Special Economic Zones | Geography Optional for UPSC (Notes) PDF Download

Introduction

The concept of Special Economic Zones (SEZs) is anticipated to yield significant benefits for the state in terms of economic and industrial development, as well as the creation of new employment opportunities. SEZs are expected to act as catalysts for economic growth.
A Special Economic Zone (SEZ) is defined as a designated duty-free area that is considered foreign territory for trade operations, duties, and tariffs. SEZs encompass a wide range of more specific zones, including:

• Free Trade Zones (FTZ): A Free Trade Zone (FTZ) is a type of special economic zone where goods can be landed, stored, handled, manufactured, or reconfigured and re-exported under specific customs regulations, generally without being subject to customs duties. FTZs are typically located near major seaports, international airports, and national borders, providing numerous geographical advantages for trade.
• Export Processing Zones (EPZ): Export Processing Zones (EPZs) are areas established to promote commercial and industrial exports by attracting investment from foreign entities. Tax exemptions and a barrier-free environment are the primary incentives offered by EPZs.
• Free Zones (FZ): Free economic zones (FEZs), free economic territories (FETs), or free zones (FZs) are a type of special economic zone designated by trade and commerce administrations in various countries. These zones offer significantly reduced or non-existent taxation to incentivize economic activity.
• Industrial Estates (IE): Industrial estates are locations where necessary infrastructure facilities are provided to entrepreneurs. Other terms used to describe industrial estates include industrial parks, industrial zones, industrial areas, and industrial townships.
• Free Ports (FP): Free ports or zones are areas designated by the government to have minimal or no taxation in order to stimulate economic activity. While geographically located within a country, these zones essentially operate outside its borders for tax purposes.
• Urban Enterprise Zones: Urban enterprise zones are areas where policies encouraging economic growth and development are implemented. These policies typically offer tax concessions, infrastructure incentives, and reduced regulations to attract investment and private companies to the zones. They are a type of special economic zone where companies can operate free of certain local, state, and federal taxes and restrictions.

History of Free Trade Zones

• First Free Trade Zone in the world had started on 1st January 1965 at Kandla port, Kutch, India.
• By 1978 India had another four free trade zones at Mumbai, Chennai, Noida, and Falta.
• In 1978 China had gone through a major economic makeover and they had realized the power in the concept of Free Trade Zones.
• First Chinese Free Trade Zone became operational in 1984 in Shenzhen.
• In the year 2000 one zone of Shenzhen was Exporting thrice than that of India.
• As on today, there are about 2000 operation-free zones spread over 150 countries in the world.

Kinds of SEZ

• SEZs can be categorized on basis of sector, function or location and required to have processing as well as non-processing area.

Fundamentals of SEZs

• SEZs (Special Economic Zones) are fundamentally different from the traditional free zones.
• They are much larger in size and offer a broader range of activities such as
  • A single-window management,
  • Streamlined procedures,
  • Duty-free privileges,
  • Access to the domestic market on a duty-paid basis.
• Cardinal factors that decides whether the enclave is termed an EPZ, FTZ, or SEZ are:
  • Appropriate infrastructure and transport facilities
  • Low factor cost
  • Flexible labour laws
  • Convertibility of currency
  • Stable legal and administrative regime
  • A commitment to the canons of an open economy.

Role of SEZ in Indian economy

• To provide an internationally competitive environment
• To encourage FDI and enhance GDP
• To increase share in global exports
• SEZ exports accounting for 26% of India’s total export.

Salient features of SEZ

• Self certification for export and import
  • Import and export movement of goods are based on self-declaration in SEZ
  • No routine examination is made unless specific order from Development Commissioner or authority is made.
• Sub contracting
  • A SEZ unit may sub-contract a part of its product or production process to different units, even in abroad.
• Fiscal incentives-Tax
  • There is an exemption from excise and customs duty on procurement of capital assets, consumable stores, and raw-materials from the domestic market.
  • There is an exemption from sales tax, import duty, income tax, minimum alternative tax, and dividend distribution tax.
• Single Window Clearance
  • There is a facility of the submission of documents at single locations on regular basis.
  • The proceedings are less and time-saving.

SEZ in India

• India established its first Export Processing Zone (EPZ) in Kandla, Gujarat, in 1965, becoming the first in Asia. Although EPZs shared similarities with Special Economic Zones (SEZs), the Indian government started setting up SEZs in 2000 under the Foreign Trade Policy to address the infrastructure and bureaucratic challenges limiting the success of EPZs. The Special Economic Zones Act was passed in 2005 and came into force in 2006 with the SEZ Rules. However, SEZs had been operating in India since 2000 under the Foreign Trade Policy.
• India's SEZ model was closely based on China's successful approach. Currently, there are 379 notified SEZs in India, with 265 being operational. Approximately 64% of these SEZs are located in five states: Tamil Nadu, Telangana, Karnataka, Andhra Pradesh, and Maharashtra. The Board of Approval, headed by the Secretary of the Department of Commerce (Ministry of Commerce and Industry), serves as the top governing body for SEZs.
• In 2018, the Ministry of Commerce and Industry formed the Baba Kalyani-led committee to examine India's existing SEZ policy. The committee submitted its recommendations in November 2018, aiming to evaluate the SEZ policy for World Trade Organisation (WTO) compatibility, incorporate global best practices, maximize capacity utilization, and optimize the output potential of the SEZs.

Baba Kalyani committee recommendations

• The Baba Kalyani committee recommendations focus on promoting broad-based employment and economic growth (Employment and Economic Enclaves-3Es) rather than just export growth. It suggests separate rules and procedures for manufacturing and service SEZs and recommends shifting from a supply-driven approach to a demand-driven one. The committee also proposes an enabling framework for Ease of Doing Business (EoDB) in 3Es that aligns with state EoDB initiatives, as well as a single integrated online portal for new investments, operational requirements, and exit-related matters.
• To enhance competitiveness, the recommendations include funding high-speed multi-modal connectivity, business services, and utility infrastructure, and promoting integrated industrial and urban development. They also suggest procedural relaxations for developers and tenants, extending the Sunset Clause, and retaining tax or duty benefits.
• Other recommendations include broadening the definition of services, allowing multiple services to come together, and providing additional enablers and procedural relaxations. The committee suggests a unified regulator for IFSC and utilizing Multi Services SEZ IFSC for all inbound and outbound investments in the country, as well as incentivizing domestic institutions to avail services from IFSC SEZ.
• Additional recommendations include allowing alternate sectors to invest in sector-specific SEZs/3Es, providing long-term lease flexibility for developers and tenants, and allowing unrestricted subcontracting for customers outside 3Es/SEZs. The committee also suggests considering specified domestic supplies supporting 'Make in India' in NFE computation and not levying export duty on goods supplied to developers and used in the manufacture of exported goods.
• Moreover, the recommendations propose flexibility in the usage of NPA by developers and the sale of space to investors/units, granting infrastructure status to improve access to finance and enable long-term borrowing, promoting MSME participation in 3Es, and enabling manufacturing service players to locate in 3E. Lastly, the committee recommends dispute resolution through arbitration and commercial courts.

Some of important SEZ in India

• Karnataka Biotechnology and Information Technology Services: SEZ on biotechnology sector in Bangalore’s Electronics City, over an area of 43 acres.
• Shree Renuka Sugars Limited – SEZ on sugarcane processing complex covering 100 hectares, comprising a sugar plant, power station, and distillery, at Burlatti in Belgaum district.
• Wipro Infotech: SEZ on IT/ITES at Electronics City, Sarajpur Bangalore.
• Hewlett Packard India Software Operation Pvt. Ltd. – SEZ on IT.
• Food processing and related SEZ services in Hassan spread over an area of 157.91 hectares
• SEZs on pharmaceuticals, biotechnology, and chemical sector in Hassan, covering of 281.21 hectares.
• Some other SEZs worth noting are:
  • SEEPZ – Andheri (East), Mumbai
  • Navi Mumbai – Multi-product, Mumbai
  • Salt Lake Electronic City, West Bengal
  • Manikanchan – Jems and jewellery, West Bengal
  • Calcutta Leather Complex, West Bengal
  • Falta Food Processing Unit, West Bengal.

Advantages of SEZs

• Growth and development: SEZs serve as centers for growth and development in a country, as their main objective is to boost trade through simplified mechanisms.
• Attract Foreign Direct Investment: Relaxed trade rules encourage foreign investors to invest in SEZs, offering them attractive deals.
• Exposure to technology and global market: SEZs facilitate the introduction of advanced technology and best business practices from foreign investors into domestic markets.
• Increasing GDP and economic growth: SEZs function as engines of growth, promoting economic activities in the area and contributing to the overall GDP.
• Employment opportunities: Increased economic activities in SEZs lead to the creation of more job opportunities.

Disadvantages of SEZs

• Land acquisition issues: SEZs often involve acquiring land at low prices, resulting in the loss of agricultural land and reduced income for farmers, sometimes leading to violent protests.
• Tax holidays affect GDP: Revenue losses occur due to various tax exemptions and incentives provided to SEZs.
• Land banks: Some traders may exploit SEZs to acquire land at cheap rates and create land banks for themselves, rather than promoting genuine economic activities.
• Mismatch between expectations and reality: The number of applications for setting up Export Oriented Units (EOUs) may not be proportional to the number of applications for establishing SEZs, raising doubts about whether the project will live up to its expectations.

SEZ Act of 2005

• The SEZ Act of 2005 was introduced to address the challenges of improving infrastructure and the business environment in the Indian economy by creating Special Economic Zones (SEZs). These zones are designed to be efficient enclaves that can be developed quickly, offering a range of benefits to businesses operating within them.
• The primary objectives of the SEZ Act are to generate additional economic activity, promote exports of goods and services, attract investment from both domestic and foreign sources, create employment opportunities, and develop infrastructure facilities.
• Some of the key features of SEZs include their designation as duty-free enclaves, which are treated as foreign territories for the purpose of trade operations, duties, and tariffs. Businesses operating within SEZs do not require a license for imports and can engage in manufacturing, trading, and service activities. They are also granted full freedom for subcontracting.
• Companies within SEZs must become net foreign exchange earners within three years of operation. While domestic sales from SEZs are subject to full customs duties and import policy, there is no routine examination by customs authorities. Furthermore, companies in SEZs receive tax incentives, such as exemption from income tax on profits for the first five years and a 50% tax concession for an additional two years. These incentives can be extended if profits are reinvested in the business.
• SEZ developers enjoy tax and duty exemptions on raw materials, such as cement, steel, and electrical parts. The government acquires large tracts of land for SEZs, with the stipulation that 25% of the area must be used for export-related activities, while the remaining 75% can be allocated for economic and social infrastructure. All SEZ benefits apply to the entire zone.
• There are provisions for both sector-specific and multiproduct SEZs. A sector-specific SEZ can include up to 7,500 houses, a 100-room hotel, a 25-bed hospital, schools, and other institutions, as well as a multiplex within a 50,000 square meter area. Multiproduct SEZs can provide up to 25,000 houses, a 250-room hotel, a 100-bed hospital, and a multiplex within a 200,000 square meter area.

Conclusion

In conclusion, Special Economic Zones (SEZs) play a crucial role in the economic growth and development of countries by attracting foreign direct investments, boosting exports, and creating employment opportunities. India's SEZ policy, inspired by China's successful model, has led to the establishment of numerous SEZs across the country, with a focus on various industries such as IT, biotechnology, and manufacturing. While SEZs offer numerous benefits such as simplified trade mechanisms, tax exemptions, and access to global markets, they also face challenges such as land acquisition issues, tax revenue losses, and infrastructure limitations. The SEZ Act of 2005, along with recommendations from the Baba Kalyani committee, aims to address these challenges and strengthen the SEZ policy to maximize its potential for economic growth and development.

Frequently Asked Questions (FAQs) of Special Economic Zones

What is the main objective of Special Economic Zones (SEZs)?

The main objectives of SEZs are to generate additional economic activity, promote exports of goods and services, attract investment from domestic and foreign sources, create employment opportunities, and develop infrastructure facilities.

What are the different types of SEZs?

Some of the different types of SEZs include Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports (FP), and Urban Enterprise Zones.

What are some benefits of setting up a business in an SEZ?

Benefits include simplified trade procedures, duty-free privileges, access to the domestic market on a duty-paid basis, tax exemptions, and streamlined procedures for businesses.

What are some of the drawbacks of SEZs?

Some drawbacks include land acquisition at low prices leading to loss of farming land and revenue for farmers, tax holidays affecting GDP due to tax exemptions and incentives, and the creation of land banks by traders at cheap rates.

How has the SEZ Act of 2005 impacted the development of SEZs in India?

The SEZ Act of 2005 provides the legal framework for the establishment of SEZs and for units operating in such zones. It also lays down the objectives and guidelines for the functioning of SEZs, including tax exemptions, simplified trade procedures, and incentives for businesses. This has led to an increase in the number of SEZs in India and contributed to the country's economic growth.