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Special Economic Zones (SEZs) in India

What is a Special Economic Zone (SEZ)?

A special economic zone (SEZ) is a defined geographical area with well-defined boundaries that is located inside a local economy but separated from it with respect to special economic provisions.

Businesses are encouraged to set up operations in SEZs and are provided with world-class infrastructure for the express purpose of producing and providing services for export. Items entering SEZs for the purpose of export promotion are generally exempt from import duties. With the exception of a narrow negative list, private and foreign players are permitted to build industries.

The concept of SEZ broadly divides the company's operational areas into:

1. Domestic Tariff Area (DTA), which comprises the rest of the domestic economy, and

2. Rest of the World (ROW).

What is India's Special Economic Zone Policy? Why was it implemented?

The Indian government established export processing zones (EPZs) to stimulate exports as early as 1965. The first EPZ in Asia was established in Kandla, Gujarat. While these EPZs had a similar structure to SEZs, the government began building SEZs in 2000 as part of the Foreign Trade Policy.

A total of 427 special economic zones have been approved by the government, with 267 of them now operational.

The SEZ Policy has resulted in a large increase in international and domestic investment in infrastructure and productive capacity, leading to increased economic activity and the creation of jobs.

Implemented in 2000: India's Special Economic Zones (SEZs) Policy was implemented in April 2000 to address flaws in the Indian economy caused by, multiple rules and permissions, lack of high-quality infrastructure, uncertain fiscal environment and to boost foreign investment.

Special Economic Zones Act of 2005: In addition, the Special Economic Zones Act of 2005 was enacted to boost investor confidence and demonstrate the government's commitment to a stable SEZ policy framework, resulting in greater economic activity and employment as a result of SEZ development.

The key goals of the SEZ Act are as follows:

• The beginning of a new economic activity.

• Promotion of exports of goods and services.

• Encouragement of both domestic and foreign investment.

• The generation of job opportunities.

• Infrastructure construction.

The SEZ model is characterised by simplified procedures for building, managing, and maintaining Special Economic Zones, as well as for establishing units and conducting business in SEZs.

Developers of SEZs can take advantage of the following incentives:

  • Duty-free import and domestic procurement of goods for the development, operation, and upkeep of your business/SEZ unit;

  • Income tax exemption: 100% exemption for the first five years, 50% for the next five years, and 50% of export earnings reinvested in the business for the next five years (Sunset Clause for Units was to take effect April 1, 2020);

  • GST Exemption: Exemption from the goods and services tax (GST) as well as state-imposed taxes (supplies to SEZs are tax-free under the IGST Act, 2017);

  • Exemption from the Minimum Alternate Tax (MAT)

  • Single-window clearances for all state and federal government approvals;

  • Low or No Taxes on Electricity: Duty and taxes on power sales have been repealed in some Indian states.

  • Speedy trade transactions: Customs officers are stationed in SEZs to assist in the facilitation and speeding up of trade transactions

  • Subsidized land: Some states also grant land to SEZ developers at subsidised costs in order to stimulate businesses in accordance with the state's existing Industrial Policy.

Concerns regarding Special Economic Zones in India

  • Revenue Loss due to Opposition: Various tax incentives in SEZs are opposed by some segments, resulting in revenue loss for the government.

  • Inadequate transparency in land acquisition displaced population rehabilitation and legal disputes.

  • The exploitation of Arable: Fertile agricultural land has been secured at the expense of India's food security in some cases.

  • Low Uptake in Manufacturing Sector: The majority of progress has been accomplished in the service sector, with little progress in the industrial sector, which has great job-creation potential.

  • Lack of clarity around SEZ governance: Fear that SEZs may become affluent islands "among" oceans of dread, hence exacerbating disparities.


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