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Understanding SEZ and its implications

The inception of the Special Economic Zones (SEZ) in India was done by the Government of India in its Exim Policy of 2000. The government launched SEZ with a view to promote export and have a better economic progress. International experience shows that SEZs are pockets of manufacturing excellence which apart from driving export growth and attracting Foreign Direct Investment(FDI) are also contributing tremendously to generation of employment and thereby contributing significantly to the economic growth of the country. According to the World Banks estimate , upto 2007 there were more than 3,000 projects taking places in SEZs in 120 countries world wide1. History of SEZ: It was the Peoples Republic of china which in the early 1980s started one of the earliest SEZs under DENG Xiaoping. PRC government had decided to reform ther national economic setup. The basic state policy was structured on the overall reforms and opening to the outside world. In 1980 PRC established SEZs in Shenzhen. Zhuhai , Shantou and Xiamen. Since then , there is no looking back at the economic growth of PRC. One of the most successful SEZ in China, Shenzhen, had developed from a small village into a city with a population of over 10 million within 20 years. Following Chinas success story SEZs have been established in several countries like India, Russia, Brazil, Jordan, Iran, Pakistan, the Phiippines, Poland and Peru. India and SEZ: Considering the need to enhance FDI and promote export from the country and realizing the need that the domestic enterprises and manufactures need to compete globally , the Government of India introduced SEZ. Earlier India had the scheme of Free Trade Zone or Export Processing Zones whose basic idea was the same as of the present SEZ . The main purpose of all these schemes was to encourage exports which is given top propriety for Indian economioc progress.However, over the years , the scheme FTZ , EPZ were diluted for various reasons and ultimately scrapped. EXIM policy( now know as Foreign Trade Policy) annonunced on 31-032000 the establishment of SEZ on the style on similar zones as in China . However, there are some differences between SEZ in India and China: 1. In China SEZ are free from Labour Laws but in India they have to comply with Labour Laws. 2. SEZs in Chima are huge in size covering thousands of hectares, while SEZs in India are very small in size . 3. The infrastructure avalivablity is generally better in SEZ , it is nothing compared to world class infrastructure available inj SEZs in China . Moreover, infrastructure outside the zone is still in pathetic condition.
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Wikipedia.com

Development of SEZ in India: Four Export Processing Zones were converted to SEZ in November, 2000. These ares1. Kandla ( Gujrat) 2. Surat (Gujarat) 3. Cochin (Kerala) 4. Santa Cruz (MumbaiMaharashtra)

Subsequently , EPZs at Chennai, Falta( West Bengal) , Noida and Vishakhapatam were also converted to SEZ in 2003. Provisions of SEZ are more liberal than provisions of EOU, STP, BTP and EHTP.As on 31-03-2005, there were 811 units in operation in the 8 fuctional SEZs . Investment by the unit in these zones are of the order of Rs 18309 Million . The SEZ units provide employment to about 100650 persons out of which 32185 are females. Export performance of SEZs in India: According to the Press Release dated 9.2.2006 of Press Information BureauExport from the SEZs during 2004- 2005 were of the order of the US $ 4 Billion , representing an annual growth of over 36% .2 Basic concept of SEZ: SEZ is a particular area inside a state which acts as a foreign territory for tariff and trade operations. These are treated as if thay are outside India for Custom pusposes . Goods can be bought in SEZ without payment of custom duty or exercise duty .Supplies to SEZ from other parts of India are treated as exports and are entitled to all export benefits.On the other hand, supplies from SEZ units to any person outside SEZ is treated as imports by that person and normal customs duty is payable. SEZ have full freedom of operation within SEZ and all facilities of import and export are provided within the zone itself. Note to Chapter of Foreign Trade Policy as existed prior to 7-4-2006 reads as follows, SEZ are grown engines that can boost manufacturing augments exports and generate employment . Private sector has been associated with the development of SEZs. The SEZs require fiscal and regulatory regime in order to impart a hassle free operational
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www.mca.gov.in

regime encompassing the state of the art infrastructure and support services. Trading in imported goods is permissible but trading in domestic goods is not permitted in SEZ. After extensive consultation amd discussions, the SEZ Act and the Rules , came into effect on the 10th February, 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. The main objectives of the sSEZ Act are: (a) generation of additional economic activity (b) promotion of exports of goods and services; (c) promotion of investment from domestic and foreign sources; (d) creation of employment opportunities; (e) development of infrastructure facilities; Special Economic Zone Act, 2005: The Act defines: a) SEZ as a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purpose of trade operations and duties and tariffs. b) Good and services going into SEZ area from Domestic tariff area( DTA) shall be treated as exports and goods coming from the SEZ area into DTA as if these are imported . c) SEZ units may be set up for manufacture of goods and rendering of services. The SEZ policy framework also comprises of an attractive package of incentives , including several fiscal concessions for the developers of the SEZs and the units to be sat up in these SEZs. The SEZ Rules provide for different minimum land requirements for different classes of SEZs . Every SEZ is divided into a processing area where the supporting infrastructure is to be created. The SEZ Rules provide for :

Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs; Single window clearance for setting up of an SEZ; Single window clearance for setting up a unit in a Special Economic Zone; Single Window clearance on matters relating to Central as well as State Governments; Simplified compliance procedures and documentation with an emphasis on self certification ; A wide range of services can be rendered from SEZs; No requirement for providing bank guarantees, thereby reducing transaction cost; Contract manufacture for foreign principal allowed;

Option to obtain sub-contracting permission at the intial approval stage; Import-Export of all items through personal baggage has been allowed.

Who can set up SEZ?? The Act provides that any private/ public/ joint sector or State government or its agencies can set up SEZ.However, international experience shows that private sector has limited experience in development of these zones. Though, it probably makes more sense to develop these SEZ projects under the public-private partnership format where the State government concerned jointly market the zone along with the private developer . This would increase the comfort level of the locating industries. This will result in foreign direct investment which continues to play an important role. India has the opportunity to become a manufacturing hub for textiles, automobiles, steel, metals, petroleum products etc. for the world market. In 2005, FDI was estimated at $ 4 billion, without counting reinvested earnings and other capital. The ministry of commerce estimates an investment of Rs 1 trillion in these SEZs in the next few years and employment generation of 5, 00,000. Administrative set up: The fuctioning of the SEZs is governed by the three tire administrative set up. The Board of Approval is the apex body and is headed by Secretary , Department of Commerce. The Approval Committee at the Zone level deals with approval of Unuts in the SEZs and other related issues. Each zone is headed by a Development Commissioner, who is the ex-officio chairperson of the Approval Committee. Once an SEZ has been approved by the BOA and Central government has notified theb area of the SEZ, units are allowed to be set up in the SEZ.The performance of SEZ units are periodically monitored by a Unit Approval Committee of the Development Commissioner, Custom representative of the State government on annual basis. The Units are liable for penal action under the provisions of Foreign Trade ( Development and Reulation) Act in case of violation of conditions of the approval.3 Incentives and facilities offered to the SEZs:4 The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:

Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units

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www.sezindia.org Background note on SEZ in india

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.

The major incentives and facilities available to SEZ developers include:

Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. Income Tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act. Exemption from dividend distribution tax under Section 115O of the Income Tax Act. Exemption from Central Sales Tax (CST).

Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act). Reality of SEZ: The government is leading a proactive role in marketing the SEZs for achieveing much needed momentum in development of objectives in Indian export and bringing FDI. India s advantage lies in its strong economice growth prospects , avaliabiltiy of large skilled workforce , comparative advantage in several industries , a strong policy framework , avaliablitilty of strong ancillary industries and a huge market. However, there are certain valid objections against the way the SEZ scheme is beimg presently implemented.These objections are: 1. Small size SEZ are not viable-basic idea of SEZ is to provide world class infrastructure to manufactures. This is possible only if SEZ are on big scale. Initially , the idea was to have SEZ of atleast 1,000 hectares. It has been so much diluted that even a small SEZ of 10 hectares is permitted. Such small sizes cannot provide world class infrasturcutre. Original concept of SEZ has been completely diluted.Thus, SEZ are going the way EPZ had gone. 2. Too many SEZ are simply unmanageable- Since small size SEZ are permitted , hundreds of SEZ are being established . SEZ expect physical clearance of goods by customs officers. Such control is impossible for revenue to provide so much

manpower. There will be no option but to introduce self clearance in such SEZ. As of 2007, more than 500 SEZs have been proposed , 220 of which have been created. This has raised the concerns of the World bank over the sustainability of such a large number of SEZs. 3. Possibility of closing old units and shifting to new SEZ- There is distinct possibility that in view of various concessions and exemptions, EOU units or units in old SEZ may find its profitable to close their old units and establish fresh units in the new SEZ. Thus, there will be only shifting of investment and employment potentials and not new investment and new employment potentials. 4. Huge residential and commercial areas permitted within SEZ- As per rule 5(2) ( a) of SEZ Rules, it is sufficient if 25% area is embarked for processing ( which is 50%) .Thus, if 100 acres are allotted for SEZ , then only 30- 35% of area is used for setting up plants.Rest of the area is used to provide housing facilities, malls , multiplexes. Also , tax exemption is for specified period say for 10 years or so. Therefore, there is possibility of real estate development rather than SEZ development Though there have been SEZs in India since the launch of the policy in 2000, yet there is an urgent need to improve the infrastructure within and around these SEZs which continue to be in a pathetic condition. The size, road, port connectivity, assured power supply and de-centralized decision making are much needed. Another problem faced by SEZs units is the Indian Labour Laws. Labour Laws which provide good working conditions and reasonable wages and security are acceptable to all. However, Indian Laws are very rigid so far as flexibility in employment is concerned. Central Government can exempt SEZ units or modify applicability of various Central Acts by issuing notification under Section 49 of SEZ Act. However, no such relaxation or modifications is permissible in case of laws relating to Trade Unions, Industrial or Labour disputes, Labour Welfare, Provident Fund, Worksman Compensation, Pension and Maternity benefits. The State Government can declare Units within SEZ as public utility. It can also delegate powers of labour commissioner to another officer exclusively for SEZ or even to Developmant Commisssioner of SEZ so that the resolution of disputes can be expediated.Many State governments have used the above provisions and have declared SEZs as PUS The last thorn in the way of setting up of SEZs is that the Central and the State governments are following a trend in which prime aricultural lands are being offered for SEZs leaving the laboures working on these lands no wehere to go. This seizing of land reached its maximum when the West Bengal government allotted fertile agricultural land to Tata motors for its small car unit to be set up in Singur. This lead to a lot of unrest and violence in the area of Nandigram.

This lead to the filling of a case in Calcuta High Court where the State government was directed to pay a compensation of Rs 5 lakhs each to the families of those killed in ploice firing in Nandigram in March last year. The petition filed by the West Bengal government in the Supreme Court challenging this order still awits its fate. However, for preventing recurrence of Nandigram like incidents , the Rehabilitation and Settlement Bill and the Land Aqusition( Amendment )Bill 2007 have been introduced in the Parlilament. The purpose of the Rehabilitaion Bill is to elevate the sufferings of the people displaced by the setting up of SEZs. The two bills contain several far reaching improvements . They broden the definition of persons whose rights must be considered when land is being acquired to include tenants, formal and informal, and to tribal with traditional rights over forest lands. Thay require social impact assessment to be carried out according to the procedures laid down in the new RR Act, which provides for consultation with the project affected families themselves, leading to the transparent , publically available RR plan and survey of affected families within three months of a land acquisition notification.Under the Act, the disputes are removed from the jurisdiction of the civil courts , and entrusted to an ombudsman and special tribunal to expedite resolution.5 The most significant change in the Land acquisition Bill is that it narrows the definition of public purpose , to land acquired for strategic and infrastructure development purposes, while removing companies as direct beneficiers . Companies will ow be expected to acquire land by themselves, through negotiation purchases from willing sellers, although the Bill allows government to step in , if it is in public intersest , to acquire land of any hold outs once a company has aggragated 70% of the land required. However , there are two defects in the Bills.While lip service is paid to the need to appraise projects by quantifying their socio-economic costs and benefits , no mechanism is included through which affected families, communities, organizations, and concerned citizens can do so, including an examination of any non-displacing or least displacing alternatives.Becauase the acquired land is almost inavrailbly available under price, there is a tendencay by project to acquire excess land and choose inappropate locations. To prevent this, the Bills need to lay down specific right to information , financing price, assumption on benefits and cost. Secondly , the Bill does not remove one of the main cause of resentment- the quantum of compensation. Under the Bill, compensation is based on the historical value of the land that prevailed at the time of the initial notification of acquisition under Section 4 of the Act. Mean while, the price of land all around has gone up.Thereore, the longer it takes for the aqusition proceedings to finalize , the greater the difference bwteen the aqusition price and the value of the land in vicinity of the project when the owner actually received the compensation payment.
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ET preventing another Nandigram

Land value in the south Nagpur have quadrupled in the past two years because of the multi national hub at Nagpur project. Yet the 1500 affected farmers in the project are have the mortification of seeing their land being acquired at Rs 3.8 lakh per acre for irrigation land when a largeblock of land , albeit nearer the main road running outside the airport , was sold recently for Rs 2.55 cores an acre!!6 It would be a pity if the otherwise excellent changes in the two Acts were rendered ineffective in achieveing one of the primary objectives, which is to expedite development by addressing an increasing cause of tension and violence. Nandigram was harsh alert signal for our Central and State Government for not to through caution to air in its experiment with radical economic reforms of SEZs. Though SEZs is a big leap towards Indias economic development yet a lot needs to be looked into and solved before the policy of SEZs are successful in India.

The Economic Times of 21 February , 2008.

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