Special Economic Zones (SEZs)

Ministry of Commerce & Industry

Definition

An SEZ is an enclave within a country that is typically duty-free and has different business and commercial laws chiefly to encourage investment and create employment.

• Apart from generating employment opportunities and promoting investment, Special Economic Zones are created also to better administer these areas, thereby increasing the ease of doing business

SEZ Background

An SEZ Policy was announced for the very first time in 2000 in order to overcome the obstacles businesses faced. 

• There were multiple controls and many clearances to be obtained before starting a venture.
• Infrastructure facilities were shoddy and well below world standards in India.
• The fiscal regime was unstable as well.
• In order to attract huge foreign investments into the country, the government announced the Policy.
• The Parliament passed the Special Economic Zones Act in 2005 after many consultations and deliberations.
• The Act came into force along with the SEZ Rules in 2006.
• However, SEZs were operational in India from 2000 to 2006 (under the Foreign Trade Policy).
• Note:- A precursor to the SEZs, the Export Processing Zones were set up in India well before. The first EPZ came up in Kandla in 1965 to promote exports. This was the first EPZ not only in India but in all of Asia as well.

Special Economic Zones Act, 2005

• “It is defined as an Act to provide for the establishment, development and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto.”

• SEZ are set up under Special Economic Zones Act, 2005 as duty free enclaves to be treated as foreign territory for the purpose of trade operations and duties and tariffs.
• SEZ are allowed for manufacturing, trading and service activities.
• A single window SEZ approval mechanism by Board of Approval
• Application recommended by states/UTs are approved by BOA

Objective

 This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations

1. To create additional economic activity.
2. To boost the export of goods and services.
3. To generate employment.
4. To boost domestic and foreign investments.
5. To develop infrastructure facilities.

What are the incentives for units in SEZs:

• Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units
• 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.
• 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 Central Sales Tax.
• Exemption from Service Tax.
• Single window clearance for Central and State level approvals.
• Exemption from State sales tax and other levies as extended by the respective State Governments.

SEZ Rules

The Rules provide for:

1. Simplified procedures to develop, operate and maintain SEZs and also to set up units and conduct businesses in the SEZs.
2. Single-window clearance to set up a Special Economic Zone, and also to set up a unit in an SEZ.
3. Single-window clearance for matters connected to the Central and State governments.
4. Simplified compliance procedures and documentation with a focus on self-certification.
5. Different minimum land requirements for different classes of Special Economic Zones.

SEZ Approval Mechanism

The SEZ approval mechanism is a single-window process provided by a 19-member inter-ministerial SEZ Board of Approval (BoA).

• The developer has to submit the proposal to the state government.
• The state government forwards this proposal to the BoA along with its recommendation within forty-five days.
• The developer or applicant can also directly submit the proposal to the BoA.
• The Board, which has been constituted by the Central Government, and is a 19-member Board takes the decision considering the merits of the proposal. All decisions taken by the Board are by consensus.

• The Board is chaired by the Secretary of the Dept. of Commerce, Ministry of Commerce and Industry.
• The other members are from various bodies and ministries such as the Central Board of Excise and Customs (CBEC), the Central Board of Direct Taxes (CBDT), Department of Economic Affairs, Dept. of Commerce, Ministry of Science and Technology, Ministry of Home Affairs, Ministry of Law and Justice, Ministry of Urban Development, etc.
• Once the BoA gives its approval, and the central government notifies the area of the SEZ, units are allowed to be established inside the SEZ.

The salient features of the SEZ scheme are:-

1. A designated duty free enclave to be treated as a territory outside the customs territory of India for the purpose of authorised operations in the SEZ;
2. No licence required for import;
3. Manufacturing or service activities allowed;
4. The Unit shall achieve Positive Net Foreign Exchange to be calculated cumulatively for a period of five years from the commencement of production;
5. Domestic sales subject to full customs duty and import policy in force;
6. SEZ units will have freedom for subcontracting;
7. No routine examination by customs authorities of export/import cargo;
8. SEZ Developers /Co-Developers and Units enjoy tax benefits as prescribed in the SEZs Act, 2005.

Challenges 

• 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.
• 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.
• 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 huge destruction of mangroves in Gujarat affecting fisheries and dairy sectors.
• 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.

Currently, about 240 SEZ are operational in the country. About 64% of the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra.

Scheme for Traders

Ministry of Commerce & Industry

1. A number of schemes have been launched for supporting traders. Details of Schemes for supporting Traders are given as under:

1. National Pension Scheme for Traders, Shopkeepers and Self-Employed Persons

   Ministry of Labour & Employment has launched “National Pension Scheme for Traders, Shopkeepers and Self-Employed Persons” on 12.09.2019. It is a voluntary and contributory pension scheme. Enrolment to the scheme is done through the Common Service Centres with its network of 3.50 lakh Centres across the country. In addition, eligible persons can also self-enroll through visiting the portal www.maandhan.in. The traders in the age group of 18-40 years with an annual turn over not exceeding Rs. 1.5 crore and are not member of EPFO/ESIC/MPS/PM-SYM or an income tax payer, can join the scheme. Under the scheme, 50% monthly contribution is payable by the beneficiary and equal matching contribution is paid by the Central Government. Subscribers, after attaining the age of 60 years, are eligible for a monthly minimum assured pension of Rs. 3,000/-. Life Insurance Corporation (LIC) of India acts as a fund manager and record keeping agency. The LIC is also responsible for managing the pension fund and pension payout. As on 31.01.2021, over 43000 enrolments have taken place under this scheme.

     2. Emergency Credit Line Guarantee Scheme (ECLGS)

                     Emergency Credit Line Guarantee Scheme (ECLGS) was introduced as an emergency measure to combat the unprecedented crisis caused in the wake of Covid-19 pandemic. Under the scheme, credit from Scheduled Commercial Banks, Financial Institutions, Non- Banking Financial Companies is provided to eligible Micro, Small & Medium Enterprise (MSME) units, business enterprises and individual loans for business purposes upto 20% of their outstanding credit as on 29.2.2020. This additional credit is fully covered by a credit guarantee provided by National Credit Guarantee Trustee Company Ltd. (NCGTC). The loans provided under ECLGS have a 12-month moratorium on repayment of principal. The Scheme has been extended through ECLGS 2.0 for the 26 sectors identified by the Kamath Committee and the health care sector. The entities with outstanding credit above Rs. 50 crore and not exceeding Rs. 500 crore as on 29.2.2020 were made eligible under ECLGS 2.0. The scheme is valid till 31.3.2021 or till guarantees for an amount of Rs 3,00,000 crore is sanctioned, whichever is earlier. ECLGS is also available to eligible non-MSME enterprises. As informed by NCGTC, as on 25.1.2021, the cumulative sanctioned amount under the scheme is Rs 2.39 lakh crore.

• A number of schemes have been launched to promote import and export at international level.Details of the Government Schemes to promote import and export at international level are given below:

1. Remission of Duties and Taxes on Exported Products (RoDTEP)

                     A new Scheme, Remission of Duties and Taxes on Exported Products (RoDTEP) has been operationalized w.e.f 01.01.2021. Department of Revenue (DoR) and the Department of Commerce (DoC) are working to finalize the modalities related to the scheme, including scheme guidelines, exclusion categories etc. The Department of Revenue has constituted a RoDTEP Committee to interact with the all stakeholders, including Exporters, Export Promotion Council and Ministries and to recommend to the Government ceiling rates for items/ sectors identified by the Government. The Committee’s work is ongoing. The disbursal of rebate amounts to individual exporters is to be implemented by the CBIC in an end-to-end digitized environment in the form of electronic transferable duty credit scrips, which will be maintained at the Customs server. The RoDTEP Scheme is based on the principle that taxes and duties are not to be exported and will help stimulate exports by making Indian merchandise cost competitive in international markets.

2. Export Promotion Capital Goods Scheme

                     Under Export Promotion Capital Goods scheme, the export obligation can be fulfilled directly by the authorisation holder or though a merchant exporter. Even exports though merchant exporter is counted for fulfilling export obligation, provided, the Authorization details of manufacturer is indicated in the export documents.