A special economic zone (SEZ) is an area in a country that is subject to unique economic regulations that differ from other regions of the same country. The SEZ regulations tend to be conducive to foreign direct investment (FDI). Conducting business in an SEZ typically implies that the company will receive tax incentives and the opportunity to pay lower tariffs.
The main objectives of the SEZ Act are:
- generation of additional economic activity
- promotion of exports of goods and services
- promotion of investment from domestic and foreign sources
- creation of employment opportunities
- development of infrastructure facilities
Development of SEZs 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 in 1965. With a view to overcoming 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 attracting 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, both at the Centre and the State level, with the minimum possible regulations.
SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. The Special Economic Zones Act, 2005, was passed by Parliament in May 2005 which received Presidential assent on the 23rd of June, 2005. The SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.
Many EPZs were converted to SEZs, with notable zones in Noida (Uttar Pradesh state), Falta (West Bengal state), Visakhapatnam (Andhra Pradesh state), Chennai (Tamil Nadu state), Cochin (Kerala state), Santa Cruz (Maharashtra state), Indore (Madhya Pradesh), as well as Kandla and Surat (Gujarat). The SEZ Act 2005 envisages a key role for the State Governments in Export Promotion and the creation of related infrastructure.
Incentives for setting up in an Indian SEZ:
- Duty-free import and domestic procurement of goods for the development, operation, and maintenance of the company;
- 100 percent income tax exemption on export income for the first five years, 50 percent for five years thereafter, and 50 percent of the export profit reinvested in the business for the next five years (these incentives will be withdrawn from April 1, 2020, under the Sunset Clause, but many observers expect it to be extended following recent tax cuts);
- Exemption from the Goods and Services Tax (GST) and levies imposed by the state government (supplies to SEZs are zero-rated under the IGST Act, 2017, meaning they are not taxed);
- Single window clearances for all state and federal government approvals.
The SEZ Rules:
- The SEZ Rules provide for different minimum land requirement for different class of SEZs. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created.
- Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs;
- Single window clearance for setting up of an SEZ;
- Single window clearance for setting up a unit in a Special Economic Zone;
- Single Window clearance on matters relating to Central as well as State Governments;
- Simplified compliance procedures and documentation with an emphasis on self certification
Administrative set up:
The functioning of the SEZs is governed by a three-tier administrative setup. 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 the approval of units in the SEZs and other related issues. Each Zone is headed by a Development Commissioner, who is the ex-officio chairperson of the Approval Committee. A Single Window SEZ approval mechanism has been provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administration are considered by this BoA periodically. All decisions of the Board of approvals are with consensus.
Challenges before SEZs:
- Despite the advantages and clear success cases, SEZs have a mixed record. The cost of investments in zone infrastructure and maintenance in many cases outweigh the benefits.
- Investors may also take advantage of tax breaks without delivering substantial employment or export earnings. It often proofs difficult to extend benefits outside the zones or to upgrade domestic skills and the production base.
- Many traditional export processing zones have been successful in attracting investment and creating employment in the short term but became uncompetitive when wages started to rise, or trade preferences disappeared.
SEZs today operate in an ever more challenging environment. Due to the new industrial revolution (NIR) zones will need to rethink their competitive advantages, as the importance of traditional location advantages is eroding. At the same time, SEZs will need to pursue business activities in a more socially and environmentally responsible manner that advances the Sustainable Development Goals (SDGs). These challenges call for a modernization of special economic zones.
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