A Presentation on Special Economic Zones (SEZ

Govardhan Swamy Shaji Nambiar

 A Special Economic Zone (SEZ) is a geographical

region that has economic laws that are more liberal than a country’s typical economic laws.  It is a geographically bound zone where the economic laws, in matters, related to export and import are more broadminded and liberal as compared to other parts of the country.  SEZs are projected as duty-free areas for the purpose of trade and operations.  SEZ units are self-contained and integrated having their own infrastructure & support services.  SEZs are believed to create a conducive atmosphere to promote investment and exports. And hence many countries are developing the SEZs with the expectation that they will act as engines of growth for their economies to achieve industrialization.

 Within SEZs, a unit may be setup for the

manufacture of goods and other activities including processing, assembling, trading, repairing, reconditioning etc.  The category ‘SEZ’ covers a broad range of specific zone types, including  Free Trade Zones (FTZ)  Export Processing Zones (EPZ)  Free Zones (FZ)  Industrial Estates (IE)  Free Ports  Urban Enterprise zones and others

 First known SEZ - Puerto Rico, 1947  Ireland & Taiwan followed - 1960s  China made SEZs gain global currency with its largest SEZ at

Shenzen in 1980  Today, there are approx 3000 SEZs operating in 120 countries which account for over US $600 billion in exports and about 50 million jobs.

The first ever Export Processing Zone (EPZ) in

Asia was set up by Government of India in Kandla in 1965. Based on the success of Kandla EPZ, in the beginning of eighties, seven more EPZs were set up in Bombay, Noida, Surat, Madras, Falta, Visakhapaptnam and Cochin. However the EPZ policy faced several problems like limited power of zonal authorities, absence of single window facility, rigid custom procedures for bank guarantees, restrictive FDI policy, procedural constraints and severe

Thus the EXIM policy introduced a new scheme

from April 1, 2000 for the establishment of the SEZs in different parts of the country and these EPZs were converted into Special Economic Zones (SEZs) in the year 2000 under a new policy announced by the Government of India. SEZs in India functioned from Nov 2000 under the provisions of foreign trade and fiscal incentives were made effective. After extensive consultation, the SEZ Act, 2005 supported by SEZ rules, came into effect on 10th Feb 2006 providing for drastic simplification of procedures and for single window clearance on matters relating to both central & state governments. notify

Generation of additional economic activity Promotion of exports of goods & services Promotion of investment from domestic &

foreign sources Creation of employment opportunities Development of infrastructure facilities

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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 labor laws, as may be locally applicable. Such SEZs shall make security arrangements to fulfill all the requirements of the laws, rules and procedures applicable to such SEZs. 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. 

The developer submits the proposal for

establishment of SEZ to the concerned State government. The State Govt has to forward the proposal with its recommendation within 45 days of the receipt of the proposal to the Board of Approval (BOA) The applicant also has the option of submitting the proposal directly to the BOA.

The BOA has been constituted by the Central

govt in exercise of the powers conferred under the SEZ Act. 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. All the decisions are taken in the BOA by consensus. The BOA has 19 members.

400000 349203

350000 300000 250000

238242

200000

No. of employees Investment

150000 100000

74451

91093

50000 0 2008

2009

TrendIn Export performanceof SEZs 140000 125950

120000 100000 80000 66638 60000 34615

40000 20000

8552

9190

10053

13854

18309

22840

0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Exports(In Cr)

PercentageGrowth in Exports 100%

92%

90%

89%

80% 70% 60%

52%

50% 39%

40%

Growth Rate(%) 32% 25%

30% 20% 10%

7%

9%

0% 2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

SEZExportsAs %Share of Total Exports 18% 15.73%

16% 14% 12%

10.17%

10% 8% 6%

6.14% 4.20%

4.40%

3.90%

2000-01

2001-02

2002-03

4%

4.70%

5.10%

5.13%

2004-05

2005-06

2% 0% 2003-04

2006-07

2007-08

2008-09

Sector-WiseExports(06-07) TextilesandGarments 4% TradingandService 7%

Others 14%

Sector-WiseExports(07-08) Textiles&Garments 2%

Electronics 19%

Engineering 4%

Engineering 3%

Plastic and Rubber 1%

Chemicalsand Pharmaceuticals 3%

FoodandAgro 1% Drugsand GemsandJewellery 46%

Electronics 23%

TradingandService 31%

FoodandAgro 2% PlasticandRubber 1%

Others 2%

Pharmaceuticals 2%

GemsandJewellery 35%

 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 license 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 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.  Exemption from payment of Service Tax.  The sale of goods or merchandise that is manufactured outside the SEZ 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.

 SEZs would result in the Finance Ministry losing

revenue to the tune of over Rs.1,00,000 cr annually due to various tax concessions and exemptions.  The SEZs are mainly coming up in Maharashtra, Gujarat, Tamilnadu, Karnataka, Haryana, Orissa. There is a lack of focus on other regions of the country. This could lead to regional imbalances. For ex, no SEZ has yet come up in the North-east region which already suffers from the problem of alienation.  In India, farmers are emotional about the land that they have farmed for years and just giving it up is not something that can be easily digested. There have also been concerns about the compensation package offered to farmers whose lands have been acquired.

 Huge tracts of agricultural and forested land will be

converted for industrial purposes for the setting up of SEZs. This can have grave impact on the ecosystem. The developers fail to follow the minimum environmental guidelines for SEZs leading to severe environmental impact.  Clusters of development - Rather than promoting the overall economic development, SEZs would result into clusters of heightened economic activity widening the already existing gap between developed and impoverished areas.  Employee Working Conditions – Since relaxed labor laws are applicable in the SEZs, workers enjoy no rights including the fundamental rights of association and protests.

 Some of the SEZs in India are:  SEEPZ SEZ, Mumbai  Kandla SEZ, Kutch, Gujarat  Cochin SEZ, Kerala,  Vishakapatnam SEZ, AP  Falta SEZ, Kolkata  Surat SEZ, Gujarat  Indore SEZ, (Multi product)  Jaipur SEZ (Gems and Jewellery)  Santa Cruz, Mumbai

Hardware Manufacturing Facility, Mahindra World City in Tamilnadu

Apparel Manufacturing Facility, Mahindra World City in Tamilnadu

Nokia SEZ Complex in Tamilnadu

 India has more or less adopted the same China

model of SEZ development,  Chinese SEZs are mostly public funded and thus the responsibility was primarily shouldered by govts. On the contrary, the Indian model encourages private sector led development.  China continues to score as it provides an attractive tax environment with world class infrastructure and a liberal labor environment. On the contrary, Democratic India, under pressure from strong labor unions failed to implement liberal labor laws.  India has significantly larger English-speaking workforce than does China. India also has an edge in a number of key knowledge based industries like software, IT enabled services etc. Indian SEZs will more likely attract investments in high end human skill based industries and services sector.

 Size – Each SEZ in China is well over 1000

hectares, the minimum recommended area. In India, the EPZs converted into SEZs are not even a third of this  Strong Domestic demand – In China, about 50% of SEZ sales are to the domestic market. Though India has a large domestic market, it has failed to project this to lure SEZ investors.  Decentralization of Power – In China, provincial and local authorities were made partners and stakeholders be delegating powers to approve foreign investments. In India, only state govts are allowed to set up SEZs and the powers for foreign

Jamnagar Incidence In November 2006, farmers from the Jamnagar District in Gujarat moved the High Court of Gujarat and 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.

This controversy started when the West Bengal Govt decided that the Salim Group of Indonesia would set up a chemical hub under the SEZ policy at Nandigram. The chemical hub would require the acquisition of over 14,000 acres of land. The SEZ would be spread over 29 villages, most of which are in Nadigram.  There was massive resistance movement again this proposed investment by the villages with the active support of some political parties. So, 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 idea for SEZs, in its originality is a very

attractive one. If implemented according to proper rules and regulations and most importantly, with proper consideration for farmers and project affected people (PAPs), the SEZs provide a win-win situation.