What are special economic zones?

What are special economic zones?
After more than a year-long tussle between the commerce and finance ministries over various components of the proposed SEZ Bill, the legislation has finally got clearance from both the Union Cabinet and Parliament. Commerce minister Kamal Nath claims the legislation will help attract $2 billion in foreign direct investment (FDI) in the next two years. Given the important role the legislation will play in the coming years, FE takes a Closer Look at the various terms associated with the SEZ policy.


What are special economic zones (SEZs)?

SEZs are specially demarcated zones where units operate under a set of rules and regulations different from those applicable to other units in the country. The emphasis is on enhancing exports and creating an environment for attracting foreign direct investment (FDI) by offering tax sops.

While units in the zone have to be net foreign-exchange earners, they are not subjected to any pre-determined value addition or minimum export performance requirements.

How successful have SEZs been in other parts of the world?

While a number of Asian and Gulf countries have SEZs in place, China has been the most successful among them. In fact, former commerce minister, the late Murasoli Maran who initiated the process of converting export processing zones (EPZs) into SEZs, had once said he wanted to repeat the success story of China.

What took India so long to have a comprehensive SEZ legislation in place?

It took long (the policy for SEZs was introduced on April 1, 2000,) since the commerce and finance ministries weren’t able to reach an agreement on the tax sops to be given to SEZ developers and units.

However, earlier this month (May 2005), the two ministries finally reached a compromise and legislation was passed.

What are the features that distinguish SEZs in India from Chinese SEZs?

To begin with, India wants to go in for a large number of SEZs unlike China which restricted itself to just five. The legislation provides for setting up of SEZs in the public, private or joint sector, or by state governments. This is again different from China’s policy of all SEZs being set up by the government. Another important distinction introduced at the last minute, due to the intervention of the Left parties, is that labour laws have not been suspended for units in SEZs and they continue to remain under the domain of the states.

How many SEZs does India have at the moment?

India has eight working SEZs, all converted from EPZs. They are located in Kandla and Surat (Gujarat), Cochin (Kerala), Santa Cruz (Mumbai- Maharashtra), Falta (West Bengal), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh) and Noida (Uttar Pradesh). In addition, approval has been given for the setting up of another 39 SEZs in various parts of the country by the private/joint sectors, or by the state government.

What are the facilities available to SEZ developers following legislation?

Developers may import/procure goods without payment of duty for the development, operation and maintenance of SEZs. They will enjoy income tax exemption for 10 years, with a block period of 15 years. They will have the freedom to allocate developed plots to approved SEZ units on a purely commercial basis. They will also have the full authority to provide services like water, electricity, security, restaurants, recreation centers etc. on commercial lines. Moreover, they will be exempt from paying service tax.

What kind of status will SEZs enjoy in India?

They will have the status of a public utility service under the Industrial Disputes Act. The state government will appoint a development commissioner or an official of an equivalent rank to oversee the implementation of government regulations.

What exemptions are SEZ units eligible for?

As per the Bill, SEZ units will be eligible for 100% tax exemption for five years, 50% for the next five and 50% of the ploughed back export profits for the next five years.

What are the provision for banking in SEZs?

Offshore banking units (OBUs) will be permitted in the SEZs. These banks will virtually be the foreign branches of banks, but located in India. OBUs will be exempted from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) and will make available finance to SEZ units and SEZ developers at international rates.

What about bureaucratic red-tape while setting up SEZs or units within them?

There need not be any worries on this front as the new legislation has provisions for a single-window mechanism to clear all investment proposals.

What are special economic zones?