SEZ in India

Special Economic Zones in India
By Dr. Mattapalli Naga Raju

Introduction :
Many developing countries including India are facing the problem of regional imbalances and capital scarcity. Vast and untapped commercial resources of an underdeveloped area can be utilized by establishing special economic zones. A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. India was one of the 1st Asian countries to establish an EPZ in Kandla in 1965 with a view to bring expertise for the country's export sector. In April 2000, the SEZ policy was announced as a part of the Export-Import (EXIM) policy of India to overcome the shortcomings on account of absence of world class infrastructure, unstable fiscal regime, multiplicity of controls and clearances. A SEZ bill was prepared after extensive discussions with the Ministry of Commerce and Industry and many other senior officials and eventually SEZ Act was passed in Parliament of India in May 2005, which received presidential assent on 23 rd June, 2005. The SEZ Act in India came into force on 10th February 2006.

The main objectives:
- 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;

Incentives for Development of SEZs:
Many lucrative incentives are provided by the SEZ Act to attract investments. Few amongst them are: 100 percent tax exemption for industries on export profits for first five years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years; provision of 100 percent foreign direct investment in industries under automatic route; duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units; exemption from central sales tax and service tax; exemption from minimum alternate tax under section 115JB of the Income Tax Act; external commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels; exemption from state sales tax and other levies as extended by the respective State Governments; single window clearance for central and state level approvals.

Amendments:
In the Special Economic Zones Rules, 2006 in rule 5, in sub-rule (2), for clause (a) clause had been substituted, namely:-
A Special Economic Zone for multi product shall have a contiguous area of one thousand hectares or more but not exceeding 5000 hectares; Provided that in case a Special Economic Zone is proposed to be set up in Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir, Goa or in a Union territory, the area shall be two hundred hectares or more:
Provided further that at least fifty per cent of the area shall be earmarked for developing the processing area."

Response from Industry:
The overwhelming response to the SEZ scheme is evident from the flow of investment and creation of additional employment in the country. The SEZ scheme has generated tremendous response amongst the investors, both in India and abroad, which is evident from the list of Developers who have set up SEZs namely: Nokia SEZ in Tamil Nadu , Quark City SEZ in Chandigarh , Flextronics SEZ in Tamil Nadu, Mahindra World City in Tamil Nadu, Motorola, DELL and Foxconn, Apache SEZ (Adidas Group), Divvy's Laboratories in Andhra Pradesh, Rajiv Gandhi Technology Park, Chandigarh, ETL Infrastructure IT SEZ, Chennai, Hyderabad Gems Limited, Hyderabad.
Exports from SEZs:
Exports from the functioning SEZs during the last three years

...................Year..................Value (Rs. crore)...................Growth Rate(over previous year )
............ 2005-2006.................... 22 840........................................ 25%
............2006-2007.....................34,615.........................................52%
............2007-2008.....................66,638.........................................92%

Criticism:
The issue of SEZ has been a "hot cake" of controversy especially in politics. Some consider SEZ to be important for India's economic growth others criticize it as an official tool used by big industrialists to grab lands from farmers for making money. The protests in Nandigram and Singur against establishment of SEZs have created a lot of political turmoil. Similar protests can be seen from millions of people from the states of Haryana, Orissa, Maharashtra and others for not giving their lands for SEZ projects. Such protests are supported by important personalities, social activists, politicians and many NGOs. The threat of massive displacement from agricultural areas has been the main focus of these agitations..Most of the fertile and agricultural land is being covered under SEZs to build buildings, malls and supermarkets. Establishment of SEZs also causes huge revenue loss to the country as it encourages the tax paying businesses to shift to tax free zones.