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.
SEZ Approval Mechanism
The SEZ (Special Economic Zone) approval process is handled through a single-window system by a 19-member SEZ Board of Approval (BoA), made up of officials from different government departments.
To get approval, the developer must first send their proposal to the state government. The state then has 45 days to review it and forward it to the BoA with their recommendation. Alternatively, the developer can directly send the proposal to the BoA.
This Board is set up by the Central Government and includes 19 members. It reviews each proposal based on its merit, and all decisions are made together, through agreement (consensus).
The BoA is led by the Secretary of the Department of Commerce, under the Ministry of Commerce and Industry. Other members come from key departments like the Central Board of Excise and Customs (CBEC), Central Board of Direct Taxes (CBDT), Ministry of Home Affairs, Ministry of Science and Technology, Ministry of Law and Justice, Ministry of Urban Development, and more.
Once the Board approves a proposal and the Central Government officially notifies the SEZ area, businesses and units can start setting up inside 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 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.
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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Who has the authority to establish SEZs 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 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.
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.
Example of Special Economic Zones (SEZs)
One prominent example of a Special Economic Zone (SEZ) in India is the Mundra SEZ in Gujarat. Located near the Mundra port, it is a port-based SEZ that supports diverse industries, including manufacturing, logistics, and export-oriented businesses. Developed by the Adani Group, Mundra SEZ benefits from its strategic location, attracting industries involved in global trade. It provides comprehensive infrastructure and access to international shipping routes, encouraging exports of manufactured goods. Mundra SEZ also enjoys GST exemptions on goods and services, contributing to the competitiveness of businesses located within the zone.
Characteristics of Special Economic Zones
Special Economic Zones (SEZs) are set up to help grow the economy. One of their main aims is to attract foreign investment. These zones are clearly marked areas, usually managed by one main authority. Businesses and investors working inside SEZs get special benefits like relaxed rules and lower taxes, making it easier and more profitable to run their operations.
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. SEZs continue to drive India’s industrial and economic advancement.
