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Special FeatureAugust 2007 ProjectsToday 65

Special Economic Zone: An Overview

Introduction

Special Economic Zone (SEZ), at present, is a hot topic of debate across India. The UPA government thinks

that its new SEZ policy will lead to rapid industrialisation, creation of world class infrastructure, bring inhuge foreign investment, create mlns of jobs and help India multiply exports earnings many folds.

However, a section of intellectuals and economists feels that the SEZ policy in its current format is not onlyill-suited to India but is also flawed on many counts. They feel that India does not require so many SEZs.The hundreds of SEZs cleared so far will only lead to a large scale land grabbing by big industrial housesand realty developers. They further argue that the huge tax benefits offered to units coming up in suchzones will entice the industrialists to re-locate their existing units from domestic tariff areas to SEZs. Thiswill not only result in huge revenue loss but will also increase the regional imbalances in the countryfurther.

Political parties of all hue have either strongly supported or opposed the policy depending upon the role- ruling or opposition - they are playing in the state, where large SEZs are planned.

Notwithstanding the sharp criticism, the UPA government seems to be determined to go ahead and permit

large scale SEZs across the country. So far it has cleared over 500 SEZs of varied sizes.

What is an SEZ?

According to the SEZ ACT, 2005, a Special Economic Zone (SEZ) is a "specifically delineated, duty-freeenclave and shall be deemed to be foreign territory for the purpose of trade operations and duties andtariffs". All trade inflows into the SEZ are treated as imports and all outflows from the SEZ are treated asexports.

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August 2007 ProjectsTodaySpecial Feature66

The world's first SEZ is believed to be set up in 1940 in the Republic of Ireland. It is China, whichpopularised the SEZ concept by developing six large size SEZs in the late 1970s and 1980s. Its six SEZslocated at Shanghai, Xiamen, Shantou, Shenzhen, Zhuhai and Hainan helped China attract the huge

foreign investment from developed countries and expand its exports, by many folds.

Though India was the first Asian country to set up exports processing zones (EPZs) way back in 1965, itseight EPZs failed to produce the expected growth in exports. The Chienese success enticed India tofollow suit, and in April 2000 the government announced the Special Economic Zones (SEZs) Policy. Theaim of the policy was to avoid the multiplicity of controls and clearances, to create state-of-the-artinfrastructure with private participation, to provide a stable fiscal regime and in return attract hugeforeign direct investments and earn huge income from exports.

The Special Economic Zones Act, 2005, was passed by Parliament in May 2005. It received Presidentialassent on the 23 June 2005. The SEZ Act, 2005, supported by SEZ Rules, came into effect on 10 February2006, paving way for setting up modern SEZs in India.

The objectives of the SEZ Act as specified by the government are:

Generation of additional economic activity

Promotion of exports of goods and services

Promotion of investment from domestic andforeign sources

Creation of employment opportunities

Development of infrastructure facilities

The government believes that SEZs cleared so far, willtogether attract around Rs.5,00,000 crore of investmentand will earn Rs. 1,00,000 crore through exports by theyear 2008-09. It also believes that this kind of huge

investment will create additional jobs for 5.7 mlnpeople.

To facilitate quick clearance of SEZ proposals and to provide single point interface for prospectiveinvestors, the government constituted a single Board of Approval (BoA) in June 2001. The Board meetsfrom time to time and clears SEZ proposals forwarded by state governments.

The SEZ Rules has stipulated different minimum land requirements for different classes of SEZs. EverySEZ is will have processing and non-processing areas. In the processing area the SEZ units will come upand in the non-processing area supporting infrastructures like residential complex, hotels, schools,hospitals, etc will be developed. As per the policy, a developer can set up three types of SEZs.

Types of SEZ

Multi-product: occupying minimum 1,000 hectares of land stretchable upto 5,000 hectares.

Sector-specific: occupying minimum 100 hectares of land.

Gems & jewellery, IT, BPO & Biotech: occupying minimum 10 hectare of land. In specialcases, the minimum acre can be reduced to 4 hectares.

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Incentives offered to units in SEZ

The incentives and facilities offered to the SEZ units for attracting investments, including foreign

investment include:

Duty free import/domestic procurement of goods for development, operation and maintenance ofSEZ units

100 per cent Income Tax exemption on export income for SEZ units under Section 10AA of theIncome Tax Act, for the first five years, 50 per cent for the next five years thereafter, and 50 per centof the ploughed back export profit for teh next five years.

Exemption from minimum alternate tax under section 115JB of the Income Tax Act.

External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturityrestriction through recognised banking channels.

Exemption from Central Sales Tax.

Exemption from Service Tax.

Single window clearance for Central and State level approvals.

Exemption from State sales tax and other levies as extended by the respective state government.

Incentives available to SEZ developers

Exemption from customs/excise duties for development of SEZs for authorised operationsapproved by the BoA.

Income Tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB

of the Income Tax Act.

Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.

Exemption from dividend distribution tax under Section 115O of the Income Tax Act.

Exemption from Central Sales Tax (CST).

Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Additional Sops

On 16 March 2007, the government allowed SEZ developers to acquire more land than initially planned.

It also allowed the developers to change the nature of the SEZs. According to the original SEZ rules, achange in the classification was not permitted.

On 25 July 2007, the government decided to allow units in SEZs to use old machinery and still qualify fortax concessions. Earlier, the government had prohibited use of second hand machinery in SEZs to preventmigration of units from Domestic Tariff Area to the tax free zones. As per the new guidelines, units will

be allowed to use old machinery up to 20 per cent of their capital goods requirement.

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Recent Amendments to SEZ Policy

The government was forced to abandon the clearing process in January 2007 when the land acquisition

process encountered stiff resistance from land owners, especially farmers, across the country.

Before the resumption of SEZ proposal clerance in April 2007, the commerce ministry incorporatedcertain changes into the SEZ policy. Accordingly, the state governments were allowed to fix a lowerceiling on the size of SEZ. The stipulated size of non-processing area was reduced from 50 per cent to 35per cent. The ministry also brought down the upper ceiling of land for multi-product SEZs from 10,000hectares to 5,000 hectares

Further, the state governments were told to abstain from land acquiring process and ensure that thedevelopers acquire only non-agricultural or barren land.

Speed Breakers to SEZ Projects

Apart from the wide-spread opposition from the land owners, political parties, the following recent

developments are expected to deter the private developers.1. Expressing their strong reservations over the the number of tax exemptions extended to the SEZ

developers and units being set up in these zones, organisations like ADB, OECD haverecommended a review on this policy.

2. The Union Finance Ministry is repeatedly asking for a cap on the number of total SEZs. Theministry fears a total revenue loss of around Rs. 1,00,000 crore (Rs. 1,000 billion).

3. The Union Human Resource ministry wants to impose reservations and other Indian universityguidelines like cap on fees, teachers' salary and reservation for the socially disadvantaged, oneducational SEZs.

4. The Union defence ministry has cautioned against giving clearances to FDI in SEZs from "countriesof concern and unfriendly entities". The ministry wants introduction of a National Security

Exception Clause to regulate overseas investment.

Further, the ministry has also asked the government to keep SEZs, minimum 10 km away from thecountry's borders and 20 km away from sensitive installations like airfields, radars andcommunication nodes for security reasons.

5. The Parliamentary standing committee on commerce has recommended a freeze on freshnotifications of special economic zones (SEZs) till the SEZ Act of 2005 is amended to deal withissues like land acquisition, tax sops and relief and rehabilitation for the displaced.

The committee has also suggested a ceiling of 2,000 hectare for multi-product SEZs built on landthat includes cultivable areas. Proposing a ban on use of irrigated double-crop or multi-crop land,the committee has stated that only single-crop, rain-fed land should be used up to an extent of 20per cent of total area for multi-product SEZs and 40 per cent of total area for other SEZs.

6. State governments recently stated they would not like to extend tax exemptions to the non-processing areas of SEZs. If accepted, this move could have major cost and revenue implications forSEZ developers.

SEZ Approval Status

Under the SEZ policy, the developer submits a proposal for establishment of SEZ to the stategovernment. The state government forwards such proposals with its recommendation within 45 daysfrom the date of receipt of such proposal to the Board of Approval (BoA) for consideration.

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In the first stage, the BoA accords an in-principle clearance. In the second stage, formal approval is grantedwhen the developer gets the possession of the land title required to set up the SEZ, and finally the SEZ isnotified when the developer submits a certificate of non-encumbrance on land. Thereafter the promoter is

permitted to commence the project implementation.

Between 10 February 2006 and 10 July 2007, the BoA has granted formal approvals to 340 SEZs and in-principle approvals to 171. Of the 340 formal approvals, 130 SEZs have been notified and in some casesactual development has begun.

According to the statistics available, the 512 SEZs cleared so far will together require 1,94,698 hecatre(1,947 sq. km) of land. Nullifying the fears that SEZs will reduce the cultivable land in the countryconsiderably, the Commerce Ministry claims that the agricultural land to be acquired for SEZs will be just0.12 per cent of the total cultivable land available in the country.

Sector-wise Distribution

Sector wise analysis of the list of 512 SEZs cleared till 10 July 2007 indicates the popular preference to setup IT related SEZs. In all, 239 IT related proposals have been cleared by BoA, so far. Most of theseproposals are small in size with land requirement less than 50 acres. Almost all existing software majorslike Infosys, Wipro, Satyam and Tata Consultancy Services have plans to set up SEZs.

Multi-product SEZ constitute the second largest segment among the cleared proposals. The 76 large multi-

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products with a spread of more than 1,000 acre account for around 80 per cent of the total land requiredby the 512 SEZs cleared.

Among the other sectors, Textiles, pharmaceuticals, biotechnology and engineering sectors have seenconsiderable interest from SEZ developers.

State-wise Distribution

Of the 512 new SEZs approved (formal as well as in-principle) , 335 proposals have been cornered by fivestates - Maharashtra, Andhra Pradesh, Tamil Nadu, Haryana and Karnataka. Together they account for65 per cent of the total planned special zones.

In case of notified projects, the above five states account for nearly three-fourth of the total on-going SEZprojects. In all 95 of the 130 notified SEZs are coming up in these five states.

Among the major states, Bihar and Jammu & Kashmir have not attracted any SEZ proposals. Similarly,none of the North Eastern states have found favours of SEZ developers.

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Maharashtra leads

Maharashtra with 105 SEZ proposals tops the state-wise table. The land requirement by these 105 SEZs

works out to nearly 50,000 hectare. Further, of these 105 SEZs, 19 are large in size and will require 42,000hectare of land. Some of the multi-product SEZs lined up in the state are by Reliance, MADC, MahindraRealty, Parsvnath Developers, Vediocon Realty, Rewas Port and India Bulls. The state owned MIDC isinvolved in setting up about 20 SEZs of various sizes.

Andhra Pradesh

The state has the largest number of notified SEZs. The 40 notified SEZs coming up in the state will occupyaround 5600 hectare of land. In addition, the state has attracted 64 SEZs. The additional land requiredwould be 13,900 hectares. Most of the SEZs planned in the state are IT based.

Tamil Nadu

More than half of the total SEZs approved in the state are for setting up IT related units. These include an

IT SEZ proposed by Tata Consultancy Services at Siruseri, Chennai. Of the six multi-product SEZs plannedin the state, four are being proposed by TIDCO. The two private large SEZs are by Parsvnath Developersand Sree Samayaa Pvt. Ltd.

Haryana

The state has attracted second highest number of multi-product SEZs in India. In all 11 such SEZs will beset up in the state. All of these are proposed by private developers like DLF Universal, Emaar MGF Land,DF Construction, Reliance, etc. The 56 SEZs planned in the state, will together occupy 35,600 hectare ofland.

Karnataka

Of the 49 SEZs planned in the state only two are multi-product. If all SEZs are implemented, the state will

have 32 IT related SEZs. Wipro, Infosys, HCL are the prominent investors in the IT sector. The two multi-product SEZs are proposed at Bangalore and Mangalore. Both are facing stiff opposition from the landowners.

Prognosis

ProjectsToday feels that instead of encouraging the mad rush to set up all kinds of SEZs across thecountry, the government should, in the first phase, have opted for a few large scale, coastal based multi-product SEZs. Based on their progress, the government could have invited private promoters in thesecond phase, to set up single product SEZs in Indias interiors. This would have ensured smoothunfolding of the scheme.

However, the government seems to be in no mood to slowdown the pace of implementation. Given theenthusiasm of state governments to have more SEZs in their territory, and given the willingness of privatepromoters to develop as many such zones by March 2008, the country will have around 700 SEZ projectsenvisaging a total investment of Rs.6,00,000 crore.

From the investment perspective, the picture may look rosy, but for developers, especially those whointends to set up multi-product large SEZs, it is not going to be an easy process. They are bound to facestiff resistance from land owners and various political outfits. Delay in land acquisition will lead not onlyto delay in project implementation but also to cost escalations.

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Further, if the government fails to provide a stable SEZ policy, by stopping frequent tinkering with therules, the developers will be left with not choice but to abandon their investment plans.

To ensure that the violent opposition seen in Nandigram in West Bengal is not repeated in the country,the Union government should enact the proposed Resettlement and Rehabilitation Act, at the earliest,and should ensure that not only an attractive compensation is offered to the land oustees but also properarrangements are made for their rehabilitation before the project is implementated.

Further, it should also ensure that once a project is cleared, the same is implemented in time and the landacquired for the SEZ is not used for any other purpose.

Chinese vs Indian SEZs

In China, SEZs are owned and managed by the government, while in India they are mainlyowned by corporate bodies and private developers.

The SEZs in China are very large in size, while the sizes of the proposed Indian SEZs rangebetween 25 acres to 10,000 acres.

Chinese SEZs are coastal based, ensuring easier access to the ports, while the locations of mostof the Indian SEZs are decided on the availability of land and political wishes.

China has six SEZs while Indian government has already cleared over 500 SEZs.

Chinese SEZs are basically manufacturing hubs, while majority of the Indian SEZs are IT orservices related.

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