Special Economic Zones (SEZs) in India | Financial Management

In this article we will discuss about:- 1. Meaning of SEZ 2. Objectives of SEZ 3. Preconditions for Setting Up 4. Acquisition of Land 5. Exemptions, Drawbacks and Concessions 6. SWOT Analysis.

Meaning of SEZ:

Under the theory of balanced growth the real bottleneck in breaking the narrow market is seen in the shortage of capital, therefore, all potential sources have to be mobilized. If capital is available, investment will be made. However, in order to ensure the balanced growth, there is a need for investment planning by the governments.

A country lacks resources to finance balanced growth, resources are therefore concentrated on strategic industries with:

1. Significant forward linkages i.e. firms creating essential inputs for other key firms in the economy.

2. Significant backward linkages i.e. key firms buy industrial inputs from a large number of domestic firms.

3. Import substitution, developing domestic industries replaces imports and so improves the balance of payments.

4. Government identifies strategically important areas with significant backward and forward linkages to nationalize (planned economy) or subsidize (market economy).

Theory of unbalanced growth led to formation of SEZs to create forward and backward linkages. To achieve this, both SEZ Developers and SEZ units are given various direct and indirect tax benefits by both Central and State governments.

In India, Special Economic Zones are setup with the main objectives to generate additional economic activity, promote export of goods and services, promote investment from domestic and foreign sources, create employment opportunities, develop infrastructure facilities and backward regions, attract Foreign Direct Investment (FDI), earn foreign exchange and contribute to exchange rate stability, single window clearance for setting up of a SEZ and an unit in SEZ, stimulate sectors such as electronics, information technology, create backward and forward linkages to increase the output and raise the standard of local enterprise that supply goods and services to the zone. By establishing Special Economic Zones, we are trying to make India, a global manufacturing and outsourcing hub.

SEZ is a specially demarcated area and special policies and laws are framed for it, which are not applicable to other areas of the country. The rationale behind the establishment of SEZs is to boost economic liberalization with primary focus on the promotion of export-oriented production in the country. A SEZ is a geographical region that has economic laws that are more liberal than a country’s typical economic laws. The SEZ is a new concept increasingly seen as an alternative way of economic growth through exports and duty exemption.

In India, Special Economic Zones Act, 2005 was enacted to create specifically delineated duty-free enclaves. The promotion of SEZ is an attempt to deal with infrastructural deficiencies and procedural and bureaucratic complexities caused by monetary, fiscal, taxation and labour laws.

A SEZ can be defined as “an industrial zone with special incentives, set up to attract foreign investors, in which imported materials undergo some degree of processing for value addition before being exported again”. A SEZ is a modification of concept ‘Export Processing Zone’.

Objectives of SEZ:

The main objectives for setting up of SEZ are as follows:

1. To attract investment to the country, particularly, foreign investment.

2. To create employment and to improve living standards of the people.

3. To enable transfer of improved technology to the country.

4. To enable economic development of the country.

5. To earn foreign exchange out of export of goods manufactured from SEZ units.

6. To attract foreign direct investment to boost the process of creating infrastructure and for creating new industrial enterprise.

7. To enhance the competitive ability of products manufactured in India.

Preconditions for Setting Up of SEZ:

The essential prerequisites in setting up of SEZ are as follows:

1. Units approved under SEZ scheme would be permitted to set up SEZ.

2. The SEZ units shall abide by local laws, rules, regulations or byelaws as exacted by the government. They shall also comply with industrial and labour laws which are locally applicable.

3. Security arrangements will be provided by the SEZ.

4. The SEZ should have a minimum area of 1000 hectares and at least 25% of the area is to be earmarked for developing industrial units.

5. Minimum area will not be applicable to product specific and port/airport based SEZs.

6. Wherever the SEZs are land-locked, an Inland Container Depot (ICD) will be an integral part of SEZs.

Acquisition of Land:

The Central Government has issued the following directions for acquisitions of land for SEZ:

1. SEZs should be set up only on barren land.

2. Acquisition of land in critical conditions should be limited to single crop agricultural land.

3. In case of any double crop agriculture land has to be acquired to meet the minimum area for SEZ and it should not be more than 10% of the total area.

Exemptions, Drawbacks and Concessions:

Section 26 of the SEZ Act provides that every developer and the entrepreneur shall be entitled to the following exemptions, drawbacks and concessions, namely:

1. Exemption from any duty of customs, under the Customs Act, 1962 or the Custom Tariff Act, 1975, on goods imported into, or services provided in a SEZ or a unit in it.

2. Exemption from any duty of Customs Act, 1962 or the Customs Tariff Act, 1975, on goods exported from, or services provided from a SEZ or from a unit.

3. Exemption from excise duty under the Central Excise Act, 1944 or the Central Excise Tariff Act, 1985, on goods brought from Domestic Tariff Area (DTA) into SEZ or unit.

4. Drawback or such other benefits as may be admissible from time to time on goods or services provided from DTA into SEZ or unit.

5. Exemption from Service Tax of the Finance Act, 1994 on taxable services provided to a developer or unit in SEZ.

6. Exemption from Securities Transaction Tax levied under section 98 of the Finance Act, 2004 in case taxable securities transactions are entered into by a non-resident through the International Financial Service Centre.

7. Exemption from the levy of taxes on the sale or purchase of goods under the Central Sales Tax Act, 1956.

Section 27 of the SEZ Act provides that the provisions of the Income Tax Act, 1961, as in force for the time being, shall apply to developer or entrepreneur in a SEZ or unit. Section 29 of the SEZ Act provides that the transfer of ownership in any goods brought into or produced or manufactured in any unit in SEZ or removal thereof from such unit or zone shall be allowed subject to the conditions as the Central Government may prescribe.

Section 30 of the Act provides that domestic clearances by units shall be governed subject to the conditions specified in the rules made by the Central Government in this half.

SWOT Analysis of SEZs:

Strengths:

1. No license required for import

2. Manufacturing, trading or services activities allowed

3. Full freedom of subcontracting

4. No routine examination of export import cargo by customs authorities

5. SEZ units to have positive net foreign exchange earner

6. Financial incentives like tax holidays, duty free imports and exports

7. Single window clearance

8. High quality infrastructure

9. Strategic location and market access.

Weaknesses:

1. Inadequate resettlement and rehabilitation policies and plans

2. Inadequate employment opportunities for local people through SEZs leading to loss of livelihood

3. Increasing burden on natural resources and the environment and alienation of local communities from these resources

4. SEZs contributing to real estate boom and creating real estate zones leads deviation of the original intent of SEZs

5. Potential revenue loss from heavy subsidizing in SEZs

6. Differences of opinion between central and state governments

7. Bypassing local governments and ignoring local communities

8. Increases regional disparities

9. No confirm mechanism of establishing SEZs led to fear psychosis among villagers.

Opportunities:

1. Opportunity to rural masses to shift from agriculture to manufacturing and service sector reducing burden on the agriculture.

2. Employment opportunity improves the morale and economic conditions of the poor landless farmer/ labour.

3. Increase awareness, competitiveness and adaptability.

4. Waste land utilization generates income to the government leading more investment in the area.

5. International market comes at doorsteps.

6. Infrastructural support provides amicable solution to the problems of sustainable development.

7. Generation of economic activity reduce the possibility of family holding and employment in disguise.

Threats:

1. Large scale and unjustified acquisition of land, fertile land is taken by SEZ reduces the cultivable land in the country.

2. Misuse of land for real estate purpose.  

3. Threat to water security.  

4. Threat from China exports.

5. Over capacity.  

6. Small and marginal farmers may turn landless.  

7. Source of livelihood may be snatched by corporate and capitalist.  

8. Immigration may alter the natural resource capital and spoil the cultural identity.

9. WTO constraints.  

10. Conversion of agricultural labour into industrial labour.