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Manual On SEZ , FT & WZ , IFTSC - Rajkumar S. Adukia

INTRODUCTION - SEZ

Which scheme to choose?

Special Economic Zones (SEZs) are specifically delineated duty-free enclaves treated as a foreign territory for the purpose of industrial, service and trade operations, with exemption from customs duties and a more liberal regime in respect of other levies, foreign investment and other transactions

The concept of export processing zones is not a new one. An International Labor Organization (ILO) report, states that some of the earliest references of export processing zones date back to thirteen century in Spain . As per the report, The Free Zone Consortium of Cadiz was founded in 1929.In Spain a free zone was set up before the First World War, but it took off only after the Second World War.

In recent times, the first export processing zone (EPZ) was set up in 1959 at Shannon, in Ireland . And in 1962 Puerto Rico established an EPZ in the island.

India was the first country to establish EPZ, at Kandla, in the Asia Pacific region in 1966

The proposal for setting up the Kandla Free Trade Zone (KAFTZ) was mooted in 1961, with the objective of facilitating the development of the Kutch region, to ensure greater utilization of Kandla Port and to create employment opportunities in the Kandla-Gandhidham area.

In the late 1990s, when the then Commerce Minister of India , late Murasoli Maran, visited the special economic zones (SEZs) in China , he was inspired by what he saw. Accordingly, The Government of India (GoI) first introduced the concept of SEZ in the Export -Import Policy 2000 with a view to provide an internationally competitive and hassle free environment for exports. Since the performance of EPZs fell far short of expectations due to various reasons, the SEZs were conceived as a much larger and more efficient form. . The policy provides for setting up of SEZ’s in the public, private, joint sector or by State Governments. All existing FTZ/ EPZ have been converted into SEZ.

SEZs are governed by SEZ Act, 2005. The Act consists of 8 chapters, 58 sections and 3 schedules. The policy relating to SEZ is contained in Special Economic Rules, 2006 notified in the Gazette of India, Extraordinary No. GSR 54 (E), dated 10.2.2006. The Rules contain 8 chapters, 77 sections, 11 forms- A to K and 2 Annexures

What is Special?

The word "Special" mainly means special economic systems and policies. That is, the central government gives SEZs special policies and flexible measures, allowing SEZs to utilize a special economic management system.

Special tax incentives for foreign investments in the SEZs.
Greater independence on international trade activities.
SEZs are listed separately in the national planning (including financial planning) and have province-level authority on economic administration. SEZ's local congress and government has legislation authority.

The salient features of SEZ are

Ų No License required for import

Ų Manufacturing, trading or services activities allowed

Ų Full freedom of subcontracting

Ų No routine examination of export import cargo by customs authorities

Ų Minimum size of multi product SEZ not to be less than 1000 hectares

Ų SEZ units to have positive net foreign exchange earner

Ų Financial incentives like tax holidays, duty free imports and exports

Ų Single window clearance

Ų high quality infrastructure

Ų Strategic location and market access

Rationale for SEZ scheme

The main objectives of SEZ scheme can be briefly stated as:

Ų Attract Foreign Direct Investment (FDI)

Ų Earn foreign exchange and contribute to exchange rate stability

Ų Boost the export sector, especially non traditional exports

Ų Create employment opportunities

Ų Introduce new technology

Ų Develop backward regions

Ų Stimulate sectors such as electronics, information technology, R & D, tourism, infrastructure and human resource development that are regarded as strategically important to the economy

Ų Create backward & forward linkages to increase the output and raise the standard of local enterprise that supply goods and services to the zone.

Fiscal benefits for SEZ

Ų SEZ developers are entitled for income-tax exemption for a block of 10 years in 15 years under section 80-IAB of the Income-Tax Act ,1961

Ų The provisions of. Section 115JB relating to MAT shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone

Ų No tax on distributed profits shall be chargeable in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2005 out of its current income either in the hands of the Developer or enterprise or the person receiving such dividend

Ų No interest income will be taxable received by non-resident or a person who is not ordinary resident in India on a deposit made in Offshore banking Unit (Section 10(15)(viii) of Income Tax Act,1961

Ų Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone (Section 54 GA of Income Tax Act,1961)

Ų Developer of SEZ may import/procure goods without payment of duty for the development, operation and maintenance of SEZ.

Ų Services provided to the developers of special economic zones and consumed within such Special Economic Zone are exempted from paying service tax subject to the fulfillment of certain conditions.

Ų CST Exemption to SEZ developers and units on inter sate purchase of goods

Ų Exemption from Central Excise duty on procurement of capital goods, raw materials, consumable spares etc. from the domestic market .

Statistics

At Present there are 948 units in operation in the 15 functional SEZs. The SEZ units provide employment to about 1.10 Lakhs persons (out of which 40% are Females)

Exports from SEZ

Year Export (Rs Crores)

2003-04 13,854

2004-05 18,309

April-December 2005-06 15,582

(Provisional)

The government has recently approved 117 new SEZs, which have committed investments of over Rs.1,00,000 crore and employment of over 5 lakh people by 2009(Press Information Bureau dated 04/05/2006 )

15 SEZs are in operation at present. These are at Kandla and Surat (Gujarat); Mumbai (Maharashtra); Cochin (Kerala); Noida (UP); 3 SEZs at Chennai and nearby (Tamil Nadu); Visakhapatnam (Andhra Pradesh); Indore (Madhya Pradesh); Jaipur and Jodhpur (Rajasthan); and at Falta, Manikanchan and Salt Lake Electronic City (West Bengal)

Besides the 15 established SEZs, around 65 greenfield SEZs have been approved by the government spread across several states including Andhra Pradesh, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Maharashtra, Orissa, Punjab, Tamil Nadu, Uttar Pradesh, West Bengal, Madhya Pradesh and the Union Territories of Delhi , Pondicherry and Chandigarh .

(Press Information Bureau Government of India dated 03/03/2006 )

Employment opportunities in SEZ

Investment of the order of Rs. 100,00 crore over the next 3 years in infrastructure development of Special Economic Zones and in setting up of units therein, with an employment potential of over 5 lakh jobs has been estimated. This estimation is on the basis of the investment/employment potential projected by the promoters of the Special Economic Zones (SEZs) at the time of seeking approval for establishment of SEZs by them. No estimate has however been made of the break up of the said 5 lakh job opportunities into categories of specialists, trained, and untrained manpower. (Press Information Bureau Government of India dated 01/03/2006 )

Export processing zones

Export processing zones are typically an enclave of units operating in a well-defined area within the geographical boundary of a country where certain economic activities are promoted by a set of policy measures that are not generally applicable to the rest of the country.

These zones are known by different names such as Free Trade Zones (FTZ), Industrial Free Zone, Export Processing Zones (EPZ), Bonded Free Zones, Maquiladoras ( Mexico ) and Special Economic Zones ( China ).

However, the EPZ concept had some limitations like

Ų Fixed geographical area,

Ų Non-suitability for medium and large industrial units

Ų Non-suitability for units which intended to set up units near the source of raw material or specialized labour.

After the introduction of SEZ scheme in the EXIM Policy from 01.04.2000, all existing FTZ/EPZ have been converted to SEZ

EOU SCHEME (Export oriented unit scheme)

The concept of EPZ was hence complemented by schemes like Export oriented scheme which was introduced by the Ministry of Commerce in 1980 vide resolution dated 31^st December 1980 . The scheme is contained under Chapter 6 of Foreign Trade Policy as amended from time to time and chapter 6 of Handbook of procedures, vol 1.amended from time to time and chapter 6 of Handbook of procedures, vol 1.

Over the years the Scheme underwent various changes and its scope also expanded substantially as compared to the initial Scheme, which was basically for manufacturing sector with certain minimum value addition in terms of export earnings.

As on 31^st December 2005 , 1924 units are in operation under the EOU scheme.

The EOUs are mainly concentrated in Textiles and Yarn, Food Processing, Electronics, Chemicals, Plastics, Granites and Minerals/Ores. Exports from EOUs during 2004-2005 were of the order of Rs.36806.17 crores as compared to the export of Rs.28827.58 crores achieved during 2003-2004, registering a growth of 27.68%.

Export Performance

(Rs. Crores)

Year	Exports
2002-2003	23590.60
2003-2004	28827.58
2004-2005	36806.17
2005-06 (April-December)	22541.73

ADDRESS BY MINISTER OF COMMERCE & INDUSTRY in New Delhi –

April 7, 2006

“EOUs account for a substantial portion of our exports. Just because we have the new SEZ Act in place, it does not mean that our EOUs can be neglected. On the contrary, we will continue to nurture them”

EOU vis a vis SEZ

Supplies to SEZ from DTA are exports and all export benefits are available while supplies to EOU from DTA are deemed exports and Indian suppliers can claim benefits of deemed export.
SEZ units have to be located within specified zones developed, EOU units can be set up at any of over 300 places in India .
There is physical control over movement of goods in SEZ, there is no physical control over goods to individual EOU.
Minimum investment in plant and machinery is Rs 1 crore for EOU before commencement of commercial production. There is no limit for SEZ.
Fast Track Clearance Scheme (FTCS) for clearances of imported consignments for EOU. In case of SEZ units, customs clearance for export and import is obtained within the zone itself.
In case of EOU sale within India should be on payment of excise duty. In certain cases excise duty payable will be only 50%/30% of normal customs duty payable on such goods if imported into India . In case of supplies from SEZ to DTA, normal customs duty as payable on import of similar goods is payable.
EOU unit can sale in DTA upto 50% of the FOB value of sales of preceding year, subject to fulfillment of positive NFE on payment of concessional rate of duty. There is no such restriction in case of SE on percentage but SEZ have to attain positive NFE.
Restrictions under Companies Act on managerial remuneration are less applicable to SEZ units.
An EOU can exit with permission of Development Commissioner, on payment of applicable duties. SEZ unit has to physically go out of SEZ
In case of EOU, CST paid on purchases is refundable (but not local tax) if goods are used for production (and not for services). An SEZ unit does not have to pay CST.
100% foreign equity is permissible in SEZ, except in a few cases. In case of EOUs, restrictions on FDI are slightly more.
restriction on ECB are less in case of SEZ compared to restrictions on EOU.
EOU has no exemption from labour laws. State Government can relax certain provisions of labour laws in case of SEZs.
SEZ are in specific locations where infrastructure is generally better.
SEZ have more freedom of operations within zone compared to EOU.

Similarities

Import without payment of customs duty
Domestic purchase without payment of excise duty
Import of second hand capital goods
Positive NFE required
Prescribed bond to be executed (B-17 in case of EOU and form prescribed in SEZ Rules in case of SEZ
Prescribed records required
No physical supervision of customs/excise authorities over production and clearances
All final production to be exported except rejects upto prescribed limit
Sub contracting of production outside on job work permissible after obtaining necessary permission on an annual basis
Job work for exports permitted
Samples can be sold/given free within prescribed limits
Unutilized material can be disposed of on payment of applicable duties

· All foreign exchange earnings can be retained in EEFC Account in foreign exchange

Which scheme to choose?

If major production of the company is towards DTA sale and only partly towards export, schemes like DEPB or advance authorization are suitable. Scheme of duty drawback is simple and easy to operate, preferred when All Industry Rate is good

When undertaking is predominantly export oriented and requirement of imported capital goods and imported raw material is high, schemes like EOU and SEZ are suitable.

The tax exemption on EOUs is available only upto the year 2009. hence, units are preferring to open up in SEZs. Infrastructure available is better in SEZs generally. Customs clearance for exports is obtained within the SEZ itself which is convenient. On the other hand, flexibility available to EOUs is much more compared to an SEZ unit. EOUs can be set up at any place declared as a Warehousing station under the Customs Act while SEZs have to be located in the specified locations where such zones are developed. Even within the factory of the manufacturer, a separate unit for EOU can be set up, even use of common utilities is possible. This reduces administrative and other costs. If export orders dry up, conversion of EOU to DTA is comparatively very easy as compared to SEZ where the unit has to be physically moved out of the zone after de bonding (exit).

Text Box: In this book unless otherwise specified, Section means section of Special Economic Zones Act 2005 and Rule mean rules of Special Economic Zones Rules, 2006

CAPS ON SEZ

The empowered Group of Ministers on Special Economic Zones, headed by the Defence Minister, Mr Pranab Mukherjee, decided on 23.08.2006 to remove the existing cap on the number of SEZs that can be established within the country.

Until now, the Government had placed a cap of 150 for the number of SEZs that could be established within the country.

Besides the Commerce Minister, Mr Kamal Nath, the e-GoM includes the Finance Minister, Mr P. Chidambaram, and the Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia.

It was also decided that approvals for new SEZs would resume only after 75 SEZs were made operational.

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