Special Economic Zone

A Boon or A Curse
 SPECIAL ECONOMIC ZONES
IN CHINA & INDIA
Introduction

- Historical background
- From ancient times – Harappan, Roman to mediaeval times and later
- Small fenced-in areas specializing in manufacturing for exports
- Modern times – Free ports – Aden, Singapore, Hong Kong – Difference
- Modern version of export zones starting from Puerto Rico (USA),
Shannon International Airport in Ireland in 1959
- India – Kandla in 1965. EPZs in Taiwan, S. Korea and other countries
- Since 1979, most extensive, large and successful SEZs in (China)
- After early start, India slow in following up
Fundamentals of SEZs
 SEZs (special economic zones) are fundamentally
different from the traditional free zones.

 They are much larger in size; offer broader range of

activities such as
 a single-window management,
 streamlined procedures,
 duty-free privileges,
 also access to the domestic market on a duty-paid
basis.
Fundamentals of SEZs
 Whether the enclave is termed an EPZ, FTZ or
SEZ, the cardinal factors are
 appropriate infrastructure and transport facilities,
 low factor cost,
 flexible labour laws,
 convertibility of currency,
 stable legal and administrative regime, and
 a commitment to the canons of an open economy
Fundamentals of SEZs
 Look at Chinese SEZ-Shenzhen SEZ
 Total Area of Shenzhen – 1,952.84 sq. kms
 Area of SEZ - 395.81 square kilometers
 Harbouring 3.5 million people
 $30 billion in FDI,
 3 million employment
 Equipped with the state-of-the-art infrastructure
 Effective port facilities,
 Simplified procedures,
 Fully flexible labour policy in terms of hiring and firing.
Shenzhen SEZ
Shenzhen SEZ
Shenzhen SEZ
Fundamentals of SEZs
 Look at Jebel Ali Free Trade Zone
in Dubai

 Area - 100 sq km

 Home to over 1,600 companies from 85 countries

 Triggered the economy and development of Dubai

Jebel Ali Free Trade Zone
Jebel Ali Free Trade Zone
Subic Bay Freeport Philippines
Subic Bay
 Strategic Location

 Easily
accessible by
land, air and
sea. Practically
half of the
world’s
container fleet
passes by its
doorway.
Rehabilitated Marine Terminal at the NSD (Naval Supply Depot)
Part of the rehabilitation is the widening of the marine terminal
apron by 12 meters (each side).
The new container terminal at the Cubi Point. Around two
million cu.m. of earth was moved to construct the 30-hectare
container yard. Specifications: 2 berths; Depth: 13 meters;
Length: 560 meters.
The Subic Bay International Airport, the gateway to Subic
Bay Freeport, is a modern, international airport with 10,000
sq. m passenger terminal, capable of handling 700 passengers
at any given time and featuring the very latest technology for
security and comfort.
Subic Bay – Tourism
Main objectives of the SEZ Act

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

SEZ Act, 2005
 Passed by Parliament in May 2005
 Received Presidential assent on
23rd June 05
 Came into effect on 10th Feb 06
supported by the SEZ Rules
Tax Incentives
Tax Incentives
 Direct Tax Benefit to Developers
 U/s 80-IAB
 100% tax holiday for 10 consecutive years
out of block of 15 years
 Profit & gains derived from business of
developing SEZ notified on or after 1st
April 2005
 Transferee Developer can also claim
deduction for balance period of 10 years
on Operation & Maintenance income
Tax Incentives

 Direct Tax benefits for Developers

 Minimum Alternative Tax

provisions not applicable
 Exemption from Dividend
Distribution Tax
 Tax Incentives
 Direct Tax Benefits to Units - 10AA
 100% of profits and gains derived from the
export for five Consecutive Years from which
business commences.
 50% of for further five A.Y. and
 50% of the profits ploughed back for the next
five A.Y.
Tax Incentives
 Direct Tax benefits for Units
 Minimum Alternative Tax provisions not
applicable
 Capital gain tax exemption on relocation to
SEZ
 TDS
 No deduction of tax at source by OBU on
interest on deposits / borrowings from non–
resident or person not ordinarily resident.
Tax Incentives

 Indirect Tax
 Exemption from payment of Import duty
 Exemption from payment of Excise duty
 Exemption from payment of CST and VAT
on purchase from DTA
 Exemption from Service tax
SEZ Act, 2005
 A Single Window SEZ approval
mechanism has been provided through
a 19 member inter-ministerial SEZ
Board of Approval (BoA).
 The applications duly recommended
by the respective State Governments
are considered by this BoA
periodically.
 Section 7 of SEZ Act, 2005
 Exemption from taxes, duties or cess
“Any goods or services exported out of, or imported
into, or procured from the Domestic Tariff Area by, -
(i) a Unit in a Special Economic Zone; or
(ii) a Developer;
shall, subject to such terms, conditions and limitations,
as may be prescribed, be exempt from the payment of
taxes, duties or cess under all enactments specified in
the First Schedule”

Contd….
The Zone Administrator
Development Commissioner
 Sec.11 – Development Commissioner
 Central Govt. may appoint
 Development Commissioner [DC]
 Assistants to DC

 Sec.12 – Functions of Development Commissioner

 Guiding the entrepreneur to establish SEZ;
 Taking suitable steps to promote exports;
 Ensuring proper co-ordination with the Central Govt. and State
Govt.;
 Monitoring the performance of the Developer and the units in SEZ;
etc.
Schedules to the SEZ Act, 2005
THE FIRST SCHEDULE (Enactments)

1. The Agricultural Produce Cess Act, 1940 (27 of 1940).

2. The Coffee Act, 1942 (7 of 1942).
3. The Mica Mines Labour Welfare Fund Act, 1946 (22 of 1946).
4. The Rubber Act, 1947 (24 of 1947).
5. The Tea Act, 1953 (29 of 1953).
6. The Salt Cess Act, 1953 (49 of 1953).
7. The Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (16 of
1955).
8. The Additional Duties of Excise (Goods of Special Importance) Act,
1957 (58 of 1957).
9. The Sugar (Regulation of Production) Act, 1961 (55 of 1961).

Contd……….
Schedules to the SEZ Act, 2005
10.The Textiles Committee Act, 1963 (41 of 1963).
11.The Produce Cess Act, 1966 (15 of 1966).
12.The Marine Products Export Development Authority Act, 1972 (13 of 1972).
13.The Coal Mines (Conservation and Development Act, 1974 (28 of 1974).
14.The Oil Industry (Development) Act, 1974 (47 of 1974).
15.The Tobacco Cess Act, 1975 (26 of 1975).
16.The Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of
1978).
17.The Sugar Cess Act, 1982 (3 of 1982).
18.The Jute Manufactures Cess Act, 1983 (28 of 1983).
19.The Agricultural and Processed Food Products Export Cess Act, 1985 (3 of
1986).
20.The Spices Cess Act, 1986 (11 of 1986).
21.The Research and Development Cess Act, 1986 (32 of 1986).
Schedules to the SEZ Act, 2005
 The Second Schedule: Incorporates
modification to the Income Tax Act, 1961, as
applicable to SEZs.

 The Third Schedule: Incorporates

amendments to Insurance act, 1938,
Banking Regulations Act, 1949 and Indian
Stamp Act, 1899
 SWOT
Analysis
SWOT Analysis for Indian SEZs
 Strengths:

 Skilled Manpower – knows English

 Worldwide acceptance of capabilities in fields like
 Pharmaceutical manufacturing & research
 Clinical trials
 Manufacturing auto parts
 Engineering designing & consultancy, IT & ITES
 Entertainment etc etc
 Financial & other institutional Networks like Stock
Exchanges, Insurance Companies, Educational Institutes
 Attraction of a large ‘Indian’ market:
 growing middle class with purchase power
SWOT Analysis for Indian SEZs
 Weakness:

 Infrastructure bottlenecks –connecting infrastructure

like Roads leading to SEZs.
 Political changes
 Convertibility of Currency on Capital A/c
 Red Tape
 Labour reforms
 Zones by & large are still zones not smart cities.
 Inappropriate locations
 Long gestation period 4 to 5 years in absence of
infrastructure development.
SWOT Analysis for Indian SEZs
 Opportunities:

 An alternative manufacturing base, particularly

compared to Chinese SEZs.
 Services SEZs do not require movement of input and
output physically and hence, surrounding
infrastructure may not matter much.
 For multi-product SEZs, almost 23 ports are available.
Most of them are likely to be EDI compliant.
 New small ports & airports are also being developed
keeping SEZ concept in mind.
SWOT Analysis for Indian SEZs

 Threats:

 Loosing edge of low labour costs - many countries

are competing.
 Formation of economic blocks, Effect on
Government Revenues.
 Negotiations for FTAs with many countries may
erode competitiveness.
 The pattern of buying & selling may not continue.
With relocations of industries in other third world
countries, new competitors will emerge.
 Major
Issues
Major Issues
 Land Acquisition

 Role of State Govt. in Land Acquisition

 Compensation Packages to land owners

 Rehabilitation packages for displaced farmers

 State Govt.’s commitment to create infrastructure

 Time frame for operationalisation

 Control over SEZs – MoC or MoF

 Amendments to Laws and Rules

 How to evaluate
whether one should
set up SEZ / SEZ Unit ?
SEZ Developer
 Viable commercial proposition

 Active support of State Govt.

 Proximity to Port

 Financial soundness

 Capacity to attract FDI

 Generation of employment

 Availability of skilled labour in the nearby area and social infrastructure

SEZ Unit
 Commercial viability

 Selection of a right SEZ

 Location,
 Area,
 Facilities,
 Benefits,
 State policies,
 Infrastructure, etc.
SEZ Unit
 Credentials of Developer

 Proper information about formalities / availability / cost

estimates etc.

 Product should be capable of maintaining demand in the

overseas market for a sustainable period.

 Availability of required labour in the nearby area

 Overall serious commitment to EXPORTING.

Discussion Issues
 Single window clearance
 +VE Net Foreign Exchange (NFE)
 Authorized Operations
 Ports, Airports, Container yards, Freight Stations
 Dedicated Corridors
 Enabling Enactments
 SEZs a Foreign Custom Territory
 Service Tax
 Services to DTA not an Import
 Stamp Duty – Under whose preview