What are Special Economic Zones?
A Special Economic Zone is a piece of land in a region of a country designed specifically to generate additional economic activity, promote exports of goods and services, encourage investment from domestic and foreign sources, and create employment opportunities along with the development of infrastructure facilities. Companies must fulfill the criteria to get permission to start their offices, manufacturing facilities, or Godown in the Special Economic Zone. All laws of India apply to the companies in SEZs unless specifically exempted. These companies then can reap benefits such as tax exemptions, incentives, subsidies, etc. which will be provided by the government.
India was one of the first Asian countries to recognize the effectiveness of Export Processing Zones (EPZ) to promote export, which was set up in Kandla in 1965. The Special Economic Zone (SEZs) Policy was introduced in April 2000 to address the challenges posed by the numerous restrictions and permissions, the lack of top-notch infrastructure, and the need to draw in more foreign investment to India.
As of 2023, India has 272 operational SEZs with a combined employment of 2.8 million people. About 64% of the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh, and Maharashtra.
According to the Ministry of Commerce and Industry, the exports made from SEZs in 2005-06 were INR 228.40 billion which increased by 3,300 percent and reached INR 7595.24 billion in 2020-21. Moreover, the investments made in SEZs in the year 2005-06 were INR 40.355 billion which increased by 15,300 percent to INR 6174.99 billion in 2020-21.
Despite these statistics, it is arguable that the SEZ scheme in India did not enjoy the same success as those in China even though the benefits of India’s SEZ policy have been multifold.
What are the types of SEZs in India?
Even though SEZs in India are comparable to those in other Asian countries, company executives who are thinking about establishing a SEZ should try to learn how SEZs operate in India. Every SEZ is different. A wide variety of more specialized zone types are included in the category “SEZ,” including but not limited to:
- Free-Trade Zone: Free-trade zones are specially secured areas that are designated for the processing of imported and exported goods. Also called commercial-free or foreign-trade zones, these areas involve special customs procedures and duty-free treatment.
- Export Processing Zone: These zones are generally meant for commercial and industrial exports. The goal is to encourage economic growth through foreign investment. Export processing zones offer certain benefits, such as tax and import duty exemptions, and little to no barriers.
- Industrial Park: As the name suggests, industrial areas or parks are designed to be used for industrial instead of commercial or residential purposes. Tax-related incentives are common benefits for those who use these special zones.
- Specialized Zone: Some of the most common uses for these areas include technology hubs, airport-based zones, and logistics parks.
What are the benefits of setting up a SEZ in India?
- SEZ units are allowed to import or procure from domestic sources, duty-free, all their requirements for capital goods, raw materials, consumables, spares, packing materials, office equipment, etc., for implementation of the business in the SEZ without any license or specific approval.
- Duty-free import and domestic procurement of goods for setting up of SEZ unit.
- Goods imported or procured locally duty-free could be utilized over the approval period of 5 years.
- Domestic sale of finished products, and by-products on payment of applicable customs duty.
- Domestic sale of rejects and waste and scrap on payment of applicable customs duty on the transaction value.
- Physical export benefit.
- 100% IT exemption (10A) for the first 5 years and 50% for 2 years thereafter.
- Reinvestment allowance to the extent of 50% ploughed back profits.
- Carry forward of losses.
- 100% FDI under the automatic route is allowed in the manufacturing sector in SEZ except for arms and ammunition, explosives, atomic substances, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars, and manufactured tobacco substitutes.
- No cap on foreign investments for SSI reserved items.
- Setting up of offshore banking units is allowed in SEZs.
- Freedom to bring in export proceeds without any time limit.
- External commercial borrowings by units up to $500 million a year are allowed without any maturity restrictions.
- OBUs allowed 100% income tax exemption on profit for 3 years and 50% for the next 2 years.
- Flexibility to keep 100% of export proceeds in EEFC account. Freedom to make overseas investments from it.
- Commodity hedging permitted.
- Exemption from interest rate surcharge on import finance.
- SEZ units are allowed to write off unrealized export bills.
- Exemption to sales made from domestic tariff area to SEZ unit.
- Exemption from service tax to SEZ units.
- SEZs are permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels, and non-polluting service industries in the coastal regulation zone area.
- SEZ units are exempted from a public hearing under Environment Impact Assessment notification.
- SEZ units enjoy exemption from port restriction under Drugs & Cosmetics Rules.
- Enhanced limit of Rs.2.4 crores per annum allowed for managerial remuneration.
- Agreement to the opening of the regional office of Registrar of Companies in SEZs.
- Exemption from requirement of domicile in India for 12 months before appointment as Director.
Investors may discover that certain SEZs offer additional benefits that enhance their business plans in India after narrowing down their choice of SEZs for additional investigation.
In the end, nevertheless, India’s SEZ policy has produced a lot of advantages. It is among the factors contributing to the rise in the number of foreign businesses doing business in India.
Source: India Filings, SEZ Unit Benefits in India
What are the challenges?
There are various challenges faced while setting up SEZs in India:
- There are approximately 25,000 hectares of land lying unutilized in these preferential-treatment industrial enclaves.
- There is a fear that the promotion of SEZs may be at the cost of fertile agricultural land affecting food security, loss of revenue to the exchequer and cause uneven growth with adverse effects.
- SEZs have to be promoted but not at the cost of the agricultural sector of the country. It should also not affect the environment adversely.
- Apart from food security, water security is also affected because of the diversion of water use for SEZs.
- SEZs also cause pollution, especially with the release of untreated effluents. There has been a huge destruction of mangroves in Gujarat affecting fisheries and dairy sectors.
- There is no flexibility provided to utilize the land for different sectors.
- There are multiple models of SEZ operations.
- Domestic sales by the SEZs face a disadvantage due to payment of full customs duty.
- Lack of support from state governments for an effective single window system.
- Since SEZs offer a wide range of incentives and tax benefits, it is believed that many existing domestic firms may just shift base to SEZs.
Also Read: Infrastructure Development: Key to India’s Economic Growth and Future Prospects
