An Overview of Special Economic Zones in India

Article by Vedika Jhall, Edited by Chinmay Jain

Do you know what Special Economic Zones are? Does the question regarding its existence ever popped-up in your mind? Do you know why it’s necessary or if you can do business there? Has it been a successful policy for the country? 

And, can it be beneficial for you to start your business there?

Similar questions popped in my head when I heard about this term for the very first time. 

In this article, I will be providing an in-depth analysis on Special Economic Zones in India as well as try to analyse the benefits and disadvantages of setting up a business here.

What Are SEZs?

Special Economic zones (SEZ) are areas that are provided with different laws for carrying on business and trade. In other words, these areas have separate business and trade laws from the rest of the country.

These Economic Zones are located within the national territorial area of a country. The purpose of these Economic Zones is to improve employment, trade balance, and investment, and therefore, financial policies were set forth to uplift the businesses in these zones.

The Special Economic Zones were created with the hope of motivating and attracting the host country towards Foreign Direct Investments (FDI). The Economic Zones aimed for global competition as these zones have to trade goods at a reduced rate than the other zones located within the territorial borders of the country.

India is foreseen as the world’s leading economic power as this possesses the international firms with several new challenges and are aiming towards taking advantage of India’s development.

Evolution of Special Economic Zones (SEZ)

These zones were first introduced in Asia as Export Processing Zones (EPZ) in the year 1965 in Kandla, Gujrat.  These zones were established to increase and promote exports.

The concept and nature of Export Processing Zones and Special Economic Zones are all most similar. The basic structure of Special Economic Zones was based on the Foreign Trade Policies.

The Special Economic Zones (SEZ) in India was a scheme initiated by the Commerce and Industry Minister, Mr. Murosoli Maran, during his visit to China in one of their Special Economic Zones (SEZ) in the year 1999. The scheme was officially announced in the year 2000 in India.

The aim attached to the scheme was to provide these zones with areas for the production of goods with the utmost flexibility to carry on businesses and trade practices, without any rules and regulations governing the export and import of goods in the country. These zones are deemed to be foreign territories for carrying on trade with different tariffs and duties.

These zones were made by the government to amend the bureaucratic process and utilize India’s infrastructure for exports and also to encourage foreign and domestic investments.

The policies of these zones were further amended by the Special Economic Zones (SEZ) Act, 2005. A number of Export Processing Zones (EPZ) were converted to Special Economic Zones (SEZ) with the aim of promoting trade in the global competitive market.

Special Economic Zones (SEZ) Act, 2005

This Act brought a new perspective to the trade practices and foreign and domestic investments in India.

New legislation namely, Special Economic Zones (SEZ) Bill, was passed by the government, which aimed toward stabilizing the country and endorsing its long term credibility in the global competitive market.

These zones were meant to sell goods and to be free from all Domestic Tariff Areas (DTA) on the payment of applicable duties. The benefit from these policies and economic zones was certain as the sales from Special Economic Zones to Domestic Tariff Areas were at par with the regular trade transactions.

The Special Economic Zones (SEZ) were exempted from various rules, regulations, and duties and were even exempted from Foreign Direct Investment (FDI) norms, also from the services of the central government and excise tax regimes.

A five-year time frame was provided to the Special Economic Zones businesses and a positive and profitable foreign exchange was estimated since the commencement of the production. To uplift the estimated benefits from these zones, the small scale industries were also given an exception from the rules and regulations as in the other areas of the country.

To enhance the financial benefits from Special Economic Zones (SEZ), Offshore Banking Units (OBU) were permitted to operate in these zones. The term Offshore Banking Units (OBU) were virtual foreign branches of banks that were available for financing at international rates. The Banking Units were to be set up in foreign territories and were exempted from certain rules and regulations of the Reserve Bank of India.

Therefore, the Special Economic Zones (SEZ) Bill, 2005 provided an umbrella to the legal framework and aimed towards covering nearly every regulatory and legal aspect in the evolution and for the units operating in these zones.

The act has increased the number of developers applying for SEZ approval. This has also stirred the economic growth of India by raising the number of issues regarding the adequacy of the applications. The application requires and in-principle approval, followed by the acquisition of land, further leading to the final notification.

The framework of Special Economic Zones (SEZ)

Different states have different policies for the Special Economic Zones (SEZ). As states have different policies for these zones, it makes it more accessible for us to rank and compare these zones with respect to their state and territorial location. These can be ranked and compared through an index, which is as follows:

1. Framing broad parameters and sub-parameters
2. Allocation of weightages to sub-parameters to obtain the score of parameter
3. Rating each state based on the parameters and overall index score of every state
4. The ranking/ rating of each state is based on:
   • Incentives
   • Society and its ability to sustain
   • The environment of the industries
   • Transparency

These elements highlight the basic necessities to mark the areas as Special Economic Zones (SEZ) as they might result in the benefit of the economy of a country and also make export feasible and provide easy access to raw materials for the purpose of production of goods.

Objectives of Special Economic Zones (SEZ)

The objective of Special Economic Zones is to increase foreign investment, export, job opportunities, and uplift domestic development of business and trade. Some of the main objectives are:

1. Generating additional economic activities.
2. Promoting export of goods.
3. Enhancing investment from foreign and domestic sources.
4. Increasing Employment opportunities.
5. Developing excellent infrastructural facilities.

Distinguishing features of Special Economic Zones:

1. These zones are set up or allotted by the private sector or the state government.
2. The private sectors are encouraged to redress and develop the already existing infrastructure of the Special Economic Zones.
3. The setting up of the Special Economic Zones is led by the state government.
4. The framework is created with the help of special windows being created under the existing rules and regulations of the central and state government.

Salient features of Special Economic Zones-

A Special Economic Zone is a geographically defined region that has laws that are liberal than other laws in the country. The Special Economic Zones have delineated duty-free enclaves and are deemed to be of foreign territory for trade, duties, and tariffs. The main goal is to uplift foreign investment.  

Administrative setup

A three-tier administration governs the functioning of the Special Economic Zones (SEZ). The Board of Approval is deemed to be the apex body and is headed by the Secretary of Department of Commerce. Therefore, each zone is headed by the Development Commissioner who is an Ex-Officio chairperson of the Approvals Committee.

The proposals for setting up units in the Special Economic Zones are to be approved at the zonal level by the Approval Committee which consists of the Development Commissioner, the Customs Authorities, and representatives from the state government.

The permission to change the name of the company, grant of importer-exporter code numbers are given at the zonal level by the Development Commissioner.
The violations of the conditions of approvals lead to penal action against the units in the Special Economic Zones. 

This is monitored by the Approval Committee periodically and can be held liable under the Foreign Trade (Development and Regulation) Act.

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Approval Mechanism

The developer is required to submit a proposal for the establishment of Special Economic Zone to the state government of that particular state where they want to establish. 

The concerned state government is provided with a window of 45 days within which they have to forward the proposal to the Board of Approval. If not, the applicant also has the option to directly submit the proposal to the Board of Approval.

The Board of Approval consists of 19 members and the board is constituted with powers under the Special Economic Zones act, by the central government. The decisions that are taken by the Board of Approvals are through the consensus.

Incentives for Developers

1. Exemption from duties of import and export for development and operation of the Special Economic Zones.
2. Exemption from Income Tax
3. Exemption from Service Tax

Special Economic Zones located in India

Today, these are the Special Economic Zones are located in the states:

1. Andhra Pradesh
2. Chandigarh
3. Chhattisgarh
4. Gujarat
5. Goa
6. Haryana
7. Jharkhand
8. Kerala
9. Karnataka
10. Maharashtra
11. Madhya Pradesh
12. Manipur
13. Nagaland
14. Odisha
15. Punjab
16. Rajasthan
17. Tamil Nadu
18. Telangana
19. Tripura
20. Uttar Pradesh
21. West Bengal

These are operational and notified Special Economic Zones (SEZ) in India. The approvals of these SEZs were based on the proposals sent by the state governments. However, note that these are subject to be changed.

Labour laws in Special Economic Zones

In the Special Economic Zones, normal labour laws avail, which is enforced by the state government of that particular area/zone.

The state governments are insisted to simplify the provisions and introduce a single-window clearance mechanism by the process of delegation of powers to the development commissioners of the Special Economic Zones.

The rules provided for Special Economic Zones-

1. To simplify the rule, regulations, and procedures for operations, development, and maintenance of the Special Economic Zones.
2. Single window clearance for setting up of zones
3. Single window clearance for setting up units in the Special Economic Zones
4. Single window clearance in matters related to the central and state government
5. Simplified documentation and compliance procedures
6. Different land requirements based on different classes of land in the Special Economic Zones
7. The zones are divided into processing and non-processing areas:

• Processing areas: The area where only the units of the Special Economic Zones are setup
• Non-Processing areas: The area where infrastructure is created / prepared.

The Special Economic Zones established/ notified prior 2005: A tabular analysis

Special Economic Zones established or notified prior to SEZ Act, 2005 in Tabular Format

Special Economic Zones performance in India after 2005: A tabular analysis of figures

CONCLUSION

The nature of the Special Economic Zones is to uplift the foreign and domestic investments and plays a key role in the economic development of the country.

The Special Economic Zone provides world-class infrastructure along with real estate, administrative process, power, transportation facilities, and flexibility.

Special Economic Zones encourage domestic businesses to flourish and have the power to compete in the global market. The businesses established in these zones are deemed to be foreign territory and are exempted from certain rules and regulations of the Reserve Bank of India.

The laws that govern these zones are enforced by the respective state government and are to be approved by the Board of Approval.

Hence, there has been an increase in the exports of Special Economic Zone from Rs. 22,840 Crores in FY 2005-06 to Rs. 5,23,637 Crores in FY 2016-17 while in USD terms in the same period it has been increased from US$ 5.08 Billion to US$ 78.07 Billion. 

The performance of the Special Economic Zones’ in India’s export contribution has been increased to a great extent but still, these are being underutilized as compared to their potentials, and India is yet to get complete benefit out of these Special Economic Zones.

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Author Bio: Vedika Jhall is a BA.LLB(H) student from Amity Law School, Delhi, and an intern at WinSavvy. Connect with her on LinkedIn.

Editor Bio: Chinmay Jain is a BA.LLB(H) student from Institute of Law, Nirma University, and an intern at WinSavvy. Connect with him on LinkedIn.