Special Economic ZoneGroup 1 – Legal Environment

Aarthi V. B.

Abhinandan Choudhury

Aditya Pachori

Ajinkya Ninawe

Akash Mohanty

INTRODUCTION

What is Special Economic Zone?

• Special Economic Zone (SEZ) is a geographical region that has economic laws different from a country’s generally applicable economic laws, with the underlying objective being an increase in economic growth and activity through increased foreign investment.

• According to World Bank estimates, as of 2007 there are more than 3,000 projects taking place in SEZs in 120 countries worldwide.

About SEZ

• SEZs are exempt from federal laws regarding taxes, quotas, FDI-bans, labor laws and other restrictive laws in order to make the goods manufactured in the SEZ at a globally competitive price.

• The category SEZ includes free trade zones (FTZ), export processing Zones (EPZ), free Zones (FZ), industrial parks or industrial estates (IE), free ports, free economic zones, and urban enterprise zones.

Origin

• The concept of “special zones” is not new.

• The first industrial park was set up in 1896 in Manchester. “Free trade zones”, designed to promote free trade

• The first export processing zone (EPZ), designed to liberalize both the trade and investment environment, was operationalised in Ireland in 1960.

• Many developing countries adopted the EPZ model, though not much action was seen on this front after the 90s.

Evolution of SEZ - India

Since the 60s, India has seen the emergence of several initiatives to boost exports. They are

• Export Processing Zone (EPZ) Scheme

• Export Oriented Units (EOU) Scheme

• Software Technology Park (STP) Scheme

• Electronic Hardware Technology Park (EHTP) Scheme

• Export Promotion Capital Goods (EPCG) Scheme

• Advance Licensing and Deemed Exports Scheme

• Free Trade Zone(FTZ) Scheme

The Indian Scenario

• First came into inception on April 1, 2000

• Foreign trade policy

• Ad-hoc amendments to different laws, executive orders

• SEZ Act 2005

Objectives of SEZ Act•Generation of additional economic activity

•Promotion of exports of goods and services

•Promotion of investment from domestic and foreign sources

•Creation of employment opportunities

•Development of infrastructure facilities

Role of SEZ in Indian Economy• Provides internationally competitive environment

• Encourages FDI and enhance GDP

• Increase share in global exports

SEZ exports account for 23% of India’s total export in 2011-2012

Definitions in Special Economic Zones Act,2005• “Unit" means a Unit set up by an entrepreneur in a Special

Economic Zone and includes an existing Unit, an Offshore Banking Unit and a Unit in an International Financial Services Centre, whether established before or established after commencement of this Act (Section 2(zc) of Special Economic Zones Act ,2005)

• “Offshore Banking Unit” means a branch of a bank located in a Special Economic Zone and which has obtained the permission under clause (a) of sub-section (1) of section 23 of the Banking Regulation Act, 1949 (Section 2(u) of Special Economic Zones Act ,2005)

• “International Financial Services Centre” means an International Financial Services Centre which has been approved by the Central Government under sub-section (1) of section 18 (Section 2(q) of Special Economic Zones Act ,2005)

DEFINITIONS (contd)• “Entrepreneur” means a person who has been granted

a letter of approval by the Development Commissioner under sub-section (9) of section 15 (Section 2(j) of Special Economic Zones Act ,2005)

• “Existing Unit” means every Unit which has been set up on or before the commencement of this Act (Section 2(l) of Special Economic Zones Act ,2005)

• New Unit Any person, who intends to set up a Unit for carrying on the authorised operations in a Special Economic Zone, may submit a proposal to the Development Commissioner concerned

Administrative Set Up For SEZsGoverned by a three tier administrative set up

1. The Board of Approval is the apex body in the Department

2. The Unit Approval Committee at the Zonal level dealing with approval of units in the SEZs and other related issues

3. Each Zone is headed by a Development Commissioner, who also heads the Unit Approval Committee

Approval Mechanism of SEZs• Proposal for setting up of SEZ in the

Private/Joint/State Sector• State Government• Department of Commerce• Board of Approval

• Proposals for setting up of units in the SEZ• At Zonal level• Development Commissioner, Customs

Authorities,representatives of State Government

• Currently, there are about 143 SEZs operating throughout India

• Additional 634 SEZs that have been formally/principally approved by the Government of India

Advantages of SEZ -Enterprise

• Income tax holiday for 15 years• 100% for the first 5 years• 50% for the next 5 years• 50% for the following 5 years on plough back of profits

• Duty free import/domestic procurement of goods• Exemption from minimum alternate tax• Exemption from Central Sales Tax

Cont…

• Exemption from Service Tax.• Single window clearance for Central and State level approvals.• Exemption from requirement of domicile in India for 12 months prior

to appointment as Director.• No strikes would be allowed• Enhanced limit of Rs. 2.40 crores per annum allowed for managerial

remuneration.

Advantages of SEZ - Country

• Economic growth and development – through exports and backward integration• Foreign Investment• Infrastructure development• Employment generation• Up-gradation of managerial and technical skills

Disadvantages of SEZ

To Nation

Loss of Revenue

To Business

Land AcquisitionNo single window facilityNo strategic planning for water, electricity

To People

Grabbing of fertile landWater scarcity- Threat to accessFood scarcityExploitation of laborLandless farmers

To Environment

Ecosystem destructionDestruction of ground water recharge systemPollution

Case

Synefra SEZ, Padubidri 2008

Close to the New Mangalore Port and adjacent to National Highway 17 which passes through Maharashtra, Goa, Karnataka and Kerala

Synefra Padubidri SEZ is designed to provide a Gateway to Global Market, for easy export & import

• Spread across an approximate area of 641 acres land with an efficiency of over 80% and a dedicated 210 acres for non process areas, green cover and roads; • Synefra has already leased out 120 acres to hi-tech engineering

companies from across the globe.

Companies presentSWIL Suzlon Wind International limitedSE Blades Suzlon Energy Limited

Flow Chart for Setting up SEZ

SEZ can be formed in two ways

By Applying to SG

By applying to Board of Approval

SG forward the Proposal to BOA

Obtain the concurrence

of SG

BOA approves the

proposal

SG=State Government

Flow Chart for Setting up SEZ contd..

Central Government shall issue letter of Approval to developer

Developer shall furnish to Central Government information about area

Central Government will notify the area as SEZ

SWOT ANALYSIS OF INDIAN SEZ STRENGTH• Based on Western model or SEZ in China• An established legal redressal system • Relatively low labour costs• Employment opportunities• India’s large English speaking and skilled workforce• Exposure to technology and global market

•Worldwide acceptance of capabilities in fields like• Pharmaceutical manufacturing & research• Clinical trials• Manufacturing auto parts• Engineering designing & consultancy, IT & ITES• Malls and hotels• Hospital

• Financial & other institutional Networks like Insurance Companies

WEAKNESS• Poor infrastructure and transport

facilities

• High cost of capital

• Inadequate institutional support

• Political changes

• Inappropriate locations

OPPORTUNITIES

• An alternative manufacturing base, particularly

compared to Chinese SEZs

• Investments in core strength areas like IT and

software products and services.

•New small ports & airports are also being

developed keeping SEZ concept in mind

•A large NRI base who have traditionally invested

less in Greenfield development in India

THREATS• The pattern of buying & selling may not continue. With relocations of industries in other third world countries, new competitors will emerge• opposing interests • Prospect of even more restrictive

labour laws being introduced • Increasing rejection rate for proposals

to establish SEZs

CONCLUSION

•

• scope of human capital formation and technology upgrading effects will widen. • Government to play a pro active role in strengthening these

effects. • linkages between the domestic economy and Special

Economic Zones. •Effects of Special Economic Zones are contingent upon the

success of these zones in attracting Foreign Direct Investment.