The introduction of special economic zones (SEZs) in India has boosted not only the national economy but put wind in the sails of exports too, reports Huned Contractor

Special economic zones make for good news, especially to a business publication. That is evident enough from the fact that hardly a few days pass by without them finding a mention in one of the columns. Recently, for example, one of the reports stated that the proposals of Zensar Technologies and Accenture Services to set up their units at special economic zones (SEZs) have been approved by the Unit Approval Committee of the Development Commissioner of Andhra Pradesh IT SEZs. The committee approved Zensar's plan to establish a facility with 300 employees at DLF Cyber City SEZ Private Ltd. The facility would come up in an area of 23,615 sq feet. Accenture Services would expand its presence by setting up 35,756 sq feet office at TSI IT Park at Nanakramguda, employing 350 people. It would be interesting then to understand what SEZs are all about and their development over the years.

According to information made available by the Department of Commerce, Ministry of Commerce & Industry, India was one of the first in Asia to recognise the effectiveness of the export processing zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances, absence of world-class infrastructure, and an unstable fiscal regime, and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the centre and the state level, with the minimum possible regulations.

SEZs in India functioned from November 1, 2000 to February 9, 2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. To instill confidence in investors and signal the government's commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime, thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill was prepared after extensive discussions with the stakeholders. A number of meetings were held in various parts of the country both by the Minister for Commerce and Industry as well as senior officials for this purpose. The Special Economic Zones Act, 2005 was passed by the parliament in May 2005 and it received presidential assent on June 23, 2005.

After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on February 10, 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well 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.
• Development of infrastructure facilities.

A single window SEZ approval mechanism has been provided through a 19-member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective state governments/UT administration are considered by this BoA periodically. All decisions of the Board of Approvals are with consensus. The SEZ rules provide for 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.

Operational Procedure

A developer submits the proposal for establishment of a SEZ to the concerned state government which has to forward it with its recommendation within 45 days from the date of receipt of such a proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval. The functioning of the SEZs is governed by a three-tier administrative set-up.

The Board of Approval is the apex body and is headed by the secretary of the Department of Commerce. The approval committee at the zone level deals with the approval of units in the SEZs and other related issues. Each zone is headed by a development commissioner, who is the ex-officio chairperson of the approval committee. Once an SEZ has been approved by the Board of Approval and the central government has notified the area of the SEZ, units are allowed to be set up in the SEZ. All the proposals for setting up of the units in the SEZ are approved at the zone level by the approval committee consisting of the development commissioner, customs authorities and representatives of the state government. All post-approval clearances, including grant of importer-exporter code number, change in the name of the company or implementing agency, broad banding diversification, etc are given at the zone level by the development commissioner. The performance of the SEZ units is periodically monitored by the approval committee and the units are liable for penal action under the provision of the Foreign Trade (Development and Regulation) Act in case of violation of the conditions of the approval.

Facilities & Incentives

As per information available from the Department of Commerce, the incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment, include:

• Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
• 100 per cent income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act 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 under Section 115JB of the Income Tax Act.
• External commercial borrowing by SEZ units up to USD 500 million in a year without any maturity restriction through recognised banking channels.
• Exemption from Central Sales Tax.
• 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.

Given the fact that SEZs have proved to be excellent spin-offs for economic growth, this is to not say that the road so far has been smooth. Of late, for instance, there has been a lot of heartburn over the issue of having been disregarded by the government in the revised draft of the Indian Tax Code. According to the India-focused website Tax Guru, "The special economic zone (SEZ) scheme seems to be in trouble. The revised draft of the Direct Taxes Code does not envisage continuation of the income tax concessions for units that may be set up after the end of the current financial year. The uncertainty means that many SEZ developers -- especially those whose projects are under implementation -- are not very hopeful of leasing their space to entrepreneurs who want to set up manufacturing, services or trading units in SEZ. They might prefer to get their SEZs de-notified. Some of them have already opted to do so."

Recently, the Export Promotion Council for Export Oriented Units and Special Economic Zones (EPCES) voiced concerns at the proposals in the Direct Taxes Code Bill, 2010, describing them as "deleterious to exports, future investments, and employment in SEZs." Referring to the DTC Bill proposal to impose Minimum Alternative Tax (MAT) and Dividend Distribution Tax (DDT) on SEZ developers as well as MAT on SEZ units, R K Sonthalia, Chairman, EPCES, said in a statement that these would severely affect investments in SEZs. The DTC Bill, introduced in the Lok Sabha, proposes the continuation of the profit-linked deductions permitted under the Income Tax (IT) Act, 1961, only for developers whose SEZs are notified on or before March 31, 2012.The Bill also proposes profit-linked deductions under the I-Tax Act to SEZ units commencing operations by March 31, 2014. Stating that the time period till March 31, 2014 given to new units is insufficient, Mr Sonthalia said that this deadline should be extended. He further said that the DTC Bill should not have altered the SEZ Act as it was made operational only four years back with the intention of providing long-term stability and continuity to the SEZ scheme.

Pointing out that the SEZ scheme has done extremely well so far in achieving its stated objectives of increasing exports, creating employment and attracting investment, Dr L B Singhal, Director General, EPCES, stated that the scheme, therefore, needs to be nurtured as it has got international acceptability. He said exports from SEZs have gone up ten times from Rs 22,000 crore in 2005-06 to Rs 2,20,000 crore in 2009-10. There is also a feeling that India has not been able to derive the maximum benefit from SEZs the way China has. While India had a first-mover advantage and China took the initiative of setting up SEZs only 15 years later i.e. in 1980 by establishing its first SEZ at Shenzhen, it is China today that is considered the world's factory. Shenzhen's 30 years have turned out to be a testament to the idea of clusters - a large area concentrating on similar manufacturing activities and benefiting from relaxed rules can create great scale and efficiency. Though it has hundreds of other investment zones, China has only five SEZs. But they are large: Shenzhen covers 2,000 sq kms. India boasts of 577 approved SEZs, with 114 of them operational but around 90 per cent of them cover less than 3 sq kms each.

Many of the SEZs in India have also run into rough weather due to land acquisition problems. However, to look at the positive side, the SEZ scheme has also begun to attract novel propositions. One such case is that of an initiative taken by the farmers of Avasari Khurd village in the Ambegaon taluka near Pune. The 1,500-odd farmers of the village have formed a company -- Avasari Khurd Industrial Development Pvt Ltd. "The SEZ has been proposed on barren land worth Rs 900 crore," says industrialist Sopan Bhor, who mobilised the farmers to explore the possibility of establishing the SEZ.

"Instead of sitting on this asset, we decided to convert it into a capital venture. About 18,000 people stay in the village and not only will everyone get a job, the farmers will also be owners of the SEZ," he adds. The proposed company plans to use 2,665 acres of the total 6,200-odd acres in the village for agriculture and 2,489 acres for industrial development. Also 1,066 acres will be set aside for residential purpose. Various sectors, including automobile, electronics, IT, and chemicals will be part of the proposed SEZ. The shareholders (farmers) will put in the initial investment.

A Bright Future

That SEZs are here to stay despite whatever hurdles they may have to conquer was driven home by Kamal Nath, Union Minister of Commerce & Industry, while addressing the 8th Ernst & Young Entrepreneur of the Year Awards function in Mumbai recently. "A total of 114 SEZs are already operational, while approvals have been given for more than 237 SEZs and about 244 proposals are before us.

We are also conceptualising very large regions termed investment regions for manufacturing which will provide world-class infrastructure and give benefits, sizes, and costing to units," he said. He also added that India's trade - both exports and imports - had been steadily rising and the country was fast emerging as a favourite destination for foreign direct investment (FDI).

(Photographs courtesy: MARG Swarnabhoomi, Chennai.)