Special Economic Zone in India – UPSC Notes

Special Economic Zone (SEZ) is a specially marked geographical region where the economic laws are more liberal than in the rest of the country.

Broadly, SEZ has certain defining features, such as duty-free movements of goods and services, world-class infrastructure, special tax incentives, export orientation, construction-intensive nature, the free inflow of foreign capital, and differentiated economic management like relaxation in some basic restrictions applicable to rest of the economy.

The Special Economic Zone (SEZ) as a category covers a broad range of more specific zone types, such as Free Trade Zone (FTZ), Free Zone (FZ), Free Ports (FP), Export Processing Zone (EPZ), Industrial Estates (IE), Urban Enterprize Zone, and others.

Background – Special Economic Zone (SEZ)

In 1965, India’s first Export Processing Zone (even Asia’s first EPZ) was set up in Kandla, Kutch in Gujarat. By 1978, India had set up another four Free Trade Zone (FTZs) in Mumbai, Chennai, Falta, and Noida.

In April 2000, the Government of India announced the introduction of the Special Economic Zone policy in the country to enhance foreign investment, promote exports from the country, and overcome the obstacles being faced by the businesses. The policy provides to set up SEZs in the private, public, joint sector, or by the state government.

From 2000 to 2006, SEZs were operational under the provisions of the Foreign Trade Policy, and the financial incentives were provided under the relevant status.

Objectives of Special Economic Zones

  • To increase the foreign and domestic investments in Industries by providing a conductive structure. Countries create SEZs to attract Foreign Direct Investment (FDI).
  • To promote exports of goods and services and increase foreign trade.
  • To generate more employment.
  • To boost the process of industrialization and urbanization.
  • To develop the relatively less developed regions.
  • To reduce the regional inequalities in the country’s socio-economic development.

Special Economic Zone Act of 2005

In 2005, the Indian Parliament Passed the Special Economic Zone Act of 2005. The Act came into force in 2006 along with SEZ Rules. The Act provides the legal framework for the establishment, management, and development of Special Economic Zones. The main objectives of the act are as follows:

  • To generate additional economic activity.
  • To boost exports of the goods and services.
  • To promote investment from domestic and foreign sources.
  • To generate employment opportunities.
  • To develop infrastructure facilities.

Special Economic Zone Rules

The SEZ Rules provided:

  • To simplify the procedures to develop, operate and maintain Special Economic Zones (SEZs) and to set up units and conduct business in SEZs.
  • Single-window clearance for setting up SEZs and also for setting up a unit in SEZ.
  • Single-window clearance on matters connected to the Central as well as State governments.
  • To simplify the compliance procedures and documentation with a focus on self-certification.
  • Different minimum land requirements for different types of SEZs.

Special Economic Zone – Approval Mechanism

Under the SEZ Act, A 19-member inter-ministerial SEZ Board of Approval (BoA) provides the SEZ approval in a single window process.

  • The applicant or developer has to submit its proposal to the State government.
  • The State government put forward this proposal to the Board of Approval along with recommendations within 45 days.
  • The developer can also directly submit its proposal to the BoA.
  • The 19 member Board of Approval (BoA), constituted by the Central Government, takes the decisions considering the merits of the proposal.
    • The BoA is chaired by the Secretary of the Department of Commerce under the Ministry of Commerce and Industry.
    • The other members of the Board are from various bodies and ministries, such as the Central Board of Direct Taxes (CBDT), Central Board of Excise and Customs (CBEC), Department of Commerce, Department of Economic Affairs, Ministry of Home Affairs, Ministry of Urban Development, Ministry of Science and Technology, Ministry of Law and Justice, etc.
  • The decisions taken by BoA are by Consensus.
  • Once the BoA approves, the Central government notifies the SEZ area, where units are allowed to establish inside it.
  • The request to set up units in SEZ is approved at the Zone level by the Approval Committee consisting of the Development Commissioner after discussion with the Customs Authorities and representatives of the State government.

Salient Features of Special Economic Zone

  • A Special Economic Zone is a designated duty-free area deemed to be foreign territory for the purpose of trade operations, duties & tariffs.
  • There is no requirement for a license for import.
  • Other notable features are:
    • The units in SEZ must become net foreign exchange earners within a period of 3 years.
    • Full freedom for subcontracting.
    • Special Economic Zones are allowed for trading, manufacturing, and other service activities.
    • The domestic sales from these Special Economic Zones are subjected to customs duties. Also, the import policy comes into force whenever they sell their product to the domestic markets.
    • There was no routine examination unless specific orders from the Development Commissioner or the Customs authority.

Special Economic Zone – Facilities and Incentives

The government offers many facilities and incentives for the businesses and companies established in SEZ. Some important ones are:

  • Duty-free domestic procurement (import from the domestic market) of goods for the operation, development, and maintenance of SEZ units.
  • Units in Special Economic Zones are exempted from the Minimum Alternative Tax (MAT).
  • Exemption from the Service tax, Central Sales tax, and State Sales tax.
  • Single window clearance.
  • Separate documentation for the customs and export-import policy is not needed.
  • Under the Income Tax Act, there is a 100% income tax exemption on export income for SEZ units for the first 5 years, 50% for the next 5 years, and 50% of the ploughed back of export profit for further next 5 years.

Baba Kalyani committee

In June 2018, the Union Ministry of Commerce and Industry constituted a committee headed by Baba Kalyani, Chairman of Bharat Forge Ltd. The objectives of the Baba Kalyani committee are as follows:

  • The committee was set up to study the Special Economic Zone Policy and to make it WTO compatible.
  • To suggest the measures for increasing the use of vacant land in SEZs.
  • To suggest changes in the Special Economic Zone Policy based on International experience.
  • Merge the SEZ policy with the other governmental scheme like the National Industrial manufacturing zone, Coastal Economic Zones, Delhi-Mumbai manufacturing zone, etc.

Key recommendations of the report by the Baba Kalyani Committee

The Baba Kalyani committee submitted its report in November 2018. The key recommendations of the report are as follow:

  • To shift focus from Export growth to broad-based Employment and Economic Growth (Employment, Economic Enclaves- 3Es).
  • To formulate separate rules and procedures for manufacturing and service Special Economic Zones.
  • To shift from a supply-driven approach to a demand-driven approach for 3Es development.
  • Promote integrated industrial & urban development.
  • Enable framework for Ease of Doing Business in 3Es.

The recommendations which have been implemented by the government are as follows:

  • Review of the specific exclusions proposed in Net Foreign Earning (NFE) computation in the light of the Make in India Initiative.
  • Sharing of duty-free assets or infrastructure between the units to be allowed against specific approval.
  • Formalizing the de-notification process for enclaves and delinking its mandatory usage for Special Economic Zones purpose only.
  • Support for the servicification of the manufacturing zone.

Challenges for Special Economic Zones

  • Land acquisition for SEZs may lead to the loss of fertile land, further affecting food security. There is also fear of uneven growth with adverse effects.
  • Diversion of water use for SEZs also affects water security.
  • As SEZs offer a wide range of facilities and tax incentives, it is believed that many domestic firms may shift their base to SEZs.
  • Tax holidays for the SEZs affect the GDP of the country.
  • SEZs also affect the environment adversely, causing pollution.

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