Special Economic ZoneSpecial Economic Zone

A Boon or A CurseA Boon or A Curse

SPECIAL ECONOMIC ZONESSPECIAL ECONOMIC ZONESIN CHINA & INDIAIN CHINA & INDIA

IntroductionIntroduction

- Historical backgroundHistorical background- From ancient times – Harappan, Roman to mediaeval times and From ancient times – Harappan, Roman to mediaeval times and

laterlater

-- Small fenced-in areas specializing in manufacturing for exportsSmall fenced-in areas specializing in manufacturing for exports

-- Modern times – Free ports – Aden, Singapore, Hong Kong – Modern times – Free ports – Aden, Singapore, Hong Kong – DifferenceDifference

- Modern version of export zones starting from Puerto Rico (USA), Modern version of export zones starting from Puerto Rico (USA), Shannon International Airport in Ireland in 1959 Shannon International Airport in Ireland in 1959

- India – Kandla in 1965. EPZs in Taiwan, S. Korea and other India – Kandla in 1965. EPZs in Taiwan, S. Korea and other countriescountries

-- Since 1979, most extensive, large and successful SEZs in (China)Since 1979, most extensive, large and successful SEZs in (China)

-- After early start, India slow in following upAfter early start, India slow in following up

Fundamentals of SEZsFundamentals of SEZs

SEZs (special economic zones) are fundamentally SEZs (special economic zones) are fundamentally different from the traditional free zones.different from the traditional free zones.

They are much larger in size; offer broader range of They are much larger in size; offer broader range of activities such as activities such as

a single-window management, a single-window management, streamlined procedures, streamlined procedures, duty-free privileges, duty-free privileges, also access to the domestic market on a duty-also access to the domestic market on a duty-

paid basis. paid basis.

Fundamentals of SEZsFundamentals of SEZs

Whether the enclave is termed an EPZ, FTZ or Whether the enclave is termed an EPZ, FTZ or SEZ, the cardinal factors are SEZ, the cardinal factors are appropriate infrastructure and transport facilities, appropriate infrastructure and transport facilities, low factor cost, low factor cost, flexible labour laws, flexible labour laws, convertibility of currency, convertibility of currency, stable legal and administrative regime, and stable legal and administrative regime, and a commitment to the canons of an open economya commitment to the canons of an open economy

Fundamentals of SEZsFundamentals of SEZs Look at Chinese SEZ-Shenzhen SEZLook at Chinese SEZ-Shenzhen SEZ

Total Area of Shenzhen – 1,952.84 sq. kmsTotal Area of Shenzhen – 1,952.84 sq. kms Area of SEZ - 395.81 square kilometersArea of SEZ - 395.81 square kilometers Harbouring 3.5 million people Harbouring 3.5 million people $30 billion in FDI, $30 billion in FDI, 3 million employment 3 million employment Equipped with the state-of-the-art infrastructure Equipped with the state-of-the-art infrastructure Effective port facilities, Effective port facilities, Simplified procedures, Simplified procedures, Fully flexible labour policy in terms of hiring and firing. Fully flexible labour policy in terms of hiring and firing.

Shenzhen SEZ Shenzhen SEZ

Shenzhen SEZ Shenzhen SEZ

Shenzhen SEZ Shenzhen SEZ

Fundamentals of SEZsFundamentals of SEZs

Look at Jebel Ali Free Trade Zone Look at Jebel Ali Free Trade Zone in Dubaiin Dubai

Area - 100 sq kmArea - 100 sq km

Home to over 1,600 companies from 85 countries Home to over 1,600 companies from 85 countries

Triggered the economy and development of Dubai Triggered the economy and development of Dubai

Jebel Ali Free Trade ZoneJebel Ali Free Trade Zone

Jebel Ali Free Trade ZoneJebel Ali Free Trade Zone

Subic Bay Freeport PhilippinesSubic Bay Freeport Philippines

Subic Bay Subic Bay

Strategic LocationStrategic Location

Easily Easily accessible by accessible by land, air and land, air and sea. Practically sea. Practically half of the half of the world’s world’s container fleet container fleet passes by its passes by its doorway.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 Subic Bay – Tourism

Main objectives of the SEZ ActMain objectives of the SEZ Act

generation of additional economic activity;generation of additional economic activity;

promotion of exports of goods and services; promotion of exports of goods and services;

promotion of investment from domestic and promotion of investment from domestic and foreign sources; foreign sources;

creation of employment opportunities; creation of employment opportunities;

development of infrastructure facilitiesdevelopment of infrastructure facilities

SEZ Act, 2005SEZ Act, 2005

Passed by Parliament in May 2005Passed by Parliament in May 2005 Received Presidential assent on Received Presidential assent on

23rd June 0523rd June 05 Came into effect on 10th Feb 06 Came into effect on 10th Feb 06

supported by the SEZ Rules supported by the SEZ Rules

Tax IncentivesTax Incentives

Tax IncentivesTax Incentives Direct Tax Benefit to DevelopersDirect Tax Benefit to Developers

U/s 80-IABU/s 80-IAB

100% tax holiday for 10 consecutive years 100% tax holiday for 10 consecutive years out of block of 15 yearsout of block of 15 years

Profit & gains derived from business of Profit & gains derived from business of developing SEZ notified on or after 1st developing SEZ notified on or after 1st April 2005April 2005

Transferee Developer can also claim Transferee Developer can also claim deduction for balance period of 10 years deduction for balance period of 10 years on Operation & Maintenance incomeon Operation & Maintenance income

Tax IncentivesTax Incentives

Direct Tax benefits for DevelopersDirect Tax benefits for Developers

Minimum Alternative Tax Minimum Alternative Tax provisions not applicableprovisions not applicable

Exemption from Dividend Exemption from Dividend Distribution TaxDistribution Tax

Tax IncentivesTax Incentives

Direct Tax Benefits to UnitsDirect Tax Benefits to Units - - 10AA10AA

100% of profits and gains derived from the 100% of profits and gains derived from the export for five Consecutive Years from export for five Consecutive Years from which business commences. which business commences.

50% of for further five A.Y. and 50% of for further five A.Y. and 50% of the profits ploughed back for the 50% of the profits ploughed back for the

next five A.Y.next five A.Y.

Tax IncentivesTax Incentives Direct Tax benefits for UnitsDirect Tax benefits for Units

Minimum Alternative Tax provisions not Minimum Alternative Tax provisions not applicableapplicable

Capital gain tax exemption on relocation Capital gain tax exemption on relocation to SEZto SEZ

TDS TDS No deduction of tax at source by OBU on No deduction of tax at source by OBU on

interest on deposits / borrowings from non–interest on deposits / borrowings from non–resident or person not ordinarily resident.resident or person not ordinarily resident.

Tax IncentivesTax Incentives

Indirect TaxIndirect Tax Exemption from payment of Import duty Exemption from payment of Import duty Exemption from payment of Excise duty Exemption from payment of Excise duty Exemption from payment of CST and VAT Exemption from payment of CST and VAT

on purchase from DTA on purchase from DTA Exemption from Service taxExemption from Service tax

SEZ Act, 2005 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, Section 7 of SEZ Act, 20052005

Exemption from taxes, duties or cessExemption from taxes, duties or cess

““Any goods or services exported out of, or imported Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by, -into, or procured from the Domestic Tariff Area by, -

(i) a Unit in a Special Economic Zone; or(i) a Unit in a Special Economic Zone; or

(ii) a Developer;(ii) a Developer;

shall, subject to such terms, conditions and shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all the payment of taxes, duties or cess under all enactments specified in the First Schedule”enactments specified in the First Schedule”

Contd….

The Zone AdministratorThe Zone AdministratorDevelopment CommissionerDevelopment Commissioner

Sec.11 – Development CommissionerSec.11 – Development Commissioner Central Govt. may appointCentral Govt. may appoint

Development Commissioner [DC] Development Commissioner [DC] Assistants to DCAssistants to DC

Sec.12 – Functions of Development CommissionerSec.12 – Functions of Development Commissioner Guiding the entrepreneur to establish SEZ;Guiding the entrepreneur to establish SEZ; Taking suitable steps to promote exports;Taking suitable steps to promote exports; Ensuring proper co-ordination with the Central Govt. and State Ensuring proper co-ordination with the Central Govt. and State

Govt.;Govt.; Monitoring the performance of the Developer and the units in SEZ; Monitoring the performance of the Developer and the units in SEZ;

etc. etc.

Schedules to the SEZ Act, 2005Schedules to the SEZ Act, 2005

THE FIRST SCHEDULE (Enactments)THE FIRST SCHEDULE (Enactments)

1. The Agricultural Produce Cess Act, 1940 (27 of 1940).1. The Agricultural Produce Cess Act, 1940 (27 of 1940).2. The Coffee Act, 1942 (7 of 1942).2. The Coffee Act, 1942 (7 of 1942).3. The Mica Mines Labour Welfare Fund Act, 1946 (22 of 1946).3. The Mica Mines Labour Welfare Fund Act, 1946 (22 of 1946).4. The Rubber Act, 1947 (24 of 1947).4. The Rubber Act, 1947 (24 of 1947).5. The Tea Act, 1953 (29 of 1953).5. The Tea Act, 1953 (29 of 1953).6. The Salt Cess Act, 1953 (49 of 1953).6. The Salt Cess Act, 1953 (49 of 1953).7.7. The Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (16 The Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (16

of 1955).of 1955).8.8. The Additional Duties of Excise (Goods of Special Importance) Act, The Additional Duties of Excise (Goods of Special Importance) Act,

1957 (58 of 1957).1957 (58 of 1957).9.9. The Sugar (Regulation of Production) Act, 1961 (55 of 1961).The Sugar (Regulation of Production) Act, 1961 (55 of 1961).

Contd……….Contd……….

Schedules to the SEZ Act, 2005Schedules to the SEZ Act, 200510.The Textiles Committee Act, 1963 (41 of 1963).10.The Textiles Committee Act, 1963 (41 of 1963).

11.The Produce Cess Act, 1966 (15 of 1966).11.The Produce Cess Act, 1966 (15 of 1966).

12.The Marine Products Export Development Authority Act, 1972 (13 of 1972).12.The Marine Products Export Development Authority Act, 1972 (13 of 1972).

13.The Coal Mines (Conservation and Development Act, 1974 (28 of 1974).13.The Coal Mines (Conservation and Development Act, 1974 (28 of 1974).

14.The Oil Industry (Development) Act, 1974 (47 of 1974).14.The Oil Industry (Development) Act, 1974 (47 of 1974).

15.The Tobacco Cess Act, 1975 (26 of 1975).15.The Tobacco Cess Act, 1975 (26 of 1975).

16.The Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 16.The Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978).1978).

17.The Sugar Cess Act, 1982 (3 of 1982).17.The Sugar Cess Act, 1982 (3 of 1982).

18.The Jute Manufactures Cess Act, 1983 (28 of 1983).18.The Jute Manufactures Cess Act, 1983 (28 of 1983).

19.The Agricultural and Processed Food Products Export Cess Act, 1985 (3 of 19.The Agricultural and Processed Food Products Export Cess Act, 1985 (3 of 1986).1986).

20.The Spices Cess Act, 1986 (11 of 1986).20.The Spices Cess Act, 1986 (11 of 1986).

21.The Research and Development Cess Act, 1986 (32 of 1986).21.The Research and Development Cess Act, 1986 (32 of 1986).

Schedules to the SEZ Act, 2005Schedules to the SEZ Act, 2005

The Second Schedule: The Second Schedule: Incorporates Incorporates modification to the Income Tax Act, 1961, as modification to the Income Tax Act, 1961, as applicable to SEZs.applicable to SEZs.

The Third Schedule: The Third Schedule: Incorporates Incorporates amendments to Insurance act, 1938, amendments to Insurance act, 1938, Banking Regulations Act, 1949 and Indian Banking Regulations Act, 1949 and Indian Stamp Act, 1899Stamp Act, 1899

SWOT SWOT AnalysisAnalysis

SWOT Analysis for Indian SEZsSWOT Analysis for Indian SEZs Strengths: Strengths:

Skilled Manpower – knows English Skilled Manpower – knows English Worldwide acceptance of capabilities in fields likeWorldwide acceptance of capabilities in fields like

Pharmaceutical manufacturing & researchPharmaceutical manufacturing & research Clinical trialsClinical trials Manufacturing auto partsManufacturing auto parts Engineering designing & consultancy, IT & ITESEngineering designing & consultancy, IT & ITES Entertainment etc etcEntertainment etc etc

Financial & other institutional Networks like Stock Financial & other institutional Networks like Stock Exchanges, Insurance Companies, Educational InstitutesExchanges, Insurance Companies, Educational Institutes

Attraction of a large ‘Indian’ market:Attraction of a large ‘Indian’ market: growing middle class with purchase powergrowing middle class with purchase power

SWOT Analysis for Indian SEZsSWOT Analysis for Indian SEZs WeaknessWeakness::

Infrastructure bottlenecks –connecting Infrastructure bottlenecks –connecting infrastructure like Roads leading to SEZs.infrastructure like Roads leading to SEZs.

Political changesPolitical changes

Convertibility of Currency on Capital A/cConvertibility of Currency on Capital A/c

Red TapeRed Tape

Labour reformsLabour reforms

Zones by & large are still zones not smart cities.Zones by & large are still zones not smart cities.

Inappropriate locationsInappropriate locations

Long gestation period 4 to 5 years in absence of Long gestation period 4 to 5 years in absence of infrastructure development.infrastructure development.

SWOT Analysis for Indian SEZsSWOT Analysis for Indian SEZs

OpportunitiesOpportunities::

An alternative manufacturing base, particularly An alternative manufacturing base, particularly compared to Chinese SEZs.compared to Chinese SEZs.

Services SEZs do not require movement of input and Services SEZs do not require movement of input and output physically and hence, surrounding output physically and hence, surrounding infrastructure may not matter much.infrastructure may not matter much.

For multi-product SEZs, almost 23 ports are available. For multi-product SEZs, almost 23 ports are available. Most of them are likely to be EDI compliant. Most of them are likely to be EDI compliant.

New small ports & airports are also being developed New small ports & airports are also being developed keeping SEZ concept in mind.keeping SEZ concept in mind.

SWOT Analysis for Indian SEZsSWOT Analysis for Indian SEZs

ThreatsThreats::

Loosing edge of low labour costs - many countries Loosing edge of low labour costs - many countries are competing.are competing.

Formation of economic blocks, Effect on Formation of economic blocks, Effect on Government Revenues.Government Revenues.

Negotiations for FTAs with many countries may Negotiations for FTAs with many countries may erode competitiveness.erode competitiveness.

The pattern of buying & selling may not continue. The pattern of buying & selling may not continue. With relocations of industries in other third world With relocations of industries in other third world countries, new competitors will emerge.countries, new competitors will emerge.

Major Major IssuesIssues

Major IssuesMajor Issues

Land AcquisitionLand Acquisition

Role of State Govt. in Land Acquisition Role of State Govt. in Land Acquisition

Compensation Packages to land ownersCompensation Packages to land owners

Rehabilitation packages for displaced farmersRehabilitation packages for displaced farmers

State Govt.’s commitment to create infrastructure State Govt.’s commitment to create infrastructure

Time frame for operationalisation Time frame for operationalisation

Control over SEZs – MoC or MoF Control over SEZs – MoC or MoF

Amendments to Laws and Rules Amendments to Laws and Rules

How to evaluate How to evaluate whether one should whether one should

set up SEZ / SEZ set up SEZ / SEZ Unit ?Unit ?

SEZ DeveloperSEZ Developer Viable commercial proposition Viable commercial proposition

Active support of State Govt. Active support of State Govt.

Proximity to PortProximity to Port

Financial soundness Financial soundness

Capacity to attract FDICapacity to attract FDI

Generation of employmentGeneration of employment

Availability of skilled labour in the nearby area and social Availability of skilled labour in the nearby area and social infrastructureinfrastructure

SEZ UnitSEZ Unit Commercial viabilityCommercial viability

Selection of a right SEZSelection of a right SEZ Location,Location, Area,Area, Facilities, Facilities, Benefits,Benefits, State policies, State policies, Infrastructure, etc.Infrastructure, etc.

SEZ UnitSEZ Unit Credentials of Developer Credentials of Developer

Proper information about formalities / availability / cost Proper information about formalities / availability / cost estimates etc. estimates etc.

Product should be capable of maintaining demand in the Product should be capable of maintaining demand in the overseas market for a sustainable period.overseas market for a sustainable period.

Availability of required labour in the nearby areaAvailability of required labour in the nearby area

Overall serious commitment to Overall serious commitment to EXPORTINGEXPORTING..

Discussion IssuesDiscussion Issues

Single window clearanceSingle window clearance +VE Net Foreign Exchange (NFE)+VE Net Foreign Exchange (NFE) Authorized OperationsAuthorized Operations Ports, Airports, Container yards, Freight StationsPorts, Airports, Container yards, Freight Stations Dedicated CorridorsDedicated Corridors Enabling EnactmentsEnabling Enactments SEZs a Foreign Custom TerritorySEZs a Foreign Custom Territory Service TaxService Tax Services to DTA not an ImportServices to DTA not an Import Stamp Duty – Under whose previewStamp Duty – Under whose preview