The government of India enacted Special Economic Zone (SEZ) Act in 2005 which came into force in February 2006.
With the establishment of Asia’s first Export Processing Zone (EPZ) at Kandla in 1965, India was one of the first countries in Asia to identify the efficiency of the Export Processing Zone (EPZ) model in promoting exports.
The Special Economic Zones Policy was first unveiled in April 2000 with the goal of addressing the issues related to the abundance of controls and clearances, the lack of world-class infrastructure, an unstable fiscal framework, and the desire to draw larger foreign investments into India. But the policy become an act in 2005.
A special economic zone is a part of a nation that has distinct economic rules from other parts of the same country.
Foreign direct investment is typically encouraged by and drawn to special economic zones (SEZs) due to their favorable economic rules (FDI).
Special economic zones (SEZs) are frequently established in order to promote quick economic growth by utilizing tax incentives to draw foreign investment and promote technological advancement.
Although several nations have established special economic zones, China has had the most success using SEZs to draw in global investment.
Objectives of Special Economic Zones
The main objectives of the Special Economic Zones are:
- production of new economic activities
- encouraging the export of goods and services
- promoting both domestic and international investment sources
- the development of job opportunities
- infrastructure facility development
Salient Features of Special Economic Zone
- For the purposes of authorized operations in the SEZ, a designated duty-free enclave shall be treated as a territory outside the customs territory of India.
- No license is needed to import.
- Manufacturing and service industries are permitted.
- The unit must generate positive net foreign exchange during a five-year period after production starts.
- Domestic sales are subject to all applicable customs duties and import regulations, but Special Economic Zone units are permitted to engage in subcontracting.
- No routine inspection of export/import cargo by customs officials.
- According to the SEZs Act, 2005, SEZ developers, co-developers, and units are eligible for direct tax and indirect tax benefits.
- simplified processes for creating, running and maintaining Special Economic Zones, as well as for establishing units and running businesses there.
- a single-window permit for the construction of a Special Economic Zone.
- clearance for a single window when constructing a unit in a special economic zone.
- clearance through a single window for issues involving the federal and state governments.
- Documentation and compliance processes that are more easily understood, with a focus on self-certification.
Approval Mechanism of SEZs
The developer presents the State Government with a proposal for the creation of SEZ. Within 45 days of receiving the proposal, the State Government must submit it along with its recommendation to the Board of Approval (a 19-member body constituted by the central government). Additionally, the applicant has the choice to send the proposal straight to the Board of Approval.
Administrative set up of SEZs
In India, SEZs may be established by any private or international enterprise as well as by the central government, state government, or its agencies.
When entering a special economic zone (SEZ), domestic tariff area goods and services are treated as exports, and when leaving SEZ, domestic tariff area goods and services are treated as imports.
Incentives and Facilities
- For the first five years under the Income Tax Act, SEZ units are exempt from paying income tax on their export income at a rate of 100%, followed by a 50% rate for the next five years, and a 50% rate on any export profits that are reinvested.
- approvals at the central and state levels through a single portal.
- Duty-free import/domestic procurement of goods for development, operation, and maintenance of SEZ units
- Under the new GST law, supplies made to SEZs are not taxed (i.e. no GST will be levied when the goods are purchased by SEZs from the DTA area)
- External Commercial Borrowing by SEZ units can borrow up to US $ 500 million in a year without any maturity restriction through reputable banking channels.
The SEZ experience in India has been disappointing so far. “Given the large gaps in attainment of the intended socioeconomic objectives by all the sectors of SEZs,” the CAG concluded in its report on SEZS, “there is an urgent need for the government to assess the issues impeding the expansion of non-operational and under-performing zones.”
The SEZS faces a number of difficulties, including the following:
- SEZs with unutilized land. Land in SEZs is not used in a variety of ways, which limits flexibility
- Existence of a variety of economic zones, including SEZs, Coastal Economic Zones, the Delhi-Mumbai Industrial Corridor, National Investment and Manufacturing Zones, Food Parks, and Textile Parks.
- SEZ domestic sales are at a disadvantage because they must pay full customs duty instead of the cheaper rates with ASEAN countries due to the Free Trade Agreement
- For services performed by SEZ units, domestic businesses must pay in foreign currency. The sale of products, for which payments might be made in rupee terms, is exempt from this rule.
- Government’s inconsistent approach to SEZ tax exemptions in various ways.
Data and Facts
About 25.60 lakh people were employed overall as of September 30, 2021, and Rs. 6,28,565.89 crore had been invested.
The value of exports from SEZs in the Financial Year 2021–22 (as of October 31, 2021) was 5,29,333 crores. The exports have increased by 31% compared to the same time in FY 2020–21.
India is a rising power with a population of 1.3 billion that cannot be ignored worldwide. In terms of Gross Domestic Product, India is the sixth largest country. The country’s GDP was $2.6 trillion in 2020, according to figures from the International Monetary Fund. India is ranked third globally in terms of GDP on a purchasing power parity (PPP) basis and stands at $8.9 trillion. To boost economic growth further and attract foreign investment is of considerable significance in India to promote the export-oriented manufacturing sector through SEZs.
Article Written by: Priti Raj