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SPECIAL ECONOMIC ZONES (SEZs)/EXPORT

ORIENTED UNITS (EOUs) 

Special Economic Zones (SEZs)

India was one of the first countries in Asia to recognize the effectiveness of the ExportProcessing Zone (EPZ) model in promoting exports. Asia's first EPZ was set up in Kandla in1965. With a view to attract larger foreign investment in India, the Special Economic Zones(SEZs) Policy was announced in April 2000. This policy was intended to make SEZs anengine for economic growth supported by quality infrastructure and by an attractive fiscal

 package, both at the Centre and the State level, with the minimum possible regulations. Thefunctioning of the SEZs in India is guided by the provisions of the Foreign Trade Policy andfiscal incentives were made effective through the provisions of relevant statutes.

To instill confidence in investors and to impart stability to the SEZ regime thereby generatinggreater economic activity and employment through the establishment of SEZs, a

comprehensive draft SEZ Bill was prepared in consultation with the stakeholders. TheSpecial Economic Zones Act, 2005, was passed by Parliament in May, 2005 and receivedPresidential assent on the 23rd of June, 2005. After extensive consultations, the SEZ Act,2005, supported by SEZ Rules, came into effect on 10th February, 2006, providing for drasticsimplification of procedures and for single window clearance on matters relating to Central aswell as State Governments. 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; and• development of infrastructure facilities

Hardware Manufacturing Facility, Mahindra World City inTamil Nadu

The SEZ Act, 2005 envisages key role for the State Governments in export promotion andcreation of related infrastructure. A single window SEZ approval mechanism has been

 provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). Theapplications duly recommended by the respective State Governments/UT Administrations are

considered by the BoA periodically. All decisions are taken with consensus

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The Act is expected to trigger a large flow of foreign and domestic investment in SEZs, ininfrastructure and productive capacity, leading to generation of additional economic activityand creation of employment opportunities.

The salient features/provisions of the SEZ Rules are given below:

• 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 Zones;• Single window clearance for matters relating to Central as well as State Governments;• Simplified compliance procedures and documentation with an emphasis on self 

certification.

Based on consultations and suggestions received, certain amendments to the Rules werenotified on 10th August 2006. Subsequently, a list of authorized operations for whichexemptions would be available, for use by the Board of Approval while approving authorizedoperations to be undertaken by SEZs, were also notified on 27th October 2006.

 Nokia SEZ Complex in Tamil Naidu

With a view to attract larger investments including FDI, a number of tax and other fiscalincentives have been offered to units in the SEZs

Box 6.1 : Fiscal Incentives for SEZ Units 

• Duty free import/domestic procurement of goods for development, operation andmaintenance of SEZ units.

• 100 per cent Income Tax exemption on export income for SEZ units under Section10AA of the Income Tax Act for first 5 years, 50 per cent for next 5 years thereafter and 50 per cent of the ploughed back export profit for next 5 years.

• Exemption from Minimum Alternate Tax under section 115JB of the Income Tax Act.

• External commercial borrowing by SEZ units up to US $ 500 million a year withoutany maturity restriction through recognized banking channels.

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• Exemption from Central Sales Tax, Service Tax, State Sales Tax and other levies asextended by the respective State Governments.

Besides the incentives provided to SEZ Units, with a view to attract private sector investments in infrastructure development, a number of fiscal incentives in the form of tax

exemptions are available to SEZ developers also. The major tax exemptions available to SEZdevelopers are given in the Box below:

SEZ Approval Status

Consequent upon the SEZ Rules coming into force w.e.f. 10th February, 2006, nine meetingsof the Board of Approvals have been held. As of present, there are 234 valid formal approvalsand 162 in-principle approvals. Out of the 234 formal approvals, notifications have already

 been issued in respect of 63 SEZs.

The fact that these 234 formal approvals given for setting up SEZs are spread over 19

States/UTs show that these are not concentrated in any particular region, but all over thecountry. The total land area in the 234 formally approved SEZs is about 33800 hectares, outof which 17800 hectares approximately are for the 60 approvals given for State IndustrialDevelopmen

Corporations/State Government Ventures. In all these cases, either the land was alreadyavailable with the State Governments or SIDCs or was in possession of the private companiessetting up the SEZs.

Region-wise and Sector-wise SEZ Approvals 

The Region-wise and Sector-wise SEZ approvals are shown in the following graphs:

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Box 6.2 : Tax Exemptions to SEZ Developers 

• Exemption from Customs/Excise duties for development of SEZs for authorized

operations approved by the Board of Approval.• l Income Tax exemption on export income for a block of 10 years in 15 years under 

Section 80-IAB of the Income Tax Act.• l Exemption from Minimum Alternate Tax under Section 115 JB of the Income Tax

Act.• l Exemption from Dividend Distribution Tax under Section 115 O of the Income Tax

Act.• l Exemption from Central Sales Tax (CST) and Service Tax (Section 7, 26 and

Second Schedule of the SEZ Act).

Benefits derived from SEZs 

The benefits derived from multiplier effect of the investments, additional economic activityin the SEZs and the employment generated thereof are estimated to far outweigh the taxexemptions and the losses on account of land acquisition. Stability in fiscal concessions isabsolutely essential to ensure credibility of the Government intentions. Benefits derived fromthe SEZs are evident from the investment, employment, exports and infrastructuraldevelopments additionally generated/expected to be generated. The benefits expected to begenerated include:

• Investment of the order of Rs.100,000 crore including FDI of US $ 5-6 billion by the

end of December 2007, and• 500,000 direct jobs by December 2007.

At present, 1016 units are in operation in the SEZs, providing direct employment to over 1.79lakh persons; about 40 per cent of whom are women. Private investment by entrepreneurs inthe SEZs established prior to the SEZ Act is of the order of over Rs. 4400 crore. In the 63notified SEZs which have come up after 10th February 2006, investment of Rs. 13,435 crorehas already been made in less than one year. These SEZs have so far provided directemployment to 18,457 persons

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Apparel Manufacturing Facility, Mahindra World City inTamil Nadu

Export Performance 

The exports from the existing SEZs during the last three years are as under:

Exports from SEZs

Year Value (Rs. Crore) Growth Rate (%)

2003-04 2003-04 13,854 39(US$ 2996 million)

2004-05 18,314 32(US$ 4075 million)

2005-06 22839.56 24.71(US$ 5077.64 million)

Impact of the Scheme 

The SEZ Scheme has generated tremendous response amongst the investors, both in Indiaand abroad. This is evident from the fact that several prominent private sector developershave come forward for establishing SEZs. Some such prominent SEZs which have recentlycome up are:

•  Nokia SEZ in Tamil Nadu• l Quark City SEZ in Chandigarh• Flextronics SEZ in Tamil Nadu• Mahindra World City SEZ, 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

Expected investment and employment from SEZs by 2009 

With the 63 notified Special Economic Zones, it is expected that total investment of overRs.

50,000 crore and 15 lakh additional jobs will be created by December 2009. If the 234 formal

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guarantee equivalent to the duty foregone on the capital goods/input proposed to betaken out.

• The EOU units in Textile Sector are allowed to dispose off the left over material/fabrics up to 2 per cent of Cost Insurance Freight (CIF) value of imports, onconsignment basis. Recognizing that settling the accounts for every consignment is

complex and time consuming it has been decided to allow disposal of left over material on the basis of previous year's imports.