History of SEZ
In 1947 when India got independence at Puerto Rico industrialist and government was busy setting up world first industrial park. Ireland and Taiwan followed Puerto Rico in sixties and in eighties China bring the SEZ to the global map with its largest SEZ at the metropolis of Shenzhen.
India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. In 2000, after thirty-five years, Murlisone Maran, then Commerce Minister, made a tour to the southern provinces of China and realized the importance of SEZ. On returning from the visit, he incorporated the SEZ into the Exim Policy of India and after five year, Special Economic Zones Act 2005 was introduced and in 2006 SEZ Rules was formulated.
The main objectives of the SEZ Act include – generation of additional economic activity , promotion of exports of goods and services, promotion of investment from domestic and foreign sources, creation of employment opportunities, and development of infrastructure facilities.
Government initiative for SEZ
Indian government to instill confidence in investors and signal their commitment towards a stable SEZ worked on the Special Economic Zones Act. In May, 2005 the Special Economic Zones Act was passed by Parliament, which received Presidential assent on the 23rd of June, 2005.
The Special Economic Zones Act 2005, after extensive consultations, came into effect on 10th February, 2006. The Act offered drastic simplification of procedures on matters relating to central as well as state governments. The main objectives of the SEZ Act include generation of additional economic activity, promotion of exports of goods and services, promotion of investment from domestic and foreign sources, creation of employment opportunities, and development of infrastructure facilities. It is expected that the Special Economic Zones Act will trigger a large flow of foreign and domestic investment. Government offered various incentives to the companies in SEZ:
•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.
The Special Economic Zones Act also offered major incentives and facilities to SEZ developers which include:
•Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.
•Income Tax exemption on income derived from the business of development of the SEZ in 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).
Apart from the above mentioned incentives the companies in SEZ require no license for import made under SEZ units. In the case of losses they are allowed to carry forward losses. The other advantages are
•No license required for import made under SEZ units.
•Duty free import or domestic procurement of goods for setting up of the SEZ units.
•Goods imported/procured locally are duty free and could be utilized over the approval period of 5 years.
•The SEZ unit is permitted to realize and repatriate to India the full export value of goods or software within a period of twelve months from the date of export.
•“Write-off” of unrealized export bills is permitted up to an annual limit of 5% of their average annual realization.
•No routine examination by Customs officials of export and import cargo.
•Setting up Off-shore Banking Units (OBU) allowed in SEZs.
•OBU's allowed 100% income tax exemption on profit earned for three years and 50 % for next two years.
•Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration.
•Since SEZ units are considered as ‘public utility services’, no strikes would be allowed in such companies without giving the employer 6 weeks prior notice in addition to the other conditions mentioned in the Industrial Disputes Act, 1947.
The advantages of the SEZ are evident from the investment, employment, exports and infrastructural developments additionally generated. In midst of all these advantages the SEZ also has its own set of disadvantages, which include
•Revenue losses because of the various tax exemptions and incentives.
•Many traders are interested in SEZ, so that they can acquire at cheap rates and create a land bank for themselves.
•The number of units applying for setting up EOU's is not commensurate to the number of applications for setting up SEZ's leading to a belief that this project may not match up to expectations.
The economist strongly believe that the benefits derived from the investments and additional economic activity in the SEZ and the employment generated thus will outweigh the tax exemptions and the losses on account of land acquisition.
