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KOCHHAR & CO.

Special Economic Zones

A U G U S T

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INTRODUCTION Special Economic Zones (SEZ) were set up by the Government of India to augment infrastructure facilities for export production. The Ministry of Commerce and Industry launched the SEZ scheme in April 2000 to provide an internationally competitive and hassle free environment for export. SEZs are specifically delineated duty free enclaves and are deemed to be foreign territories for the purposes of trade operations, duties and tariffs. The objective of setting up SEZs include making available goods and services free of taxes and duties supported by integrated infrastructure for export production, mechanisms incentives to quick and a approval package foreign of & The policy relating to SEZs was earlier contained in Foreign Trade Policy. THE SPECIAL ECONOMIC ZONE ACT, 2005 (the SEZ Act) ____________________

However, to give a long term and stable policy framework with minimal regulation, the SEZ Act was enacted. The Act provides the umbrella legal framework, covering all important legal and regulatory aspects for the setting up of SEZs as well as units operating in SEZs.

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domestic investments for promoting exports. SETTING UP OF SEZ

SEZs are notified by the Ministry of Commerce and can be set up by private developers or by Central / State Governments or jointly by any two or more of the above. SEZs are required to have a minimum area of 1,000 hectares of land.

SPECIAL ECONOMIC ZONES (SEZs)

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INCENTIVE/ FACILITIES TO SEZ DEVELOPER

100% Foreign Direct Investment (FDI) is allowed for townships with residential, educational, recreational facilities and franchise for basic telephone service in SEZs.

A 10-year tax holiday (i.e. a tax holiday for any consecutive block of 10 years in the first 15 years of operation) has been provided for undertakings involved in developing and/or operating and/or maintaining notified SEZs before March 31, 2006.

Duty free import/domestic procurement of goods for development, operation and maintenance of SEZs.

Exemption from Service Tax and/or Central Sales Tax. Income of an infrastructure capital fund/company from investment in a SEZ is exempt from Income tax.

Investment made by individuals in SEZs is also eligible for exemption under Section 88 of Income- tax Act, 1961 (the IT Act).

Generation, transmission and distribution of power in SEZs is allowed. Full freedom in allocation of space and built up area for approved SEZ units on commercial basis.

Authorization to provide and maintain services like water, electricity, security, restaurants, recreation centers, etc on commercial lines is allowed.

SPECIAL ECONOMIC ZONES (SEZs)

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ADVANTAGES The SEZ Act also provides a number of incentives to units proposed to be set up in SEZs. SEZ units may be set up for carrying on manufacturing, trading or service activity. A unit set up in SEZ has the following facilities and incentives:

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. Duty free import/domestic procurement of goods for setting up of the SEZ units. Goods imported/procured locally are duty free and could be utilised 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, 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 realise 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.

SPECIAL ECONOMIC ZONES (SEZs)

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ADVANTAGES
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. Most players are interested in setting up SEZs with an eye on the real estate bounty 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.

OPERATIONAL SEZ PROJECTS 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), Nodia (Uttar Pradesh), Indore (Madhya Pradesh), Jaipur (Rajasthan), etc. In view of the tremendous investment opportunities and attractive incentives available to SEZs, corporate giants have now stepped in to establish SEZs all over the country. One of the earliest examples of this is the Mahindra World City at Chennai. The SEZ was promoted by Mahindra & Mahindra Ltd and the Tamil Nadu Industrial Development Corporation. Mahindra & Mahindra Ltd holds 89% equity in the same. On June 19th 2006, Reliance Industries signed a pact with the Haryana government for setting up of the Rs. 25,000 crore multi-product SEZ near Gurgaon.

SPECIAL ECONOMIC ZONES (SEZs)

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FACT FILE:

Special Economic Zones (SEZ)

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Proposals are in the pipeline, awaiting a nod from the 19member Board of Approval or BoA. There is no objective criteria for approval, and the same is granted on a casetocase basis taking into account the financial strength of the promoter. BoA decisions are based on consensus and not on majority. New proposals continue to be accepted now.

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Formal-approvals have been given till date. Formal approvals are given only when the promoter has the land to set up the SEZ. Without the land, only an in-principal approval is given. Reliances 10,000 hectare multi-product SEZ in Haryana (which is almost the size of Chandigarh city) has an inprincipal approval as land is yet to be secured.

SEZs under the old dispensation (pre-Feb-2006) are currently functional. These include Kandla, Surat, Cochin, Santa Cruz, Falta and Visakhapatnam. The income tax exemption, they enjoy, is marginally lower than what the new rules offer though they are eligible to claim the higher exemption.

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Large SEZ--- Gujarat Adani Port, Mundra---is among the five notified zones. Spread across 2,658 hectares, the first phase of the project is to be completed in 6-9 months.

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SEZs have been notified. Notification is the final approval stage after which the physical work on the SEZ can begin. About 7 SEZs are close to being notified.

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Percent is the minimum area which will have to be dedicated to the core manufacturing process in a multiproduct SEZ, while the rest can be used up for residential, recreational and other infrastructure. Also known as the processing area, it will be a bonded area (accesscontrolled). For sector-specific SEZs, the minimum processing area is 50%.

SPECIAL ECONOMIC ZONES (SEZs)

KOCHHAR & CO. LARGE MULTI-PRODUCT SEZs
Developer Kakinada SEZ, Andhra Gujarat Adani port Gujarat Industrial Devt Corp Mundra SEZ, Gujarat Essar Hazira SEZ Maharashtra Industrial Devt Corp
(Services: Ministry of Commerce)

Area (hectares) 4,134 2,658 1,768 1,082 1,100 1,010

LARGE SECTOR-SPECIFIC SEZs Formally approved

Developer Reliance Infrastructure MIDC MIDC MIDC MIDC Claridges Hotels CPL infra Ahmedabad Karnataka Industrial Areas Devt Board MIDC SIPCOT (Tamil Nadu) Sector Petroleumand Petrochem Textile Agro Automobile &related activities Textile Multi-services Pharma Engineering & Related Pharma Electronics, Telecom Hardware etc Area (hectares) 440 383 200 210 208 242 200 167 150 120

LARGE IT/ITES SEZs Formally approved

Developer/proposed location Infosys-Karnataka MIDC-Pune Karnataka Industrial Areas Devt BoardMangalore Sanghi Industries-Andhra Electronics Corp of TN- Chennai ETL Infrastructure-Kanchipuram Flextronics-Chennai MIDC-Pune Tata Consultancy Services-Chennai Area (hectares) 125 229 203 202 159 105 101 82 71

Over the course of the next year, it is anticipated that there will be investment of close to Rs 100,000 crore in about 148 SEZs proposed to be set up around the country. Apart from the primary attraction of the tax benefits that are offered to SEZs, the Government is also proposing to introduce fresh incentives such as single window clearance for customs and excise duty, relaxation from various labour law regulations, allowing companies in the SEZ to conduct board meetings via video conferencing by amending the Companies Act, 1956, thus making SEZs the next big investment and growth opportunity for FDI in India.
Kochhar & Co., Advocates and Legal Consultants, S-454, Greater Kailash Part II, New Delhi- 110 048 Tel: +91 11 4111 5222, 2921 5477 Fax: +91 11 2921 9656 Email: delhi@kochhar.com Offices also in ATLANTA, BANGALORE, CHENNAI & MUMBAI