
All the requests for setting up of units in the SEZ are approved at the Zone level by the Approval Committee consisting of Development Commissioner after a discussion with the Customs Authorities and representatives of State Government. All post approval clearances in matters related to importer-exporter code number, change in the name of the company or implementing agency; broad banding diversification, etc. are given at the zonal level by the Development Commissioner. A separate unit is also there who monitor the performance of the SEZ units on a periodic basis and is governed by the Approval Committee. SEZ units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of any violation in the rules formulated by the Approval Committee.
SEZs / EOUs, each zone are headed by a Development Commissioner, who is also heading the Unit Approval Committee. Development Commissioner is the nodal officer for SEZs and help in resolution of problem, if any, faced by the units or developer. In all SEZ’s, the statutory functions are controlled by the Government while the rest of the operations are privatized.
Controversies Related to SEZ’s
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
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.
