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OBJECTIVES OF SEZ

To instill confidence in investors and signal the Government's commitment


to a stable SEZ policy regime and with a view to impart stability to the
SEZ regime thereby generating greater economic activity and employment
through the establishment of SEZs, a comprehensive draft SEZ Bill
prepared after extensive discussions with the stakeholders. The Minister
held a number of meetings in various parts of the country both for
Commerce and Industry as well as senior officials for this purpose. The
Special Economic Zones Act, 2005, was passed by Parliament in May
2005, which received Presidential assent on the 23rd of June 2005. The
draft SEZ Rules were widely discussed and put on the website of the
Department of Commerce offering suggestions/comments. Around 800
suggestions were received on the draft rules. After extensive consultations,
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. The main objectives of the SEZ Act are:
(a) Generation of additional economic activity
(b) Promotion of exports of goods and services;
(c) Promotion of investment from domestic and foreign sources;
(d) Creation of employment opportunities;
(e) development of infrastructure facilities;
It is expected that this will trigger a large flow of foreign and domestic
investment in SEZs, in infrastructure and productive capacity, leading to
generation of additional economic activity and creation of employment
opportunities.
The SEZ Act 2005 envisages key role for the State
Governments in Export Promotion and creation of related infrastructure. A
Single Window SEZ approval mechanism has been provided through a 19
member inter-ministerial SEZ Board of Approval (BoA). This BoA
considers the applications duly recommended by the respective State
Governments/UT Administration periodically. All decisions of the Board
of approvals are with consensus.

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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.

The SEZ Rules provide for:


 "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.

Special Economic Zones Establishment Procedure

A SEZ unit can be set up anywhere in India after fulfilling the following
requirements.

Step-by-Step Procedure

 According to SEZ Act 2005, a Special Economic Zone can be


established either jointly or severally by the Central Government, State
Government, or any other person involve in the manufacturing of goods.
Even a foreign company can also set up SEZ in India.

 After identifying the proper area a person wishing to establish a SEZ


unit may make a proposal to the State Government.

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 Notwithstanding anything contained in sub-section (2), any person,
who intends to set up a Special Economic Zone, may, after identifying the
area, at his option, make a proposal directly to the Board for the purpose of
setting up the Special Economic Zone:

 In case, a State Government intends to set up a Special Economic


Zone, it may after choosing the area, forward the proposal directly to the
Board of Approval for the purpose of setting up the Special Economic
Zone:

 Every proposal under sub-sections (2) to (4) shall be made in such


form and manner containing such particulars as may be prescribed.

 The State Government may, on receipt of the proposal made under


sub-section (2), forward the same together with its recommendations to the
Board within a fix period as may be prescribed.

 Without prejudice to the provisions contained in subsection (8), the


Board may, after receipt of the proposal under sub-section (2) to (4),
approve the proposal subject to such terms and conditions as it may deem
fit to impose, or modify or reject the proposal.

 The Central Government may prescribe the following requirement for


establishment of a Special Economic Zone, namely:-

 The minimum area of land and other terms and conditions


subject to which the Board shall approve, modify or reject any proposal
received by it under sub-section (2) to (4) ; and

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 The terms and conditions, subject to which the Developer shall
undertake the authorized operations and his obligations and entitlements.

Provided that different minimum are of land and other terms and
conditions referred to in clause (a) may be prescribed by the Central
Government for a class or classes of Special Economic Zones.

 If the Board, -

 Approves without any modification, the proposal received under sub-


section (2) to (4), it shall communicate the same to the Central
Government;
 Approves with modifications the proposal received under sub-section
(2) to (4), it shall, communicate such modifications to the person or the
State Government concerned and if such modifications have been accepted
by such person or the State Government, the Board shall communicate the
approval to the Central Government;
 Rejects the proposal, received under sub-section (2) to (4), it shall
record the reasons therefore and communicate the rejection to the Central
Government, which shall intimate to the State Government or the person
concerned.

 The Central Government shall, on receipt of communication under


clause (a) or clause (b) of sub-section (9), grant, within such time as may
be prescribed, a letter of approval on such terms and conditions and
obligations and entitlements as may be approved by the Board, to the
Developer, being the person or the State Government concerned:

Provided that the Central Government may, on the basis of approval of the
Board, approve more than one Developer in a Special Economic Zone in
cases where one Developer does not have in his possession the minimum
area of contiguous land, as may be prescribed, for setting up a Special
Economic Zone and in such cases, each Developer shall be considered as a
Developer in respect of the land in his possession.

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 Any person who, or a State Government which, intends to provide any
infrastructure facilities in the identified area referred to in sub-section (2)
to (4), or undertake any authorized operation may, after entering into an
agreement with the Developer referred to in sub-section (10), make a
proposal for the same to the Board for its approval and the provisions of
sub-section (5) and sub-sections (7) to (10) shall, as far as may be, apply to
the said proposal made by such person or State Government.

 Every person or a State Government referred to in subsection (11),


whose proposal the Board and who have approved, or which, has been
granted letter of approval by the Central Government, shall be considered
as a Co-Developer of the Special Economic Zone.

 Subject to the provisions of this section and the letter of approval


granted to a Developer, the Developer may allocate space or built up area
or provide infrastructure services to the approved units in accordance with
the agreement entered into by him with the entrepreneurs of such Units.

Documents Submission
Following necessary document are required before making the final
proposal for the SEZ units-

 15 copies of the application shall be submitted to the Chief Secretary


of the State, which shall indicate:

 Name and address of the applicant

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 Status of the promoter (whether private/public or joint sector/ NRIs or
state government)

 Project report

The documents for establishment of SEZ shall be submitted with the


following details: -

 Location of the proposed Zone with details of existing infrastructure


and that proposed to be established,

 Area of the proposed SEZ and its distance from the nearest Sea
Port/Airport/Rail/Road head etc.

 Financial details and mode of financing the project and viability of the
project.

 Details of foreign equity, if any

 Whether the zone will allow only certain specific industries or will be
a multi-product zone.

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State Government Approval

The State Government shall, forward it along with their commitment to the
following to the Department of Commerce, Government of India:

 That the area proposed under Special Economic Zone shall be free
from any environmental restrictions;

 Water, electricity and other services would be provided as required;

 Full exemption shall be given in electricity duty and tax on sale of


electricity for self generated and purchased power;

 Exemption from State Sales Tax, octroi, mandi tax, turnover tax and
taxes, duty, Cess, levies on supply of goods from Domestic Tariff Area to
SEZ units;

 That single point clearances system and minimum inspections


requirement under State Laws/Rules would be provided.

 Generation, transmission and distribution of power shall be allowed


within the SEZ;

 The Zone will be declared as a Public Utility Service under the


Industrial Disputes Act;

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 All powers under Industrial Dispute Act, 1947 shall be delegated to
Development Commissioner.

 Section 11(1) of Special Economic Zones Act, 2005 provides that "the
Central Government may appoint any of its officers not below the rank of
Deputy Secretary to the Government of India as the Development
Commissioner of one or more Special Economic Zones"

Government of India after considering the above proposals may grant in-
principle approval for setting up of SEZs. The in-principle approval shall
be valid for a period of one year. However, this validity period may be
extended by the Department of Commerce, as it may thinks fit.

According to Section 3(7) of Special economic Zones Act, 2005, the Board
of Approval may accept, modify or reject the proposal depending upon
various circumstances. In case of acceptance, approval is valid for a period
of 3 years within which time effective steps shall be taken by the developer
to implement the project. Although, this time period can be extended the
Department of Commerce depending upon various circumstances.

Brief view on approval mechanism


The Board of Approval has been constituted by the Central
Government in exercise of the powers conferred under the SEZ Act. All
the decisions are taken in the Board of Approval by consensus. The Board
of Approval has 19 Members. Its constitution is as follows:

(1) Secretary, Department of Commerce Chairman


(2) Member, CBEC Member
(3) Member, IT, CBDT Member
(4) Joint Secretary (Banking Division),
Department of Economic Affairs,
Ministry of Finance
(5) Joint Secretary (SEZ), Department of Member
Commerce
(6) Joint Secretary, DIPP Member

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(7) Joint Secretary, Ministry of Science and Member
Technology
(8) Joint Secretary, Ministry of Small Scale Member
Industries and Agro and Rural Industries
(9) Joint Secretary, Ministry of Home Member
Affairs
(10) Joint Secretary, Ministry of Defence Member
(11) Joint Secretary, Ministry of Member
Environment and Forests
(12) Joint Secretary, Ministry of Law and Member
Justice
(13) Joint Secretary, Ministry of Overseas Member
Indian Affairs
(14) Joint Secretary, Ministry of Urban Member
Development
(15) A nominee of the State Government Member
concerned
(16) Director General of Foreign Trade or his Member
nominee
(17) Development Commissioner concerned Member
(18) A professor in the Indian Institute of Member
Management or the Indian Institute of
Foreign Trade
(19) Director or Deputy Sectary, Ministry of Member Secretary
Commerce and Industry, Department of
Commerce

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,

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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.

Administrative set up

The functioning of the 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. A Development Commissioner, who is ex-officio chairperson of the
Approval Committee, heads each Zone.
The Board of Approval has approved once an SEZ and Central
Government has notified the area of the SEZ, units are allowed to be set up
in the SEZ. The Approval Committee consisting of Development
Commissioner, Customs Authorities and representatives of State
Government approves all the proposals for setting up of units in the SEZ at
the Zone level. All post approval clearances including grant of importer-
exporter code number, change in the name of the company or
implementing agency, broad banding diversification, etc. are given at the
Zone level by the Development Commissioner. The Approval Committee
periodically monitors the performances of the SEZ units and units are
liable for penal action under the provision of Foreign Trade (Development
and Regulation) Act, in case of violation of the conditions of the approval.

Incentives and facilities offered to the SEZs

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Considering the need to enhance foreign investment and promote exports
from the country, the Government of India has introduced various types of
special incentives and benefits to SEZ units, which are as follows-

Customs and Excise


 SEZ Units are free to import from the domestic sources without
paying any duty on capital goods, raw materials, consumables, spare,
packing materials, office equipment, DG sets, etc. for implementation of
their project in the zone without any license or specific approval. Good
which are imported duty free could be utilized over the approval period of
5 years.

 Sales to DTA (Domestic Tariff Area) by SEZ units is always regarded


as import and is subject to all normal import duties, including
Countervailing Duty, SAD, etc.

 SEZ Units are free from the periodic examination by Customs of


export and import cargo.

 SEZ units may sub-contract a part of their production through units in


DTA/SEZ/EOU/EPZ with the permission of the customs authorities. Sub-
contracting may also be permitted for processing abroad with the
permission of the board of approval.

Income Tax

Part-1 Income Tax incentives for SEZ units


 Tax exemption for SEZ units engaged in manufacture or providing
services- A new section 10AA has been introduced in the IT Act by SEZ
Act, 2005 which provides that the units in SEZ which start manufacturing
or producing articles/ things or which start providing services on or after

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April 1, 2005 will be eligible for a deduction of 100 percent of export
profits for the first five years from the year in which such manufacture/
provision of services commences and 50 percent of the export profits for
the next five years. Further, for the next five years a deduction shall be
allowed of up to 50 percent of the profit as is debited to the profit and loss
account and credited to the Special Economic Zone Reinvestment Reserve
Account (subject to conditions).

 Tax exemption for Offshore Banking units in SEZ- A deduction in


respect of certain incomes would be allowed under the new section 80LA,
to scheduled banks or foreign banks having an Offshore Banking unit in
SEZ or to a unit of IFSC. The deduction shall be for 100 percent of income
for five consecutive years beginning from the year in which permission/
registration has been obtained under the Banking Regulation Act or the
SEBI Act or any other relevant law and 50 percent of income for next five
years.

 Interest received by non-residents and not ordinary residents on


deposits made with an Offshore Banking Unit on or after April 1, 2005
shall be exempt from tax.

 Exemption from Minimum Alternate Tax ("MAT")- Income arising or


accruing on or after April 1, 2005 from any business carried on, or services
rendered by SEZ unit would be exempt from MAT under section 115JB.

 Exemption from Capital Gains- Capital gains arising on transfer of


assets (machinery, plant, building, land or any rights in buildings or land)
on shifting of the industrial undertaking from an urban area to any SEZ
would be exempt from capital gains tax. The exemption would be
allowable if within one year before or three years after such transfer:

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 Machinery or plant is purchased for the purposes of business of
industrial undertaking in SEZ by the assessee.

 Assessee has acquired land or building or has constructed building for


the purposes of business in SEZ.

 The original assets are shifted and establishment of the industrial


undertaking is transferred to SEZ; and other specified expenses are
incurred.

 The amount of exemption for capital gains would be restricted to the


costs and expenses incurred in relation to all or any of the purposes
mentioned above.

Part-2 Income Tax incentives for SEZ Developer

 Tax holiday for SEZ developers- A new section 80-IAB has been
introduced in the IT Act vide SEZ Act, 2005 whereby a deduction of 100
percent of profits derived from the business of developing SEZ (notified on
or after April 1, 2005) would be available to developer of SEZ for any 10
consecutive years out of 15 years beginning from the year in which SEZ
has been notified.

 Exemption under section 10(23G) that was available to infrastructure


capital fund or a cooperative bank on interest and long term capital gains
investment had been extended to investment made by SEZ developers

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qualifying for tax holiday under section 80-IAB of the IT Act. However,
this exemption has been withdrawn with effect from assessment year 2007-
08.

 Exemption from Dividend Distribution Tax ("DDT")- No DDT would


be payable by a developer of SEZ on dividend declared, distributed or paid
on or after April 1, 2005 out of current income.

 Exemption from MAT- Any income earned on or after April 1, 2005


by a SEZ developer would be exempt from MAT under section 115JB of
the Act. from Domestic Tariff Area (DTA) to SEZ.

Foreign Direct Investments


 100% FDI is freely allowed in manufacturing sector in SEZ units
under automatic route, except arms and ammunition, explosive, atomic
substance, narcotics and hazardous chemicals, distillation and brewing of
alcoholic drinks and cigarettes, cigars and manufactured tobacco
substitutes.

 No cap of foreign investments for SSI reserved items.

Off-Shore Banking Units (OBUs)

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 Setting up of OBUs allowed in SEZs.

 OBUS are entitled for 100% income tax exemption for 3 years and
50% for next 2 years.

Banking / External Commercial Borrowings (ECBs)


 ECBs by units up to US$ 500 million a year allowed without any
maturity restrictions.

 Freedom to bring in export proceeds without any time limit.

 Flexibility to keep 100% of export proceeds in EEFC account and


freedom to make overseas payment from such account.

 Exemption from interest rate surcharge on import finance.

 SEZ units allowed to write-off unrealized export bills.

 Exemption from interest rate surcharge on import finance.

Service Tax
 Exemption from service tax to SEZ units.

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Sales to DTA

 DTA sales can be undertaken subject to achievement of positive NFE.


Net Foreign Exchange (NFE) shall be calculated cumulatively for a period
of 5 years from the commencement of commercial production.

 For the purpose of calculation, the value of imported capital goods


shall be amortized as follows -

 1st – 2nd year: 5% each year.


 3rd – 5th year: 10% each year.
 6th – 8th year: 20% each year.

 Exemption from capital gains on transfer of an industrial unit from


urban area to a SEZ.

 Drawback or such other benefit as may be admissible from time to


time on goods and services admitted from the DTA for setting up,
operation and maintenance of units.

 All exports from the DTA to the Zone shall be exempt from state and
local body taxes or levies as (In some states, exports made to educational
institutions, hospitals, hotels, residential and / or commercial complexes,
leisure and entertainment facilities or any other facilities as may be notified
by the state government are not exempt).

 Developers of SEZs may import or procure goods from DTA without


payment of duty for development, operation or maintenance of SEZ.

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 Exemption from Central Sales Tax (CST) on supply of goods from the
DTA for development, operation and maintenance of SEZs.

 Income tax exemption for a block of 10 years in the first 15 years of


operation.

 Drawback or such other benefits as may be admissible from time to


time on supply of goods from DTA for development, operation and
maintenance of SEZs.

 Investment income in the form of dividends, interest or long term


capital gains, of an infrastructure capital company from investments made
in an enterprise engaged in the development, operation or maintenance of a
SEZ are exempt from tax.

 Foreign investment permitted.

 Service tax exemption on services provided to a developer or to a unit


located in the SEZ region.

 Any activity or transaction in the Zone, which is liable for


entertainment duty under the Bombay Entertainments Duty Act, 1923 and
Luxury Tax under the Maharashtra Tax on Luxuries Act, 1987 shall not be
liable to such tax The fiscal benefits shall be applicable for a period of 25
years from the date of notification of the zone by the Government of India
or such extended period as may be decided by the State Government

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 With respect to each Special Economic Zone all such transactions
between the Zones or within the Zone or both, including the transactions of
land acquisition for development of the Zone between the developer or co-
developer and land owners and land transactions between the developers or
co-developers and the units, carried out after declaration of the Zone by the
Government of India, shall be exempt from the following State taxes, cess
and levies namely:

 Purchase tax, Sales tax and Turnover tax

 Specified sales (Lease tax) in respect of lease of goods

 Stamp duty for the first transaction between the Developer or co-
developer and the land-owner and the first transaction between the
Developer or co-developer and the Units

 Registration fee for the first transaction between the Developer or co-
developer and the land-owner and the first transaction between the
Developer or co-developer and the Units

 Land assessment tax

 Electricity duty and tax (Only for sales to Units in processing


area)

 Water pollution cess

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 Works Contract tax

 State government shall –

 Provide exemption from electricity duty or taxes on sale of self


generated or purchased electric power for use in processing area of an
SEZ.

 Allow generation, transmission, distribution of power within a SEZ


subject to the provisions of the electricity act

Exemptions in Matters Related to Environment

 SEZs permitted to have non-polluting industries in IT and facilities


like golf courses, desalination plants, hotels and non-polluting service
industries in the Coastal Regulation Zone area.

 SEZ units are exempted from public hearing under Environment


Impact Assessment Notification.

Company Act

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 Enhanced limit of INR 2.4 crores per annum is allowed for managerial
remuneration.

 Agreement to opening of Regional office of Registrar of Companies


in SEZ.

 Exemption from requirement of domicile in India for 12 months prior


to appointment as Director.

Drugs and Cosmetics

 Exemption from port restriction under Drugs & Cosmetics Rules.

 Sub-Contracting / Contract Farming.

 SEZ units may sub-contract part of production or production process


through units in the Domestic Tariff Area or through other EOU / SEZ
units.

 SEZ units may also sub-contract part of their production process


abroad.

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Labour Laws
Normal Labour Laws are applicable to SEZs, which are enforced by the
respective State Governments. However, State Governments have been
requested to simplify the procedures / returns and for introduction of a
single window clearance mechanism by delegating appropriate powers to
Development Commissioners of SEZ.

SEZ Approval Status

Consequent upon the SEZ Rules coming into effect w.e.f. 10th
February 2006, Twenty-eight meetings of the Board of Approvals have
since been held. During these meetings, formal approval has been
granted to 531 SEZ proposals. There are 143 valid in-principle
approvals. Out of the 531 formal approvals, 260 SEZs have been
notified.

Land requirements for approved Special Economic Zones:


The total land requirement for the formal approvals granted till date is
approximately 67680 hectares out of which about 109 approvals are for
State Industrial Development Corporations/State Government Ventures,
which account for over 20853 hectares. In these cases, the land already
available with the State Governments or SIDCs or with private companies
has been utilized for setting up SEZ. The land for the 270 notified SEZs
where operations have since commenced involved is approximately over
31405 hectares only.
Out of the total land area of 2973190 sq km in India, total agricultural
land is of the order of 1620388 sq km (54.5%). It is interesting to note that
out of this total land area, the land in possession of the 270 SEZs notified
amounts to approximately over 314 sq km only. The formal approvals
granted also works out to only around 676 sq km.

SEZs- leading to the growth of labour intensive


manufacturing industry:

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Out of the 531 formal approvals given till date, 174 approvals are for
sector specific and multi product SEZs for manufacture of Textiles &
Apparels, Leather Footwear, Automobile components, Engineering etc..
which would involve labour intensive manufacturing. SEZs are going to
lead to creation of employment for large number of unemployed rural
youth. Nokia and Flextronics electronics hardware SEZs in Sriperumbudur
are already providing employment to 14577 and 1058 persons. Hyderabad
Gems SEZ for Jewellery manufacturing in Hyderabad has already
employed 2145 persons. Majority of who are from landless families, after
providing training to them. They have a projected direct employment for
about 2267 persons. Apache SEZ being set up in Andhra Pradesh will
employ 20, 000 persons to manufacture 10,00,000 pairs of shoes every
month. Current employment in Apache SEZ is 5536 persons. Brandix
Apparels, a Sri Lankan FDI project would provide employment to 60,000
workers over a period of 3 years. Even in the services sector, 12.5 million
sq meters space is expected in the IT/ITES SEZs, which as per the
NASSCOM standards translates into 12.5 lacks jobs. It is, therefore,
expected that establishment of SEZs would lead to fast growth of labour
intensive manufacturing and services in the country.
Benefits derived from SEZs
Benefit derived from SEZs is evident from the investment, employment,
exports and infrastructural developments additionally generated. The
benefits derived from multiplier effect of the investments and additional
economic activity in the SEZs and the employment generated thus will far
outweigh the tax exemptions and the losses on account of land acquisition.
Stability in fiscal concession is absolutely essential to ensure credibility of
Government intensions.

Exports from the functioning SEZs during the last


three years are as under:

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Year Value (Rs. Crore) Growth Rate (over
previous year)
2003-2004 13,854 39%
2004-2005 18,314 32%
2005-2006 22 840 25%
2006-2007 34,615 52%
2007-2008 66,638 92%

Investment and employment in the SEZs set up prior to


the SEZ Act, 2005:

At present, 1943 units are in operation in the SEZs. In the SEZs established
prior to the Act coming into force, there are 1143 units providing direct
employment to over 1.97 lakh persons; about 37% of who are women.
Private investment by entrepreneurs in these SEZs established prior to the
SEZ Act is of the order of over Rs. 5626.24 Crore.

Investment and employment in the SEZs notified


under the SEZ Act 2005:

Current investment and employment:

 Investment: Rs. 83450crore


 Employment: 1,13,426 persons

Impact of the scheme


The overwhelming response to the SEZ scheme is evident from the flow of
investment and creation of additional employment in the country. The SEZ
scheme has generated tremendous response amongst the investors, both in

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India and abroad, which is evident from the list of Developers who have
set up SEZs:
 Nokia SEZ in Tamil Nadu
 Quark City SEZ in Chandigarh
 Flextronics SEZ in Tamil Nadu
 Mahindra World City in Tamil Nadu
 Motorola, DELL and Foxconn
 Apache SEZ (Adidas Group) in Andhra Pradesh
 Divvy's Laboratories, Andhra Pradesh
 Rajiv Gandhi Technology Park, Chandigarh
 ETL Infrastructure IT SEZ, Chennai
 Hyderabad Gems Limited, Hyderabad

Special Economic Zones 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.

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 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.

 A detailed guideline on setting up of SEZ in the


Private/Joint/State Sector is given in Appendix 14-II.N of Handbook of
Procedures Volume I.

Key Issues

The SEZ Act deals primarily with the following matters:

 Establishment of the SEZ and the various authorities constituted in


this connection.

 Appointment of the Developer, Co-developers and approval for units


to be located in the notified area.

 Exemptions, drawbacks and concessions including exemptions from


customs duty (on goods brought into or exported from the SEZ), excise,
service tax, securities transaction tax, sales tax and income tax.

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 Offshore Banking Unit & International Financial Services Centre.
Setting up of offshore banking units / International Financial Services
Centre in SEZs.

 Notified Offences & Civil Suits. A single enforcement agency/officer


for certain notified offences as well as the designation of courts by the state
governments for such offences committed in and for civil suits arising in
SEZs.

Salient Features of the SEZ Act


Governance: An important feature of the Act is that it provides a
comprehensive SEZ policy framework to satisfy the requirements of all
principal stakeholders in an SEZ – the developer and operator, occupant
enterprise, out zone supplier and residents. Earlier, the policy relating to
the EPZs/ SEZs was contained in the Foreign Trade Policy while
incentives and other facilities offered to the SEZ developer and units were
implemented through various notifications and circulars issued by the
concerned ministries/departments. This system did not give confidence to
investors to commit substantial funds for development of infrastructure and
for setting up units.

Another major feature of the Act is that it claims to provide expeditious


and single window clearance mechanisms. The responsibility for
promoting and ensuring orderly development of SEZs is assigned to the
board of approval. It is to be constituted by the central government. While
the central government may suo motu set up a zone, proposals of the state
governments and private developers are to be screened and approved by
the board. At the zone level, approval committees are constituted to
approve/reject/modify proposals for setting up SEZ units.

In addition, the Development Commissioner (DC) and his/her office is

30
responsible for exercising administrative control over a zone. The labour
commissioner’s powers are also delegated to the DC. Finally, clause 23
requires that designated courts will be set up by the state governments to
try all suits of a civil nature and notified offences committed in the SEZs.
Affected parties may appeal to high courts against the orders of the
designated courts.

Incentives: The Act offers a highly attractive fiscal incentive package,


which ensures

 Exemption from custom duties, central excise duties, service tax,


central sales taxes and securities transaction tax to both the developers and
the units;
 Tax holidays for 15 years (currently the units enjoy a seven year tax
holiday), i e, 100 per cent tax exemption for 5 years, 50 per cent for the
next five years, and 50 per cent of the ploughed back export profits for the
next five years1; and

 100 per cent income tax exemption for 10 years in a block period of
15 years for SEZ developers.

Infrastructure: Provisions have been made for:

 The establishment of free trade and warehousing zones to create


world-class trade-related infrastructure to facilitate import and export of
goods aimed at making India a global trading hub.

 The setting up of offshore banking units and units in an international


financial service Centre in SEZs.

31
 The public private participation in infrastructure development.

 The setting up of a “SEZ authority” in each central government SEZ


for developing new infrastructure and strengthening the existing one.

 There has been a tremendous rush to set up SEZs since the Act came
into effect in February 2006. The total number of approvals and in-
principle approvals across 21 states as on October 27, 2006, was 212 and
152, respectively. As on date, 34 SEZs out of these approvals have been
notified. Table 1 shows the current status of the upcoming SEZs.

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 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 approval period of 5 years.

32
 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.

33
 No routine examinations by Customs officials of export and import
cargo.

 Setting up Off-shore Banking Units (OBU) allowed in SEZs.

 OBUs 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.

34
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 EOUs is not


commensurate to the number of applications for setting up SEZs leading to
a belief that this project may not match up to expectations.

SEZ Controversy
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

35
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.

Nandigram Violence

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 southwest 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.

36
EXPORT PROJECTION FROM SPECIAL
ECONOMIC ZONES FOR THE YEAR 2008-09:
Central govt. SEZs

No Name of the SEZ Projection of exports


. for 2008-09 (Rs crores)

1. Kandla Special Economic Zone 2500

2. SEEPZ Special Economic Zone 13498

3. Noida Special Economic Zone 20000

4. MEPZ Special Economic Zone 3000

5. Cochin Special Economic Zone 2000

6. Visakhapatnam SEZ 800

7. Falta Special Economic Zone 1100

Total 42898

37
State Govt./Private Special Economic Zones established
prior to SEZ Act

N Name of the SEZ Projection of exports from 2008-09


o. (Rs crores)
1. Indore Special Economic Zone 488.5

2. Surat Special Economic Zone 9500

3. Surat Apparel Park SEZ 4

4. Jaipur Special Economic Zone 350

5. Jodhpur Special Economic Zone 40

6. Mahindra Industrial Park (IT) SEZ 2209.5

7. Mahindra Industrial Park (Apparel) 201.85

8. Mahindra Industrial Park (Auto) 191.28

9. Moradabad 30

10 Manikanchan Special Economic 1700


. Zone

11 Wipro Special Economic Zone 400


.

12 Nokia Special Economic Zone 15060.39


.

Total projection 30175.52

38
Total export projection from SEZs

Govt. SEZs 42898

SG/Private SEZs prior to SEZ Act, 2005 30175.52

SEZs notified under SEZ Act 05 52876.96

Total projection 125950.48

Sector wise breakup of Physical Exports (2007-08)


from Special Economic Zones in India
Rs(in crores)
Govt. SEZs State Govt/Pvt SEZs notified Total
SEZs under
prior to SEZ SEZ Act.
Act, 2005
Biotech 159.45 159.45
Computer/ 2663.38 1046.24 275.64 3985.26
Electronic
software
Electronics 1408.53 6313.34 3399.457 11121.327
hardware
Electronics 518.71 518.71
Engineering 886.81 421.87 343 1651.68

Gems and 15979.98 7025.935 0.15 23006.065


Jewellery
Chemicals & 1069.49 20.33 333.23 1423.05
Pharmaceutic
als
Handicrafts 30.33 30.33
Plastic and 354.97 302.69 657.66
rubber
Leather, 190.79 46.23 237.02
footwear and

39
sports goods
Ceramics 24 24
Food and 645.58 645.58
Agro Industry
Non- 126.01 126.01
conventional
Energy
Trading and 14073.22 6793.75 20866.97
service
Textiles and 1135.69 101.16 79.76 1316.61
garments
Tobacco 9.5 8.98 18.48
related
products
Misc. 314.66 103.23 431.59 849.48

Total 39275.31 22167.855 5194.517 66637.682

Sector wise breakup of Physical Exports (2006-07)


from Special Economic Zones in India

Central State Total


Government Govt/Pvt
sector
SEZs prior
to SEZ Act,
2005
Rs. in Crore
Zones Total
Textile and 1132.5 175.45 1333.87
Garments
Computer 507.22 507.22
Software
Electronics 0.13 0.13
Electronic 1347.24 733.44 2090.07
software
Electronic 2070.38 1775.962 3846.342
hardware
Engineering 1259.09 130.08 1389.17
Gems and 11741.81 4327.03 16068.84
Jewellery
Chemical and 989.46 63.9 1106.29

40
Pharmaceutic
als
Plastic and 179.37 213.85 393.22
rubber
Handicraft 6.49 6.49
Leather and 168.47 168.47
sports goods
Ceramics 22.78 22.78
Food and 573.08 573.08
Agro Industry
Misc. 4667 34.89 4701.89
Tobacco 3.17 3.17
Biotech 33.4
Trading and 699.92 1670.24 2370.16
service
Total 25358.45 9134.502 34614.592

SEZs: Sector wise Distribution

Sectors Formal In-principle Notified

approvals approvals SEZs

Aviation/Aerospace 1 2
IT/ITES/Electronic
341 11 181
Hardware/Semiconductor

Textiles/Apparel/Wool 20 13 10

Pharma/chemicals 22 2 14

Petrochemicals & petro. 4 0 1

Multi-Product 23 53 12

Building product/material 1 2

Beach & mineral/metals 3 0 1

Bio-tech 26 1 9

Ceramic & glasses 1

Engineering 23 10 14

41
Multi-Services/Services 16 11 5

Metallurgical Engineering 1

Electronic prod/ind 3 4 3

Auto and related 3 5 1

Energy related

Footwear/Leather 7 2 4

Gems and Jewellery 10 4 3

Power/alternate energy 4 1 2

FTWZ 7 8 1
Metal/Stain.
8 4 3
Steel/Alum/Foundry

Food Processing 4 2 3

Non-Conventional Energy 4 1

Plasting processing 1

Handicrafts 4 1 1

Agro 5 3 2

Port-based multi-product 7 2

Airport based multi- 2 1

product

Writing and printing paper 2 1

mills

GRAND TOTAL 552 141 274

42
SEZs: State wise Distribution

State Formal In-principle Notified


approvals approvals SEZs
Andhra Pradesh 99 2 57
Chandigarh 2 2
Chattisgarh 1 2
Delhi 2 1
Dadar & Nagar 4
Haveli
Goa 7 3
Gujarat 49 11 24
Haryana 45 17 25
Himachal 3
Pradesh
Jharkhand 1 1
Karnataka 50 9 25
Kerala 19 1 8
Madhya Pradesh 14 6 4
Maharashtra 104 34 43
Nagaland 2
Orissa 10 3 4
Pondicherry 1
Punjab 10 7 2
Rajasthan 8 11 5
Tamil Nadu 66 18 44
Uttar Pradesh 31 4 16
Uttarankhand 3 2
West Bengal 24 13 8
GRAND 552 141 274
TOTAL

43
SEZ Glossary Words and Definitions

SEZ Exim words Definitions


Exim words Definitions
The person on whose behalf the application is made and
Applicant shall, wherever the context so requires, include the person
signing the application.
The Board of Approval as notified by the Department of
BOA
Commerce.
Any plant, machinery, equipment or accessories required
for manufacture or production, either directly or
indirectly, of goods or for rendering services, including
those required for replacement, modernization,
technological up gradation or expansion. Capital goods
also include packaging machinery and equipment,
refractories for initial lining, refrigeration equipment,
Capital Goods
power generating sets, machine tools, catalysts for initial
charge, equipment and instruments for testing, research
and development, quality and pollution control. Capital
goods may be for use in manufacturing, mining,
agriculture, aquaculture, animal husbandry, floriculture,
horticulture, pisciculture, poultry, sericulture and
viticulture as well as for use in the services sector.
An authority competent to exercise any power or to
Competent
discharge any duty or function under the Act or the Rules
Authority
and Orders made there under or under this Policy.
One of the parts of a sub-assembly or assembly of which a
manufactured product is made up and into which it may
Component
be resolved. A component includes an accessory or
attachment to the component.
Consumables Any item, which participates in or is required for a
manufacturing process, but does not necessarily form
part of the end- product. Items, which are substantially or
totally consumed during a manufacturing process, will be

44
deemed to be consumables.
Any consumption goods, which can directly satisfy human
Consumer
needs without further processing and includes consumer
Goods
durables and accessories thereof.
Any arrangement under which exports/imports from/to
India are balanced either by direct imports/exports from
the importing/exporting country or through a third
country under a Trade Agreement or otherwise.
Counter Trade Exports/Imports under Counter Trade may be carried out
through Escrow Account, Buy Back arrangements, Barter
trade or any similar arrangement. The balancing of
exports and imports could wholly or partly be in cash,
goods and/or services.
A person or body of persons, company, firm and such
other private or government undertaking, who develops,
builds, designs, organizes, promotes, finances, operates,
Developer
maintain or manages a part or whole of the infrastructure
and other facilities in the Special Economic Zones as
approved by the central Government.
Development The Development Commissioner of the Special Economic
Commissioner Zone.
DFRC Duty Free Replenishment Certificate.
Domestic Tariff Area within India, which is outside the Special Economic
Area Zones.
Relation to any goods manufactured in India and
exported, means the rebate of duty chargeable on any
imported material or excisable material used in the
Drawback
manufacture of such goods in India. The goods include
imported spares, if supplied with capital goods
manufactured in India.

EHTP Electronic Hardware Technology Park.


EOU Export Oriented Unit.
Any goods produced or manufactured in India and
Excisable goods subject to a duty of excise under the Central Excise and
Salt Act 1944 (1 of 1944).
Exporter A person who exports or intends to export and holds an
Importer-Exporter Code number unless otherwise

45
specifically exempted.
The obligation to export the product or products
covered by the license or permission in terms of
Export Obligation
quantity, value or both, as may be prescribed or
specified by the licensing or competent authority.
The Handbook of Procedures (Vol.1) and "Handbook
(Vol.2)" means Handbook of Procedures (Vol.2)
Handbook (Vol.1)
published under the provisions of the paragraph 2.4 of
the Policy.
A person who imports or intends to import and holds an
Importer Importer-Exporter Code number unless otherwise
specifically exempted.
Industrial, commercial and social infrastructure or any
Infrastructure
other facility for the development of the Special
facilities
Economic Zone as notified.
ITC (HS) Classifications of Export and Import Items
ITC (HS)
Book.
Processing or working upon of raw materials or semi-
finished goods supplied to the job worker so as to
Jobbing complete a part or whole of the process resulting in the
manufacture or finishing of an article or any operation
which is essential for the aforesaid process.
Licensing The authority competent to grant a license under the
Authority Act/Order.
The period beginning on the 1st April of a year and
Licensing Year
ending on the 31st March of the following year.
To make, produce, fabricate, assemble, process or bring
into existence, by hand or by machine, a new product
having a distinctive name, character or use and shall
include processes such as refrigeration, re-packing,
polishing, labeling. Re-conditioning repair, remaking,
Manufacture
refurbishing, testing calibration, re-engineering.
Manufacture, for the purpose of this Policy, shall also
include agriculture, aquaculture, animal husbandry,
floriculture, horticulture, pisciculture, poultry,
sericulture, viticulture and mining.
Manufacturer A person who exports goods manufactured by him or
Exporter intends to export such goods.
MAI Market Access Initiative

46
Merchant A person engaged in trading activity and exporting or
Exporter intending to export goods.
Net Foreign Exchange Earning as a percentage of
NFEP
exports.
Notification A notification published in the Official Gazette.
An Order made by the Central Government under the
Order
Act.
An element of a sub-assembly or assembly not normally
useful by itself and not amenable to further disassembly
Part
for maintenance purposes. A part may be a component
or an accessory.
An individual, firm, society, company, corporation or
Person
any other legal person.
The Export and Import Policy, 2002-07 as amended
Policy
from time to time.
Prescribed under the Foreign Trade (Development and
Prescribed Regulation) Act, 1992 (No. 22 of 1992) or the Rules or
Orders made there under or under this Policy.
A notice published under the provisions of paragraph
Public Notice
2.4 of the Policy.
(i) basic materials which are needed for the
Raw material manufacture of goods, but which are still in a raw,
natural, unrefined or unmanufactured state; and
(ii) for a manufacturer, any materials or goods which
are required for his manufacturing process, whether
they have actually been previously manufactured or are
processed or are still in a raw or natural state.
(RCMC) means the certificate of registration and
Registration-Cum-
membership granted by an Export Promotion Council
Membership
or other competent authority as prescribed in the
Certificate
Policy or Handbook (Vol.1).
Rules made by the Central Government under Section
Rules
19 of the Act.
All the tradable services covered under General
Services Agreement on Trade in Services and earning free
foreign exchange.
Service Provider A person providing
(i) Supply of a ‘service’ from India to any other

47
country;
(ii) Supply of a ‘service’ from India to the service
consumer of any other country in India; and
(iii) Supply of a ‘service’ from India through
commercial or physical presence in the territory of any
other country.
(iv) Supply of a ‘service’ in India relating to exports
paid in free foreign exchange.
Special Economic Zone notified by the Ministry of
SEZ
Commerce & Industry, Department of Commerce.
All types of vessels used for sea borne trade or coastal
Ships
trade and shall include second hand vessels.
Standard Input Output Norms notified by DGFT in the
SION Handbook (Vol.2), 2002-07/approved by Board of
Approval.
A part or a sub-assembly or assembly for substitution,
that is ready to replace an identical or similar part or
Spares
sub-assembly or assembly. Spares include a component
or an accessory.
Specified Specified by or under the provisions of this Policy.
An exporter recognized as "Export House/Trading
House by DGFT/ Development Commissioner or Star
Status holder
Trading House/ Super Star Trading House" by the
Director General of Foreign Trade.
STP Software Technology Park
Exports made by an exporter or manufacturer on
Third-party behalf of another exporter(s). In such cases, shipping
exports bills shall indicate the name of both the
exporter/manufacturer and exporter(s).
The Committee notified for Special Economic Zones to
Unit Approval
consider proposals on matters relating to Special
Committee
Economic Zone unit under its jurisdiction.
Any wild animal as defined in Section 2(36) of the
Wild Animal
Wildlife (Protection) Act, 1972.
The Zone Development Board notified for Special
Zone Development
Economic Zones to consider matters relating to
Board
development, operation and maintenance of SEZs.

48
RECOMMENDATION

I have already mentioned that SEZ is a growth engines that can boost
manufacturing, augment export and generate employment. Before 1947
India didn’t have concept of foreign trade and its simplication on the Indian
economy. After 1950, when we started planning to enter foreign trade, lot of
issues were there, in which exports and imports of goods was also an
important issue. That time National Defence Council suggested to establish

49
foreign trade section under the Ministry of Commerce. After starting 5 years
plan there was awareness and Planning Commission suggested the role of
exports and imports and its simplications or effect on the economic growth.
In 1991 a policy was drawn which is known as EXIM Policy and a
separate chapter on SEZ was added to the EXIM Policy for the 5 years plan
1997-2002. Now on the basis of report and collected data, conclusions are as
follows-

 Special Economic Zone (SEZ) is a specifically delineated duty free


enclave and shall be deemed to be foreign territory for the purposes of
trade operations and duties and tariffs.
 Any private/public/joint sector or State Government or its agencies
can set up Special Economic Zone (SEZ).

 Any foreign company can setup SEZs.


 State Governments will have a very important role to play in the
establishment of SEZ. Representative of the State Government, who is
a member of the Inter-Ministerial Committee on private SEZ, is
consulted while considering the proposal. Before recommending any
proposals to the Ministry of Commerce & Industry (Department of
Commerce), the States must satisfy themselves that they are in a
position to supply basic inputs like water, electricity, etc.
 100% FDI allowed for:

 Townships with residential, educational and recreational


facilities on a case to case basis,
 Franchise for basic telephone service in SEZ.

 SEZ units may import or procure from the domestic sources, duty
free, all their requirements of capital goods, raw materials,
consumables, spares, packing materials, office equipment, DG sets
etc. for implementation of their project in the Zone without any
license or specific approval.

 100% foreign direct investment is under the automatic route is


allowed in manufacturing sector in SEZ units except arms and
ammunition, explosive, atomic substance, narcotics and hazardous
chemicals, distillation and brewing of alcoholic drinks and cigarettes,
cigars and manufactured tobacco substitutes.

50
 Inter Unit Sales are permitted as per the Policy. Buyer
procuring from another unit pays in Foreign Exchange.

BIBLIOGRAPHY

1) sezindia.nic.in
2) sezindia.com
3) thehindubusinessline.com
4) Export Do It Yourself- Mahajan
5) How To Export- Navi Publication

51
6) How To Import- Navi Publication
7) Foreign Exchange- Jeevan Anandam
8) International Economics- Francis Cherunilam

52