Special Economic Zone: Meaning, Objectives, Special Economic Zone in India UPSC

What is Special Economic Zone?

Special Economic Zone or SEZ can be explained as an enclave existing in the country that is duty-free and has several business branches and commercial laws.

Special Economic Zone PDF

• It creates great encouragement for investment and generates employment in a country. Exports are promoted through the creation of Special Economic Zones.
• They are not only restricted to creating employment opportunities and encouraging investments, but it also provides a strong background for the administration of various businesses in the respective areas, which will further contribute to making the businesses run smoothly.
• The Special Economic Zone policy was declared in 2000 to overcome the problems faced by businesses.
• There are several controls and different clearances to be made before starting a venture.
• While implementing the SEZ in India under the Foreign Trade Policy, India followed the steps of China as they were very successful in the creation of SEZ. Rules and policies across India are governed by the Special Economic Zone Act 2005.
• At present, we have 379 SEZs in India, out of which 64% are concentrated in Karnataka, Andhra Pradesh, Tamil Nadu, Telangana, and Maharashtra.

Objectives of Special Economic Zone

Some of the important objectives of the Special Economic Zone in India are discussed below:

• It boosts the exports of goods and services as developers are provided with various exemptions only if they export them.
• It creates ample employment opportunities in rural and semi-rural areas of the country.
• Infrastructural facilities are developed in and around places where SEZs are situated. This helps in the growth of trade and industry in domestic areas.
• Since developers in Special Economic Zone emphasize highly on exports of goods and services, foreign investments increase. This further helps the country in earning huge foreign reserves, which is extremely beneficial for the country.

Importance of Special Economic Zone in India

The importance of a Special Economic Zone in India can be summarized in the following few points. One of the main reasons why a Special Economic Zone is important for India is because it encourages investments from various sectors including from overseas. It promotes economic growth and development of the country which contributes to the Gross Domestic Product of the country.

The presence of a Special Economic Zone in India also contributes to the increased growth of foreign exchange income. It also encourages the creation of fresh employment opportunities for the citizens. This leads to an upgraded standard of living.

Special Economic Zone Features

The main goal behind setting up of Special Economic Zone or SEZ was to attract investments into the country. This will automatically increase the business and GDP of the country’s economy. Some special features of the Special Economic Zone are:

• The Special Economic Zones are comprised of one of the best infrastructures in the world.
• The companies or entities that are based in these SEZs are provided with all the basic amenities including a regular supply of water, free-of-cost electricity, and discount on the prices of the required land, etc.
• Some of the businesses set up in these Special Economic Zones may also be exempted from paying the service and sales tax.

Challenges of Special Economic Zone

The following points mentioned below analyze the challenges faced by the Special Economic Zones in India:

• Land unutilized in the Special Economic Zones: The lack of demand for space and disruption caused by the pandemic has created a challenge for the SEZs.
• Multiple Models already existing: There are multiple models of Special Economic Zone that are already existing in the market. For Example, Manufacturing Zone, food park and textile park, Delhi-Mumbai Industrial Corridor, Coastal Economic Zone, and so on. This poses a challenge in integrating various models.
• Competing ASEAN Countries: In the last few years, ASEAN countries have implemented various policies to attract big or global players to invest in their SEZ. These countries have also worked on the development of skill initiatives. Moreover, the Special Economic Zone in India has lost their influence or competitive advantage in the global market. Hence, it is the right time to have fresher policies that would attract global players to invest in the Indian SEZs.

Special Economic Zone in India

In Asia, the first EPZ, i.e. Export Processing zone, was established in 1965 in Gujarat, Kandla. All these EPZs had a similar structure to that of Special Economic Zones.

• Under the foreign trade policy, the government of India started SEZs, which were first established in 2000.
• It was established to reform the bureaucratic and infrastructural challenges that were faced by the Export Processing Zones. EPZ had limited success as compared to SEZ.
• The Government of India passed a Special Economic Zones act in 2005. It came into force in 2006 with some new rules and regulations about the SEZs. But, it became operational in 2000 under the Foreign Trade Policy.
• India’s SEZs were structured very closely with China’s SEZs. Currently, In India, there are 379 Special Economic Zones that are notified.
• However, among them, 264 are operational. More importantly, 64 per cent of total SEZs in India are located in Tamil Nadu, Telangana, Karnataka, Andhra Pradesh, and Maharashtra.

Performance of Special Economic Zones in India

• Employment: In 2006, the employment in SEZs was 1,34,704 persons. It has increased to 23,58,136 persons (2020-21).
• Investment: In 2005-2006, investment amounting to Rs. 4,035.51 crores was made in Special Economic Zones. It has increased to Rs. 6,17,499 Crore (2020-21).
• Exports: The export has seen a drastic change from Rs. 22,840 Crore (2005-06) to 7,59,524 Crore (2020-21).

Special Economic Zone Tax Benefits

Under Section 10AA of the Income Tax Act, 1976, the Special Economic Zone in India has been provided with various exemptions. These exemptions are discussed below:

1. 100% of profits are exempt from income tax for the first five years of production.
2. 50% of the profits are exempt from income tax for the next five years of production.
3. 50% of the profits are exempt for five consecutive years provided such profit is transferred to the Special Economic Zone Re-investment Reserve Account.

General Conditions for Taking Tax Benefits:

• There should be no splitting up or reconstruction of an existing business.
• Only 20% of old plants and machinery are allowed. However, second-hand imported machinery is fully admissible.
• Accounts of the unit in an SEZ should be audited by a Chartered Accountant.
• Where a unit located in Special Economic Zone is also transacting within India, then income deriving from such transactions is not exempt.

Special Economic Zones: Way Forward

Promotion of Micro, Small, and Medium Enterprises in the Special Economic Zones by linking them with Micro, Small, and Medium Enterprises schemes. Government can allow alternate and different sectors to come and invest in specific SEZs, which is also in the recommendations of the Baba Kalyani Committee. Granting the Special Economic Zone Infrastructure status in order to improve their access to long-term borrowings and finance.

Special Economic Zone UPSC

Special Economic Zone is a very important part of the UPSC Syllabus, which comes under Economics. Various questions on this topic are frequently asked in the UPSC Prelims and the Mains exams. Thus, students should go through this topic properly to learn about the Special Economic Zone meaning, tax benefits, SEZ full form, challenges, and other related concepts.

Special Economic Zone UPSC Question

Question: Choose the correct option: Special Economic Zones have an exemption under the IT Act, 1961, for 100% of the profits for the first ___ years of production.

1. 15
2. 10
3. 5
4. 20

Answer: C

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