History of Special Economic Zones (SEZs)
The concept of Special Economic Zones (SEZs) has evolved significantly over time, with the following key developments:
- 1950s – The first SEZs emerged in Asia to attract foreign investments.
- 1965 – India’s first Export Processing Zone (EPZ) was set up in Kandla, Gujarat.
- 1980s – SEZs gained popularity globally as effective economic growth tools.
- 2000 – India introduced the SEZ policy to increase exports and attract FDI.
- 2005 – The Special Economic Zones Act was passed, formalising SEZ regulations in India.
- 2006 – SEZ rules were notified, leading to rapid growth in SEZ approvals.
- 2010s – SEZs became a prominent strategy for regional economic development.
- Present – SEZs continue to evolve with reforms for efficiency and inclusiveness.
Special Economic Zone Act
The Special Economic Zone Act, 2005, was introduced to provide a regulatory framework for SEZs in India. Key aspects include:
- Establishes rules for setting up SEZs and governing their operations.
- Outlines eligibility criteria for businesses to operate within SEZs.
- Offers fiscal incentives like tax exemptions and duty-free imports.
- Defines procedures for approving and managing SEZs.
- Allows for simplified compliance with labour and environmental laws.
- Empowers states to play a role in SEZ development and governance.
- Specifies dispute resolution mechanisms within SEZs.
- Regulates entry and exit of goods, capital, and workforce in SEZs.
If you are considering expanding your business into an SEZ, check your pre-approved business loan offer to see the financing options available for you.
Characteristics of Special Economic Zones
- Special Area with Separate Rules
SEZs are specific zones within a country that have different economic and legal rules compared to the rest of the country, designed to attract businesses and investment.
- Tax Benefits
Businesses in SEZs often enjoy tax exemptions such as no customs duty, reduced income tax, and no GST on imports or exports.
- Simplified Procedures
SEZs offer a single-window clearance system for approvals, licensing, and other government processes, making it easier to set up and run a business.
- 100% Foreign Direct Investment (FDI)
Most SEZs allow full foreign ownership of businesses, encouraging international companies to invest and operate in India.
- Duty-Free Imports and Exports
Companies in SEZs can import raw materials and export finished goods without paying customs duties.
- Improved Infrastructure
SEZs are developed with modern infrastructure including roads, power, water supply, logistics, and communication facilities.
- Focus on Exports
The main goal of SEZs is to boost exports, create jobs, and earn foreign exchange for the country.
- Employment Opportunities
SEZs generate employment by promoting industries such as IT, manufacturing, and services.
- Regulated by SEZ Authority
SEZs are monitored and approved by the Board of Approval (BoA) under the Ministry of Commerce and Industry.
Types of Special Economic Zones (SEZs)
Type of SEZ
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Description
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Free Trade Zone
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Aims to boost exports through relaxed customs regulations and duty exemptions.
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Export Processing Zone
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Supports export-oriented industries with tax benefits and simplified regulatory processes.
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Industrial Park
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Dedicated areas for manufacturing with infrastructure and operational support.
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Sector-Specific SEZ
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Focuses on specific industries, such as IT, textiles, or electronics.
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Port-Based SEZ
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Located near ports, facilitating trade through easy access to international shipping.
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Multi-Product SEZ
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Hosts a diverse range of industries with benefits for multi-sector operations.
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Authorities Involved in SEZ Establishment in India
In India, SEZs can be established by authorised government bodies with specific guidelines:
- Central government – Can establish SEZs directly or approve proposals from developers.
- State governments – Propose SEZs in their regions, following central government approvals.
- Private sector – Private developers can apply to set up SEZs, subject to government regulations.
- Public-private partnerships (PPP) – Collaborative SEZ projects between government and private entities.
- Board of Approval (BoA) – Reviews and approves SEZ proposals, including land use and environmental aspects.
- Development commissioners – Oversee SEZ operations, including compliance and dispute resolution.
- Ministry of commerce and industry – Provides policy guidelines and regulatory frameworks.
- Local bodies – Assist with infrastructure and local requirements for SEZ development.
Special Economic Zones (SEZs) Approval Mechanism
The SEZ (Special Economic Zone) approval process is a single-window system handled by a 19-member inter-ministerial SEZ Board of Approval (BoA).
The developer must first submit their proposal to the state government. The state government then sends this proposal to the BoA with its recommendation within 45 days. Alternatively, the developer can also submit the proposal directly to the BoA.
The BoA is set up by the Central Government and includes 19 members. It reviews the proposal based on its merits and makes a decision through mutual agreement (consensus).
The Board is headed by the Secretary of the Department of Commerce, under the Ministry of Commerce and Industry. Other members include representatives from various departments such as the Central Board of Excise and Customs (CBEC), Central Board of Direct Taxes (CBDT), Department of Economic Affairs, Ministry of Science and Technology, Ministry of Home Affairs, Ministry of Law and Justice, Ministry of Urban Development, and others.
Once the BoA approves the proposal and the Central Government officially notifies the SEZ area, businesses can set up units within the SEZ.
Facilities in Special Economic Zones (SEZs)
The government offers many benefits for companies and businesses set up in SEZs. Some of the important ones are:
- Duty-free import or purchase of goods from within India for developing, running, and maintaining SEZ units.
- 100% income tax exemption on export income for SEZ units under the Income Tax Act for the first 5 years, 50% exemption for the next 5 years, and 50% exemption on reinvested export profits for the following 5 years. (The sunset clause for units will start from 2020.)
- Units are exempt from paying Minimum Alternate Tax (MAT).
- They are exempt from Central Sales Tax, Service Tax, and State sales tax, which are now combined into GST. Supplies to SEZs are zero-rated under the IGST Act, 2017.
- Single window clearance is available for approvals at both Central and State levels.
- No import license is needed.
- In manufacturing, except for a few areas, 100% Foreign Direct Investment (FDI) is allowed.
- Profits earned can be freely sent abroad without the need for dividend balancing.
- There is no separate paperwork needed for customs and export-import policies.
- Many SEZs provide ready-made plots and spaces for businesses to start immediately.
Besides the companies working in SEZs, developers of SEZs also get many benefits and incentives from the government.
Special Economic Zone Locations in India
India hosts numerous SEZs in strategically located regions, focusing on different industries:
- Kandla SEZ, Gujarat – India’s first SEZ, focusing on manufacturing and export activities.
- Santacruz Electronics Export Processing Zone, Mumbai – Specialises in electronics and software exports.
- Chennai SEZ, Tamil Nadu – A multi-product SEZ supporting diverse industries.
- Noida SEZ, Uttar Pradesh – Known for IT, ITES, and electronics industries.
- Visakhapatnam SEZ, Andhra Pradesh – Port-based SEZ with marine and heavy industries.
- Mundra SEZ, Gujarat – A port-based SEZ facilitating export-oriented manufacturing.
- Hyderabad SEZ, Telangana – Focuses on IT and biotechnology industries.
- Cochin SEZ, Kerala – Supports IT, jewellery, and food processing sectors.
Example of Special Economic Zones (SEZs)
China – Shenzhen SEZ
- Location: Guangdong Province
- Established: 1980
- Highlights:
- China’s first SEZ
- Transformed from a small fishing village into a global tech and manufacturing hub
- Home to major companies like Huawei and Tencent
- Key driver of China’s economic growth and foreign investment
UAE – Jebel Ali Free Zone (JAFZA)
- Location: Dubai
- Established: 1985
- Highlights:
- One of the largest free zones in the world
- Located near the Jebel Ali Port, offering strong logistics support
- Hosts over 8,000 companies from 100+ countries
- Offers 100% foreign ownership, tax exemptions, and no currency restrictions
India – Mundra SEZ
- Location: Gujarat
- Established: Notified in 2003
- Highlights:
- Developed by Adani Ports and SEZ Limited
- India’s largest private port-based SEZ
- Focuses on sectors like logistics, manufacturing, and energy
- Attracts both domestic and international investments
Benefits of SEZs to businesses
Special Economic Zones provide numerous advantages to businesses, especially in terms of tax benefits and streamlined regulations.
Tax Benefits –GST exemptions exemptions on goods and services, along with reduced import/export duties.
Reduced Compliance Burden – Simplified regulatory processes and faster approvals.
Infrastructure Support – SEZs offer state-of-the-art infrastructure, aiding efficient operations.
Easy Import and Export – Duty-free import of raw materials and capital goods.
Access to Global Markets – SEZs encourage exports, connecting businesses with international customers.
Enhanced Credibility – SEZ registration attracts foreign investors and builds brand value.
Employment Opportunities – SEZs contribute to job creation, helping regional development.
Access to Skilled Workforce – SEZs attract skilled labour due to industry concentration.
Disadvantages of SEZs
Despite their benefits, SEZs pose certain challenges for businesses and local communities.
High operational costs – Initial investments in SEZs can be costly.
Limited domestic market access – SEZs focus on exports, restricting domestic trade opportunities.
Regulatory constraints – Subject to SEZ-specific regulations that may hinder flexibility.
Dependency on government support – SEZ success depends on continuous government incentives.
Environmental concerns – SEZs often require large land areas, impacting local ecosystems.
Labour issues – Relaxed labour laws can lead to exploitation and limited workers’ rights.
Inequality in regional development – SEZs may lead to uneven development, favouring urban areas.
Competition among SEZs – High competition between SEZs can reduce profitability.
Challenges of SEZ Development in India
Since SEZs offer many tax benefits and other incentives, there is concern that some existing Indian businesses may shift their operations to SEZs just to enjoy these advantages.
People are also worried that promoting SEZs might come at the cost of using fertile farmland, which can affect food production and food security. This could also lead to a loss of government revenue and create unequal growth in different regions.
Water use is another concern, as water may be diverted from farming and local needs to SEZs, affecting water security. In some areas, SEZs have also caused pollution by releasing untreated waste into the environment. For example, in Gujarat, large areas of mangroves have been destroyed, affecting fishing and dairy businesses.
While SEZs can help in economic growth, they should not harm the agricultural sector or the environment. Development should be balanced and sustainable.
Conclusion
Special Economic Zones play a vital role in promoting economic growth by providing tax benefits, infrastructure, and simplified regulations for businesses. SEZs support both exports and employment, making them attractive for entrepreneurs. For businesses aiming to establish operations in SEZs, a business loan can assist with initial setup costs, enabling growth within these favourable economic hubs. When planning such investments, considering the current business loan interest rate is important, as lower rates can enhance the financial viability of projects within SEZs. SEZs continue to drive India’s industrial and economic advancement
