Prior to setting up of SEZs, India had the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. However, due to multiplicity of controls and clearances, lack of world-class infrastructure, and an unsound fiscal regime and with an intent to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.
Special Economic Zones Act, 2005
In order to instil confidence in investors and commitment to a stable SEZ policy regime, the Special Economic Zones Act, 2005, was passed by Parliament in 23rd of June, 2005 and came into effect from 10th February, 2006 along with SEZ Rules.
- The Act envisages a key role for the State Governments in Export Promotion and creation of related infrastructure.
- The applications duly recommended by the respective State Governments/UT Administration are considered by the Board of Approval periodically.
- All decisions of the Board of approvals are made with consensus.
Key features of SEZ Act:
- SEZs are duty-free export enclave to be treated as foreign territory for the purpose of trade operations and duties and tariffs. SEZs are not considered as a part of India.
- That means goods and services entering into the SEZ area from Domestic Tariff Area (whole India except SEZ areas) shall be treated as exports and goods coming from the SEZ area into DTA shall be treated as imports.
- Exempted from Environment Impact Assessment.
- 100% FDI under the automatic route is allowed in SEZ units in the manufacturing sector.
- SEZs are exempt from direct taxes for a fixed period.
- SEZ are exempt from GST
- Supply To SEZ: Any supply of goods or services or both to a Special Economic Zone developer/unit will be considered to be a zero-rated supply. In other words, these supplies attract Zero tax rate under GST. That means, supplies into SEZ are exempt from GST and are considered as exports.
- SEZ To Others: When a SEZ supplies goods or services or both to anyone, it will be considered to be a regular inter-state supply and will attract IGST.
- SEZ To DTA: However, when a SEZ supplies goods or services or both to a Domestic Tariff Area (DTA), this will be considered as export to DTA (Which is exempt for the SEZ) and customs duties and other import duties will be payable by the firms in DTA.
SEZ Rules provide for:
- Simplified procedures for development, operation, maintenance of SEZ and conducting business in SEZs
- Single window clearance of setting up of SEZ or a unit in SEZ
- Self-certification for SEZs
Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created.
The main objectives of the SEZ Act are to:
- Generate additional economic activity
- Promote exports of goods and services
- Promote investment from domestic and foreign sources
- Create employment opportunities
- Develop infrastructure facilities
- INVESTMENTS: About 5 Lakh crores are invested in setting up of SEZs till 2019.
- EXPORTS: In FY 2018-19, about 21% growth in exports over the corresponding period of FY 2017-2018 has been registered
- EMPLOYMENT: Nearly 20 lakh man-days have been generated by SEZs as of 2018.
- The process of Land Acquisition is cumbersome and often time-consuming
- Free Trade Agreements: India is signing more FTAs, which is an incentive for exporting companies outside SEZs in India and a disincentive for SEZs.
- Withdrawal of MAT & DDT: Abolition of Minimum Alternate Tax MAT and Dividend Distribution Tax (DDT) exemptions for SEZs has become more beneficial to operate in Domestic Tariff Area (DTA) rather than SEZ.
- Non-compliance with WTO rules results in export in-competitive - SEZs are entitled to get various tax benefits that not compliant under the World Trade Organization (WTO) rules. Hence, the importing countries resort to imposing countervailing duties on exports from India, to counter the effect of direct tax subsidies provided by India to the SEZ units.
- Policy instability and unfavourable regulatory environment
- lack of skilled labour force
- Since SEZs are exempted from various taxes or granted tax rebates, it is perceived that many existing domestic companies may just shift base to SEZs.
- As setting up of a SEZ does not require Environmental Impact Assessment, often they encroach upon fertile agricultural lands affecting food security and pollutions of environment etc.
SEZs have huge potential to generate foreign exchange and create employment and become an engine of growth, provided a stable policy regime and creating an enabling environment.
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