Special Economic Zone:

Introduction:

A Special Economic Zone (SEZ) is a geographical region that has economic laws
more liberal than a country’s typical economic laws. They are established with an
aim to purport development, promote rapid economic growth by providing tax
and business incentives for attracting foreign technology along with investment.
These are not merely SEZ’s but may be called as “favorite Investment
destinations” for foreign establishments. Such units would be future sources of
employment, hubs of latest technologies and equipped with the best
infrastructure. Today, there are approximately 3,000 SEZs operating in 120
countries1.

In this research paper an attempt is made to trace the origin of the SEZ’s, a brief
overview of the SEZ Act, 2005 and the latter part mentions about institutions
that made India a Software hub.

Concept and Origin of SEZ’s

The first time when the setting up of SEZ came into limelight was when it was
established in the Caribbean island Puerto Rico with an aim to attract investment
from US. It was in the 1980s China brought SEZs to spotlight by setting up the
largest SEZ in Shenzhen.

It was in 1965 that India experimented with the concept of Export Processing
Zones (EPZ). Although these EPZ’s somehow failed to achieve the objective they

1
World bank website – James Crittle (IFC) – http://rru.worldbank.org/Discussions/Topics/Topic40.asp taken
from http://www.nishithdesai.com/Special_Economic_Zones.pdf

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 Special Economic Zone:

were created for but in the year 2000, there were winds of change where the
Export and Import policy allowed the setting up of SEZ’s in all sectors.
Subsequently all EPZs were converted into SEZs. And the process for setting up of
various SEZ’s was also put into action.2

India’s special Act relating to the SEZ came in 2005 taking country’s foreign
investment policy and converted its EPZs to SEZs. This act further lays down
provisions for setting up of additional SEZ’s which is discussed elaborately further.
Currently there are, nearly 200 SEZs operating and approximately 565 have
already been given the permission to operate, which are sure to open new doors
of investment and opportunities for Indian Markets.

The need for a special Legislation

Before the enactment of the SEZ Act,2005, the necessary provisions in respect of
the SEZ’s were a part of the Foreign Trade Policy which is released every five
years. The policy discussed the latest incentives and benefits that were conferred
to them. The need for this act was well highlighted in the arguments by one of
the counsels in a recent case Biomedical Lifescience Pvt vs Union Of India, “In
order to give a long term and stable policy framework with minimum regulatory
regime and to provide expeditious and single window clearance mechanism, a
Central Act for Special Economic Zones has been found to be necessary in line with
international practice.

The global economic crisis of 2008–09 had resulted in a substantial fall in demand
for new special economic zones (SEZs) in India owing, among other factors, to a

2
https://www.gtap.agecon.purdue.edu/resources/download/4103.pdf

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 Special Economic Zone:

general slowdown in global trade, and the resultant withholding of investment

plans, and an increase in the cost of borrowing. Within the country, the SEZ policy
and related land acquisition practices became the centre of a great public debate.
This followed the well-known 2007 protests in West Bengal over government
acquisition of private agricultural land for an SEZ, during which several farmers
lost their lives. Acquisition of private land, particularly farmland, for the purpose
of establishing SEZs has now become one of the important public policy issues in
India.

The Committee on State Agrarian Relations and Unfinished Task in Land Reforms,
set up in 2008, had recommended, inter alia, that the government should
comprehensively “revisit” the Special Economic Zones Act, 2005, and put a ban on
the transfer of common property resources and agricultural land for its
implementation3. The recommendations of the committee perhaps vindicate the
widely held view that the present SEZ policy does not adequately address the
concerns of the stakeholders and needs a thorough review. Indeed, the Supreme
Court is scheduled to hear a few petitions on SEZs in the nearfuture. Some of the
petitions raise questions about specific projects, such as acquisition of farmland
for SEZs in Haryana; while others, such as the public interest litigation (PIL) against
the Maha Mumbai SEZ, question the constitutional validity of the SEZ Act itself.
The decision of the apex court on these petitions is likely to have a significant
bearing on the future SEZ policy in India. It is, therefore, high time that the
present policy, the performance of SEZs and the problems being faced by the
stakeholders are critically examined so as to identify the policy priorities and
implementation challenges. More specifically, it has become imperative to answer
critical questions such as:

3
Draft Report of the Committee on State Agrarian Relations and Unfinished Task of Land Reforms.” Vol 1. Ministry
of Rural Development, Govt. of India, March 2009. Available online at
http://www.rd.ap.gov.in/IKPLand/MRD_Committee_Report_V_01_Mar_09.pdf

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 Special Economic Zone:

 Have the policy objectives behind establishing SEZs been met?

 What are the social and economic costs being borne by stakeholder
groups?
 What are the issues and concerns that the SEZ policy must address in
future?

The section that follows traces the evolution of the SEZ policy in India and
identifies the current policy focus and priorities. The third section discusses the
performance of SEZs. In the fourth section, land displacement issues associated
with establishing SEZs are analyzed. The issues confronting SEZs and the concerns
of the stakeholders are examined next. The final section contains concluding
observations.

Evolution of SEZs

India launched its first export processing zone (EPZ) in 1965 in Kandla,
Gandhidham, Gujarat. It was the first EPZ in Asia. EPZs were conceived of as duty-
free areas in which the operating units avail of a host of fiscal and other
concessions to produce and export goods and services. The EPZ units in the
country operated within the framework of export-import policies. Though the
performance of Indian EPZs was considered listless in comparison with their
counterparts in other parts of Asia, the EPZ scheme was continued through the
1970s and the ‘80s.

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 Special Economic Zone:

With a view to overcome the multiplicity of controls and clearances, the absence
of world-class infrastructure, and an unstable fiscal regime, and to attract larger
foreign investments, the Special Economic Zones (SEZs) Policy was announced by
the Government of India in April 2000. The policy envisaged the development of
an internationally competitive and hassle-free environment for exports inthe
designated zones so that the then existing process hurdles could be removed. The
policy intended to make SEZs an engine for economic growth, supported by
providing quality infrastructure and complemented by an attractive fiscal
package, both at the Centre and in the states, with the minimum possible
regulation. SEZs in India functioned from 1 November 2000 to 9 February 2006
under the provisions of the Foreign Trade Policy, and fiscal incentives were made
effective through the provisions of relevant statutes.

The SEZ Act, 2005, supported by SEZ Rules, came into effect on 10 February 2006,
providing for drastic simplification of procedures and for single-window clearance
on matters relating to the central as well as state governments. The SEZ Rules
provide for different minimum land requirements for different classes of SEZs.
With the enactment of the 2005 legislation, SEZs received a major thrust. There
has been a significant increase in the number of SEZs in India since then. The act
has 56 sections, containing legal provisions for the establishment of SEZs,
constitution of the Board of Approval, appointment of development
commissioners, provisions for dispute settlement, etc. After the SEZ Act and Rules
were notified, amendments to the SEZ rules were notified in 2006 and again in
2007.

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 Special Economic Zone:

The main objectives of the SEZ Act :

 Generation of additional economic activity

 Promotion of exports of goods and services
 Promotion of investment from domestic and foreign sources
 Creation of employment opportunities
 Development of infrastructure facilities

According to Section 53 of the SEZ Act, an SEZ shall be “deemed to be a territory

outside [the] customs territory of India for the purpose of undertaking authorized
operations.” The government has notified such a list of authorized operations. As
a consequence, the Union government converted the existing EPZs into SEZs.

Accordingly, all the EPZs in the country were notified under the Customs Act,
1962, as SEZs. Even though EPZs and SEZs have several differences, the units in
both EPZs and SEZs enjoy the facility of duty-free import/procurement of required
equipment and raw materials.

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 Special Economic Zone:

Currently, units in SEZs enjoy the following incentives and facilities4:

 Duty-free import/domestic procurement of goods for the

development, operation and maintenance of SEZ units.
 Exemption up to 100 per cent from income tax on export income
for SEZ units under Section 10AA of the Income Tax Act, 1961, for
the first five years, 50 per cent for the next five years thereafter,
and 50 per cent of the ploughed-back export profit for the next five
years.
 Exemption from Minimum Alternate Tax (MAT) under Section 115JB
of the Income Tax Act.
 External commercial borrowing (ECB) by SEZ units up to US$ 500
million in a year, without any maturity restriction, through
recognized banking channels.
 Exemption from Central Sales Tax (CST).
 Exemption from service tax.
 Single-window clearance for central and state-level approvals.

Exemption from state sales tax and other levies as extended by the respective
state governments. The major incentives and facilities available to SEZ developers
include:

 Exemption from customs/excise duties for the development

of SEZs for authorized operations.
 Income tax exemption on income derived from the business
of development of the SEZ under Section 80-IAB of the
Income Tax Act.

4
Special Economic Zones in India, Dept. of Commerce, Ministry of Commerce & Industry, Govt. of India. Available
online at http://www.sezindia.nic.in/about-fi.asp.

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 Special Economic Zone:

 Exemption from MAT under Section 115JB of the Income Tax

Act.
 Exemption from Dividend Distribution Tax (DDT) under
Section 115O of the Income Tax Act.
 Exemption from the Central Sales Tax (CST).
 Exemption from the service tax (Sections 7and 26 and
Second Schedule of the SEZ Act).

As on 10 May 2011, there are 130 operational SEZs5 out of the 377 notified SEZs,
which have been formally approved since February 2006.

Overview of the Special Economic Zone Act,2005

Government took the initiative of enacting the SEZ Act keeping in mind various
objectives including generation of additional economic activity, promotion of
export of goods and services, attracting investment from foreign sources as well
as domestic along with creating employment opportunities at all levels.6

Following the SEZ Act,2005 came the rules in 2006 that lay down comprehensively
how a zone first may be classified specifically and then establishment of a unit in
that zone, the procedural requirements and other miscellaneous provisions.

5
Out of these 130 operational SEZs, 7 were established by the Government of India, and 12 were established by
state governments and the private sector prior to the enactment of the SEZ Act, 2005. Thus, there are 111
operational SEZs notified under the SEZ Act, 2005.
6
http://taxguru.in/corporate-law/special-economic-zones-act-2005-anoverview.html#sthash.AYuIa83Z.dpuf

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 Special Economic Zone:

Establishing a Special Economic Zone

Application For Filing for SEZ

 The Ministry of Commerce & industry issued a circular in 2008 which

provides various online services that are:
 An application may be filed for setting up a SEZ (Form A) on the
special website created http://sezindia.nic.in/.
 Requests including Application for authorized operations, change in
area/ location, and other land details may be also filed online.
 A separate e-mail box for each developer/ so as to secure quick
communication with the Department.
 Online status of requests.

Taxation and SEZ’s

Any goods or services exported out of, or imported into, or procured from the
Domestic Tariff Area by –

 a Unit in a Special Zone

 Economic Zone; or
 a Developer;

Shall, subject to such terms, conditions and limitations, as may be prescribed, be

exempt from the payment of taxes, duties or cess under all enactments specified
in the First Schedule.

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 Special Economic Zone:

The Second Schedule to the Act makes modifications to the Income-Tax Act,
1961.A special Section 10 AA discusses about the Tax incentives that shall be
made available to the SEZs.

With an aim make investment in SEZ’s a lucrative option the government

introduced various tax incentives. The income tax act was also amended and
provisions related to SEZ’s were added to the Act, to provide them with amenities
so that they may startup and establish their operations in India. Besides the
provisions that have been laid down in the Income tax act, 1961 provisions have
also been made under Central Sales Tax Act, 1956, Service Tax Act, 2013; The
Central Excise Act, 1944 and the Customs Act, 1962.7

To avail the benefits that have been conferred under the Income tax act,1961 a
SEZ needs to fulfill certain conditions

 As per Section 2(j) an SEZ shall be deemed to be an entrepreneur,

who has been granted the letter of approval by the Development
Commissioner under section 15 of the Act.
 Along with this, the Finance Bill 2016 seeks to amend section 10AA
where the benefits have been conferred to the SEZ developer are
being limited to 31st March 2020. Any SEZ that shall come into
operation after this date will not be exempted from the tax, which
the current law provides under the Income Tax Act,1961.

7
http://taxguru.in/corporate-law/special-economic-zones-act-2005-an-overview.html#sthash.9jxBgdwK.dpuf

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 Special Economic Zone:

 It is necessary that assess either exports certain goods or provides

some services out of India from the SEZ.Ultimate aim is to increase
exports from the
 Also, it is vital that the SEZ carries out by a proper audit of the Books
of the account and needs to submit an audit report as per Form no.
56F.
 Only if the conditions are satisfied, it is only then one shall be eligible
to apply for deduction under Section 10AA8

Steps that need to taken to ensure the proper Utilization of SEZ’s

Monitored and Regulated Approach:

Systematic efforts need to be made to help zone units forge links with the outside
units. To make the best use of the SEZ there is a dire need for a comprehensive
policy framework which needs to be introduced to ensure that strategies are
developed in a timely manner to strengthen the opportunities that are likely to
emerge, protect interests of the Special Economic Zones workers, and build a link
between Special Economic Zones and the domestic economy. It is only by
adoption of a regulated and monitored approach that full worth may be extracted
from these potential laden SEZ’s

Better execution :

It is essential that the investors are taken into confidence and given rationalized
benefits along with an outline for their availability.

8
https://blog.ipleaders.in/special-economic-zone-tax-benefits/

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 Special Economic Zone:

Promotion of Strategic Industries:

Rationalized Tax incentives to promote industries of strategic importance. Special

schemes may be introduced for Technology-intensive and industries which have a
lower rate of survival and struggle to survive in the market.

Integration with National Schemes:

The much popular Make-in-India initiative could be well integrated with the SEZ
to create manifold opportunities.

Transparency at all levels:

This is a must so that the challenges that come up are tackled effectively, and
red-tapism of any kind is reduced and the favourite investment dstinations
actually serve as an engine for economic growth.

SEZs have the potential to be a major growth engine for India. The government
should act fast to revive them otherwise SEZs will become another missed growth
opportunity9.

9
http://www.boomlive.in/special-economic-zones-in-india-growth-engines-or-missed-opportunity/

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 Special Economic Zone:

Incentives for Setting Up of SEZ’s in INDIA

The Government of India is keen on making India an export hub and with this aim
established several foreign trade zone schemes to promote production which is
export-oriented. Such schemes are great incentives for a company to grow and
simultaneously they provide an escape through from the country’s restrictive
fiscal and infrastructural obstacles and make Indian goods and services
competitive in international markets.

Other than the SEZ’s schemes include the Export Processing Zone (EPZ) and the
Software Technology Park (STP),which are designated areas for export-oriented
activities there are also certain EOU’s that is Export Oriented Units that have also
been established with an aim to multiply the exports of the country. They are
governed by separate rules and have been conferred various other benefits.10

In comparison to China India provides for better options for setting up of SEZ’s as
the measures which the Government is providing is more conducive for their
functioning. In contrast to China which has only five major SEZ’s functioning
contrary India has a huge reservoir of SEZ’s that are upcoming and numerous
have already been established. Indian Government is also giving the benefits at all
levels to these SEZ’s for their growth.

Software technology Parks in India

Software Technology Parks of India (STPI), is a Government of India initiative that

set up and established a society by the Ministry of Communications and
Information Technology, Government of India in 1991.

10
Research Paper by “SEZs In India: Concept, Objectives And Strategies”Department Of Economics,Bangalore
University

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 Special Economic Zone:

Software Technology Park [STP] Scheme is an absolute scheme for export

orientation. This scheme was undertaken with an objective for exporting
software services and developing them using data communication links that may
be in form of physical media.11Such parks offer multifarious services that are
required day to day.
The scheme was set up to contribute to the prosperity of the national economy
through promotion of exports from the Software & services Industry by
facilitating all the statutory services of the Govt., strengthening the
Communication Infrastructure12

Currently, STPIs that are established across the country are equipped with
outstanding infrastructure and statutory support which further aims at improving
and enhancing the development process of Information Technology in the
country. It is because of these STPI’s that have given India recognition all across
the world as a global hub for software services.

The objectives of the Software Technology Parks of India are:

(a) Promotion and development of software and software services including

Information Technology (IT) enabled services/ Bio- IT.

(b) Providing statutory and other promotional services to the exporters by

implementing Software Technology Parks (STP) that shall be formulated and
made by the Government from time to time.

(c) Provision of data communication services including value added services to IT /

IT enabled Services (ITES) related industries.

11
http://swapnilkosare.blogspot.in/2015/06/normal-0-false-false-false-en-in-x-none.html

12
http://www.psalegal.com/pdf/e-newsline-january-201001252010113255am.pdf

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 Special Economic Zone:

(d) Encouraging micro,small and medium entrepreneurs by creating better

opportunities for entrepreneurship in the field of IT/ITES.13

Conclusions:

India was the first country in Asia to set up an EPZ and has keenly pursued the
policy of establishing EPZs/SEZs to further its economic policy objectives. The
present study shows that the policy has yielded only modest results in terms of
exports, employment and investments. The social costs of human displacement
and the economic costs of land acquisition have been observed to far outweigh
the benefits that have accrued from the policy. Indeed, an Expert Group Report
released by the Planning Commission28 appears to call into question the benefits
of SEZs:

Land acquisition for Special Economic Zones (SEZ) has given rise to widespread
protest in various parts of the country. Large tracts of land are being acquired
across the country for this purpose. Already, questions have been raised on two
counts. One is the loss of revenue in the form of taxes and the other is the effect
on agricultural production .

In addition, the SEZ policy may have contributed to aggravating regional

imbalances in the country. Considering the significant land displacement issues,
there is a need for the government to fine-tune the SEZ policy to facilitate the
development of large employment generating SEZs and also to address the issues
of regional imbalances that are highly visible in the current development pattern
of Indian SEZs.

13
http://www.letscomply.com/SEZ-and-STPI-Compliances.php

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