Before Independence British Government had been ensuring export of Indian goods in form of raw material.
Export of finished goods from India was negligible. After Independence India was in dire need of foreign exchange for its economic development. This necessity led the Government in its five year plans to formulate plans and policies to boost export of Indian goods and services and earn as much foreign exchange as possible.
In 1965, Government of India took a novel approach and came up with the idea of establishing Special Export Enclaves devoted exclusively to export and export related activities. These Special Export Enclaves were known as Export Processing Zones (EPZs). The first EPZ in India which was also the first in Asia was established in 1965 in Kandla (Gujarat) to promote exports. The EPZs were developed to boost the Indian economy through the provision of tax holidays offered in various sectors. Between 1965 and 1990 seven EPZs were set up in Mumbai, Chennai, Surat, Falta, Kochi, Noida and Vizag. These EPZs are precursors of Special Economic Zones (SEZ).
The SEZ policy in India first came into existence on April 1, 2000 in the Export and Import Policy (EXIM Policy) with a view to provide an internationally competitive and hassle free environment and to provide a stable fiscal regime and in return to attract huge Foreign Direct Investments (FDIs) and to earn valuable foreign exchange from increased exports. The policy laid down for the conversion of EPZs to SEZs. Thus the SEZs are new nomenclature of modified earlier EPZs.
Prior to 2005, the policy relating to SEZs was contained in foreign trade policy under the administration of Director General of Foreign Trade and Ex-Officio Additional Secretary to the Government of India. However with lacunas, like lack of central legislation, appropriate financial incentives to entrepreneurs, rigid regulatory regime the SEZs in India were not off to a flying start.
In order to avoid these pitfalls and to give a long term and stable SEZ policy the Government of India came up with The Special Economic Zones Bill 2005 which was subsequently passed by the Parliament in May 2005 and received the President’s assent on 23rd June 2005. The Special Economic Zones Act 2005 together with SEZ Rules came into effect on 10th February 2006, paving way for setting up modern SEZs in India.
Briefly speaking a SEZ is a specifically delineated duty free enclave and is deemed to be foreign territory for the purpose of trade operations and duties and tariffs in India. These SEZs have a single window clearance system and a simpler regulatory regime than that of prevailing in domestic tariff area. In India today there are around 14 functional SEZs and about 453 SEZs which have received formal approval and 136 which have received in-principle approval and are under the process of establishment.
The Special Economic Zones Act 2005 is a self contained code. It provides the legal framework covering all important legal and regulatory aspects for setting up of an SEZ and defining the key role of the Government in export promotion and creation of infrastructural facilities. A single window SEZ approval mechanism has been facilitated through a 19 member inter-ministerial SEZ Board of Approval whose decision is final and binding. The Act provides a number of benefits or incentives to an SEZ Developer. The Act has been amended thrice since coming into force i.e. on 10th August 2006, 16th March 2007 and 12th October 2007 in order to take care of the difficulties faced in course of operation of the Act.
Procedure for establishment of SEZ:
1. Who may establish a SEZ
As per Section 3(1) of the Act a SEZ can be established by:
- The Central Government
- Any State Government or
- Any other person
The Act offers the opportunity to Central and State Government, public and private sector companies, individuals and joint ventures with public and private participation. Thus SEZ can be either in the public or private or joint sectors.
2. Making of a Proposal to establish
As pointed out above a SEZ can be established by different entities. For each such entity the procedure for making a proposal to establish is provided under the Act in Section 3 as given hereunder:
a) For a person: As per Sec.3 (2) of the Act any person can make a proposal after identifying the area for a SEZ project to either:
· The State Government or
· The Board of Approval
In case where the proposal is made to the State Government, it may on consideration of the proposal forward it to the Board of Approval with its recommendation.
Where the proposal is made directly to the Board of Approval constituted by the Central Government, the Board may grant approval and upon receiving the Board’s approval, the concerned person needs to obtain the concurrence of the State Government within 6 months from the date of such approval. The State Government may then forward the proposal to Board of Approval which will further forward it to the Central Government.
b) For a State Government: According to Sec.3 (4) of the Act a State Government intending to set up a SEZ needs to make a proposal directly to the Board of Approval, after identifying the area which will then forward it to the Central Government after satisfying itself that the applicant has complied with conditions.
c) For the Central Government: According to Sec.3(4) of the Act the Central Government can, on its own, set up and notify the SEZ after identifying the area and consulting the State Government concerned. It does not need to make a proposal to the Board of Approval.
3. Processing of a Proposal to establish a SEZ:
After the proposal is made as explained above by different entities the proposal is routed in the following manner:
I. By the State Government: As per Sec.3 (6) of the Act the State Government upon receiving a proposal for setting up a SEZ forwards the same to the Board of Approval within 45 days along with its recommendations. However before recommending any proposal the State Government as per Rule 5(5) of the SEZ Rules shall make an effort that the following are made available to the proposed SEZ Units and Developer:
· Exemption from the state and local taxes, levies and duties
· Exemption from electricity duty
· Allow generation, transmission and distribution of power within a SEZ
· Providing water, electricity and such other services as may be required by the Developer
· Delegation of power to Development Commissioner
· Declaration of SEZ as a Public Utility Service
· Providing single point clearance system to the Developer
The State Government shall also inform the Board of Approval whether the proposed area falls under reserved or ecologically fragile category.
II. By the Board of Approval: Once the proposal is forwarded by the State Government to Board of Approval, the Board of Approval has three options:
· To approve the proposal as such
· To modify and approve the proposal
· To reject the proposal
According to Sec.3 (9) (a) of the Act if the Board approves the proposal as such i.e. without modifications, it shall communicate it to the Central Government who on Board’s proposal will issue a Letter of Approval to the Developer.
According to Sec.3 (9) (b) of the Act, if the proposal is approved with modifications, the Board shall communicate the modifications to the person or the State Government concerned. Once the person or the State Government concerned accepts the modifications, the approved proposal shall be communicated by the Board to the Central Government. On the other hand if the Board rejects the proposal, it shall record the reasons for such rejection and communicate the rejection to the Central Government in accordance with the provisions of Sec.3 (9) (c) of the Act. The Central Government shall then communicate the rejection to the person or the State Government concerned.
While processing a proposal for establishing a SEZ, the following matters are specifically looked into by the Board of Approval:
· the minimum area of land and other terms and conditions subject to which the Board shall approve, modify or reject any proposal received by it for setting up a SEZ
· the obligations and entitlements of the Developer as well as the terms and conditions under which he shall carry out the authorized operations.
So far land for SEZ is concerned there are two aspects to be seen:
i. mode of possession of land by the Developer
ii. minimum area of land required
III. By the Central Government: According to Rule 6(1) of The Special Economic Zones Rules, 2006 the Central Government, upon receiving the communication of approval of the proposal by the Board, shall, within 30 days, grant a letter of approval to the Developer who may be the person or the State Government concerned. The letter of approval shall be on such terms, conditions, obligations, and entitlements as may be approved by the Board and may also contain additional conditions laid down by the Board.
According to Section 3(10) of the Act, in a SEZ the Central Government can approve more than one Developer if one Developer does not possess the prescribed minimum area of contiguous land for setting up a SEZ.
REQUIREMENTS TO BE MET:
The Developer is required to meet the following requirements in respect of land while establishing a SEZ:
1. Minimum Area of Land prescribed for different classes of Special Economic Zones
|
Special Economic Zone Activity |
Area Prescribed |
|
SEZ for multi product
|
Contiguous minimum area of 1,000 hectares and maximum 5000 hectares |
|
Minimum 200 hectares |
|
At least 50% of the area |
|
SEZ for a specific sector or for one or more services or in a port or airport |
Contiguous minimum area of 100 hectares |
|
10 hectares or more with a minimum built-up processing area of 1,00,000 square meters |
|
10 hectares or more with a minimum built-up area as under: |
|
40,000 square meters |
|
50,000 square meters |
|
Minimum 50 hectares for the SEZs not covered under activities exclusively for electronics hardware and software, including IT enabled services; and activities exclusively for bio-technology, non-conventional energy, including solar energy equipments / cell, or gem and jewellery sectors |
|
At least 50% of the area |
|
SEZ for Free Trade and Warehousing Zone |
Minimum 40 hectares with a built-up area of not less than 1,00,000 square meters |
|
At least 50% of the area for developing processing area |
|
May also be set up as part of a SEZ for Multi-product |
|
Permitted with no minimum area requirement, subject to the condition that the maximum area of such Free Trade and Warehousing Zone shall not exceed 20% of the processing area |
Further Annexure II also provides some requirements of minimum area of land for the SEZ relating to particular sector in a State which is given in a tabular form hereunder.
|
Name of the State |
Sector |
Minimum Area (in hectares) |
|
Andhra Pradesh |
Information Technology |
6 |
|
Delhi |
Information Technology |
6 |
|
Gujarat |
Apparel |
38 |
|
|
Pharmaceuticals |
48 |
|
Haryana |
Information Technology |
3 |
|
Jharkhand |
Automobiles and Components |
36 |
|
Karnataka |
Information Technology |
4 |
|
Kerala |
Information Technology |
9 |
|
|
Food Processing |
12 |
|
Maharashtra |
Pharmaceuticals and bio technology |
21 |
|
Madhya Pradesh |
Information Technology |
8 |
|
Punjab |
Pharmaceuticals |
32 |
|
Tamil Nadu |
Footwear |
60 |
|
West Bengal |
Leather Products |
44 |
2. Requirements of the land under acquisition
Rule 7 of the SEZ Rules lay down that the area of land acquired by the Developer must fulfill the following requirements:
- The legal possession and irrevocable rights to develop the said area as a SEZ shall vest with the Developer;
- The area shall be free from all encumbrances;
- If the Developer has a leasehold right over the identified area, the lease shall be for a period not less than 20 years;
- The identified area shall be contiguous and vacant, having no public thoroughfare.
Provided that the Board of Approval may relax any condition except the condition that the identified area to be a vacant land.
3. Infrastructure Requirements relating to Information Technology SEZ
Rule 5 A of The SEZ Rules, 2006 envisages that in case of a SEZ relating to information technology, the following facilities shall be ensured by the State Government :
- Twenty four hours uninterrupted power supply at stable frequency in the Zone
- Reliable connectivity for uninterrupted and secure data transmission
- Provision for central air-conditioning system
- A ready to use, furnished plug and pay facility for end users
THE LETTER OF APPROVAL:
The letter of approval granted by the Central Government can be of two types depending on the possession of the land by the Developer
· FORMAL LETTER OF APPROVAL- Rule 6 (1) (a) of the Rules provides for formal approval in cases where land is in possession of the Developer. It has a validity of 3 years and which according to Rule 6(2) (a) of the Rules further may be extended for a period not exceeding 2 years if the Developer’s request for such an extension satisfies the Board. Within this time limit the Developer must take effective steps for implementing the approved proposal.
· IN-PRINCIPLE LETTER OF APPROVAL- Rule 6(1) (b) of the Rules provides for in - principle approval in other cases i.e. where land is not in possession. It has a validity of 1 year and which according to Rule 6(2) (b) of the Rules further may be extended for a period not exceeding 2 years if the Developer’s request for such an extension satisfies the Board. Within this time limit, in - principle approval must be converted to formal approval.
SUBMISSION OF PARTICULARS OF THE IDENTIFIED AREA:
As stated by Sec.4 (1) of the Act after being granted the letter of approval, the Developer shall submit the exact particulars of the identified area to the Central Government. Such particulars shall include proofs regarding the fulfillment of the requirements of the land under acquisition, as mentioned above. Further Rule7 (1) of the SEZ Rules envisages that the Developer needs to procure a certificate of the State Government certifying that:
· The Developer has legal possession and unalterable rights to develop the said area
· The area shall be free from all encumbrances
· The area shall be contiguous and vacant
· The area shall have no public thoroughfare
NOTIFICATION OF SPECIAL ECONOMIC ZONE BY CENTRAL GOVERNMENT:
Rule 8 of the SEZ Rules endows that the Central Government, after being satisfied that all the requirements have been met, shall notify the specifically identified area in the State as a SEZ. Further Sec.4 of the SEZ Act provides that the Central Government if it considers appropriate can subsequently notify any additional area to be included in the SEZ previously notified. However Section 5 of the Act envisages that the Central Government before notifying an area as a SEZ shall ensure that setting up a SEZ in such an area will:
- generate additional economic activity;
- promote export of goods and services;
- promote investment from domestic and foreign sources;
- create employment opportunities;
- develop infrastructure facilities; and
- maintain the sovereignty and integrity of India, the security of the State and friendly relations with foreign States.
APPROVAL FOR AUTHORIZED OPERATIONS:
Rule 9 of the SEZ Rules, 2006 requires the Developer to submit to the Board, the details of operations which would be undertaken in the SEZ. The Board may authorize the Developer to undertake such operations in a SEZ as authorized by the Central Government. After a SEZ is notified exemptions, drawbacks and concessions shall be available to the SEZ for authorized operations. Approval Committee constituted under Section 13 of the Act can permit procurement of goods and services to carry on operations authorized to the Developer.
DEMARCATION OF AREAS FALLING WITHIN A SPECIAL ECONOMIC ZONE:
The Act in its Section 6 read with Rule 11 of the SEZ Rules, 2006 provides for demarcation of area within a SEZ into three categories such as:
1. Processing Area: This refers to an area for setting up units for activities relating to manufacture of goods or rendering services.
2. Storage Area: This area is for exclusive trading or warehousing purposes.
3. Non-processing Areas: This area is for all other activities not specified above.
The Development Commissioner has been given the authority by the Central Government to demarcate the area of a SEZ as mentioned above and to ensure:
· That the processing area and free trade and warehousing zone in a SEZ have specified entry and exit points.
· That only authorized person are allowed to enter the processing area.
· That the land or built up space is given on lease only to the entrepreneurs holding a valid Letter of Approval to establish a Unit.
· That the lease mentioned above shall not be for a period less than five years.
The Developer shall not sell the land in a SEZ.
The Developer shall not lease the vacant land in non- processing area for business and social purposes.
The SEZ shall be deemed to be a port, airport, inland container depot.
The Specified Officer may delegate any area in a SEZ as an area for loading and unloading of import or export cargo.
Specified Officer in relation to a SEZ means Joint or Deputy or Assistant Commissioner of Customs for the time being posted in a SEZ.
EXEMPTION FROM TAXES, CESS OR DUTIES
According to Section 7 of the Act any goods or services exported out of or imported into or procured by Domestic Tariff Area by:
· A unit in SEZ or
· A developer
shall be exempt from payment of taxes, duties or cess including Excise Duty, CST, Service Tax, Security Transaction Tax.
TRANSFER OF LETTER OF APPROVAL OF DEVELOPER
When the approval of a Developer is suspended the Board invites application for transfer of a letter of approval of the developer. In this process the provisions of Section 3 with the Rules as discussed above are applicable.
Problems faced by Developer in establishing SEZs: Among various problems faced by the Developers in establishing an SEZ the problem of availability of land is more critical than others because large tracts of land are required for setting up especially of multi-product manufacturing SEZs. Agriculture continues to be the mainstay of majority of the population of India and therefore land acquisition under the provisions of the Land Acquisition Act of 1894 is faced with a lot of opposition. According to SEZ Act, 2005 the minimum area for setting up an SEZ in the country has to be, at least 1 thousand hectares.
India is the second largest country in terms of population in the world. Growth in population is directly related to pressure on land as land is required for agriculture, for shelter, and also required for the economic development of the country. It is the right of the farmers to grow crops on his land, similarly it is the right of all human beings to seek lands for shelter and it is also the right of the government to foster economic growth of the country. The government’s efforts in acquiring lands by resorting to Land Acquisition Act of 1894 are increasingly being challenged in different forums. Courts at all levels are flooded with applications challenging land acquisition. Agitations have turned violent in some parts of the country. Therefore finding land for establishing SEZs is becoming the biggest bottleneck for the Developers. Making use of waste and non- agricultural land for establishing SEZs is strongly suggested. In order to avoid the compulsory acquisition the Government is asking the developers to go for purchase of land on willing seller and willing buyer basis in areas earmarked under Land Acquisition notice.
Further Political parties are having different views in so far as the benefits and concessions allowed to SEZ developers are concerned. Some parties are of the opinion that such benefits and concessions to the Developers shall not result in any improvement in economic condition of general public and the Developers shall be the sole beneficiaries adding to their personal profits. So there is a pressure on the government to curtail the benefits and concessions. A national debate is on as to advantages of having so many SEZs across the length and breadth of the country.
What is said above is but natural in a democracy and should not be taken as a threat to the establishment of SEZs. The Act is new and the full impact has not been assessed as yet. Public opinion in a democracy is always welcome and with time the oppositions shall pass as the SEZs would start showing results. Already the existing SEZs has provided employment to over 1.93 lakh people and the volume of exports from existing SEZs has increased from 13,854 Crores to 67,088 Crores between 2003-2004 and 2007-2008.
Left political parties and trade unions have been opposing the non-application of labour laws and no to trade-unionism in SEZs. This is a serious issue. Taking the effects of trade unionism into consideration the Government has thought twice before giving in to the pressure of such political parties and unions advocating for trade union activities. But at the same time provisions should be made for adequate job security and benefits as are available to employees outside SEZs.
Conclusion:
In conclusion I must say that the objectives of the Act are catering to the needs of the country. It shows India’s determination to make its presence felt in international market by offering competitive goods and services of international standard and making the national economy stronger and stronger. Globalization has been changing the world into a smaller and compact unit and if India does not take timely steps other countries will take over the job. As I have said before exports are given top priority in every country and India is no exception. Basic concept behind the SEZs is that goods and services are to be exported and taxes are not to be exported so that the Indian goods and services can compete in international market. The Special Economic Zones Act, 2005 is a decision in this direction for it would provide a stable framework for SEZs to create employment opportunities and to provide an internationally competitive and hassle free environment.
Apart from earning more and more foreign exchange for the country, the other goal of SEZs is also to increase Foreign Direct Investment in India. The SEZ Act provides the right combination of facilities and encourages setting up of world class infrastructure for attracting Foreign Direct Investments. India has certainly come a long way in attracting foreign investment. Yet even with all the recent advances India still lacks behind China as an export oriented manufacturing location. Therefore SEZ Act by providing the appropriate framework and protection is likely to go a long way in achieving its aim of a new India shining in international market justifying its potential.
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