Special Economic Zones

Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 and received Presidential assent on the 23rd of June, 2005. The act envisages that the SEZs would attract a large flow of foreign and domestic investment in infrastructure and productive capacity leading to generation of additional economic activity and creation of employment opportunities.

Salient Features

• A SEZ is a designated duty free enclave to be treated as foreign territory for the purpose of trade operations and duties and tariffs.
• A SEZ does not require a license for imports. Other notable features are as follows:
• The units must become net foreign exchange earners within 3 years
• SEZ are allowed manufacturing, trading and service activities.
• Full freedom for subcontracting.
• The domestic sales from the SEZ are subject to full custom duties and import policy is in force, when they sell their produce to domestic markets.
• There was no routine examination by the custom authorities.
• The corporation in SEZs will not have to pay any income tax on their profits for the first five years and only 50% of the tax for 2 more years thereafter.
• If half of the profit is reinvested in the corporation, the concession of 50% tax is extendable for next 3 years.
• For SEZ developers , the raw material from cement to steel to electrical parts are subject to zero tax and duty.
• For the SEZ, the Government acquires vast land tracts and gives to the developers. The basic condition involves that 25% of the area of the SEZ must be used only for export related activities. Rest 75% area can be used for economical and social infrastructure. However, all SEZ benefits are applicable over the entire SEZ area.
• There were provisions for sector specific SEZs and Multiproduct SEZs.
• The Sector specific SEZ may have 7500 houses, hotels with 100 rooms, 25 bed hospital , schools and other institutions, a multiplex in 50000 sq. meters.
• Multiproduct SEZ are allowed to build 25000 houses. 250 room hotel and 100 bed hospital along with a multiplex with 2 lakh sq. meters.

How a SEZ is created?

There is a well defined approval mechanism for SEZ. The developer submits the proposal for establishment of SEZ to the concerned State Government.

• The net worth of the applicant is to be Rs. 50 crore minimum and investment criterion of Rs. 250 Crore for sector specific SEZ. Net worth for Multiproduct SEZ was fixed Rs. 250 Crore and investment of ` 1000 Crore.

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. However, the applicant also has the option to submit the proposal directly to the Board of Approval. 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. The Chairman of the BoA is Secretary, Department of Commerce. The Board may approve as such or modify and approve a proposal for establishment of a Special Economic Zone, in accordance with the SEZ Rules, subject to the requirements of minimum area of land and other terms and conditions indicated in the SEZ Rules. Once the BOA gives formal approval and the concerned Development Commissioner gives an inspection report certifying the contiguity and vacancy of the area, the area is notified as SEZ.

Minimum Land Area Requirements

Minimum area requirements for setting up a SEZ are as follows:

In order to provide greater flexibility in operation and efficiency in use of infrastructure, it has now been decided in April 2013 that for every additional 50 hectares of contiguous area, an additional sector would be allowed on a graded scale to be added in the existing SEZ.

• To provide greater flexibility in utilizing land tracts falling between 50-450 hectares, it has been decided to introduce a Graded Scale for Minimum Land Criteria which would permit a SEZ an additional sector for each contiguous 50 hectare parcel of land. This will also bring about more efficient use of the infrastructure facilities created in such an SEZ.
• Further flexibility to set up additional units in a sector specific SEZ is being provided by introducing Sectoral broad-banding to encompass similar / related areas under the same sector.
• On the issues relating to Vacancy of Land, while the existing policy allows for parcels of land with pre-existing structures not in commercial use to be considered as vacant land for the purpose of notifying an SEZ, it has now been decided that additions to such pre-existing structures and activities being undertaken after notification would be eligible for duty benefits similar to any other activity in the SEZ.

Minimum Builtup Criteria:

The minimum built-up area criteria requirement has been considerably relaxed from April 2013 at one lakh m² for Mumbai, Delhi (NCR), Chennai, Hyderabad, Bangalore, Pune and Kolkata. For class B-cities, minimum built-up area would be 50,000 m². For other cities, 25,000 sq. m. built-up area norm would be applicable. To provide greater flexibility in utilising land tracts falling between 50 hectares and 450 hectares, it had been decided to introduce ‘graded scale’ for minimum land criteria which would permit a SEZ an additional sector for each contiguous 50 hectare parcel of land.

Fiscal benefits for a SEZ in a nutshell

• Single window clearance for Central and State level approvals.

Customs and Excise

• Duty free import (or domestic procurement), without any license or specific approval, of capital goods, raw materials, consumables, spares, packing materials, office equipment, and anything else required for implementation of their project in SEZ
• Generous 5 year period for utilization of goods imported duty-free or goods procured locally
• Exemption of domestic sales from Special Additional Duty (SAD)
• Domestic sales of finished products or by-products, on payment of the applicable Customs duty
• Domestic sales of rejects, waste and scrap, on payment of the applicable Customs duty

Income Tax

• Physical export benefit
• 100% exemption from Income Tax under Sec 10A of the Income Tax Act, —, for the first 5 years, and 50% exemption for the next 5 years
• Exemption from minimum alternate tax under section 115JB of the Income Tax Act.
• Reinvestment allowance of up to 50% of ploughed back profits for next 5 years
• Carry forward of losses to the next financial / accounting year

Foreign Direct Investment (FDI)

• 100% FDI under the automatic route is allowed in SEZ units in the manufacturing sector, except in the following areas: arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes
• There is no cap on foreign investments for items reserved for small scale industries

Banking / Insurance / External Commercial Borrowings

• Setting up of Off-shore Banking Units (OBU) is permitted in SEZ
• OBUs are allowed 100% Income Tax exemption on profits for 3 years and 50% exemption for the next two years
• External commercial borrowings by SEZ units, up to $500 million a year, is allowed without any restrictions on maturity
• Entrepreneurs have freedom to bring in export proceeds without any time limit
• SEZ units can keep 100% of export proceeds in an EEFC (Exchange Earner Foreign Currency) account and make overseas investment from this account
• Commodity hedging is permitted
• SEZ units are exempt from the interest surcharge on import finance
• SEZ units are allowed to write-off unrealized export bills

Central Sales Tax Act

• SEZ units are exempt from paying Central Sales Tax on sales made from Domestic Tariff Area to other SEZ units

Service Tax

• SEZ units are exempt from Service Tax. The taxable services provided to a unit located in a SEZ would be exempt from service tax only if the services are consumed within the SEZ.

Environment

• SEZ units are exempt from public hearing under Environment Impact Assessment Notification
• SEZ is providing a CETP for Chemical, Textile & other industries whose effluent needs to be treated
• Marine discharge facilities can be made available

Companies Act

• Directors of SEZ units do not have to fulfil the requirement of 12 months domicile in India prior to appointment as Director
• Sub-Contracting/Contract Farming
  
• SEZ units are allowed to sub-contract part of their production to units in the Domestic Tariff Area or to other Export Oriented Units or SEZ units
• SEZ units may also sub-contract part of their production abroad
• Agro industries in SEZ are allowed to provide inputs and equipment to contract farmers in the Domestic Tariff Area for their supplies

Monitoring

A Unit Approval Committee, consisting of the Development Commissioner, Custom authorities and representative of the State Government, monitors SEZ units on an annual basis. There is a current issue in this context. The Directors, STPI, have been declared Development commissioners (DCs) for the IT SEZs under their respective jurisdiction. An STPI is under administrative control of the Department of Information Technology. Other multi-product and sector-specific SEZs are under the charge of DCs appointed by the Department of Commerce. However a number of issues, for example processing of notification of IT SEZs, coordination with state governments etc, relating to IT SEZs are also looked after by the DCs appointed by the Department of Commerce. This leads to a situation of dual control adversely impacting effective coordination and needs to be resolved.

Can SEZ units sell to other units in SEZ?

• Yes. Inter Unit Sales are permitted according to the SEZ Policy which also stipulates that a SEZ unit procuring from another SEZ unit pays in any Foreign Convertible Currency.
• Such sales will be a part of the positive foreign exchange earning of the selling unit. For multi product SEZ with cluster formation, there is a huge opportunity for SEZ units for sale within the zone.

Current Number of Special Economic Zones in India

The Special Economic Zones (SEZs) scheme has been a key instrument for promoting exports from India. At present, 389 SEZs have been notified of which 170 are functional and they employ over one million persons. India has received investment of over Rs. 2.36 lakh crores in SEZs and exports from SEZs have seen a dramatic jump from Rs. 22,840 crores in 2005-06 to Rs. 4.76 lakh crores in 2012-13, a growth of over 2000% over the 7 year period. Exports from SEZs during the last financial year have registered a growth of over 31% over the previous year. Undoubtedly, these are significant achievements, but the SEZ scheme has not been able to realize its full potential so far.

Statewise Distribution of SEZ in India