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INTRODUCTION TO SUBJECT

The world first known instance of SEZ have been found in an industrial

park set up in Puerto Rico in 1947. In the 1960s, Ireland and Taiwanfollowed suit, but in the 1980s China made the SEZs gain globalcurrency with its largest SEZ being the metropolis of Shenzhen.

From 1965 onwards, India experimented with the concept of such units in the form of Export Processing Zones (EPZ). But arevolution came in 2000, when Murlisone Maran, then CommerceMinister, made a tour to the southern provinces of China. After returning from the visit, he incorporated the SEZs into the Exim Policyof India. Five year later, SEZ Act (2005) was also introduced and in2006 SEZ Rules were formulated. Earlier India had export processingzones (EPZs), which were later converted in to SEZs. EPZs areindustrial estates, which form enclaves from the national customsterritory of a country and are usually situated near seaports or airports.Almost the entire production of such zones is normally intended for exports. An export-processing zone is different from a free port. AnEPZ is normally an area within or near a port. As against this, a free

port encompasses a port or whole city isolated from the rest of thecountry for customs purposes (examples include Hong Kong,Singapore and Dubai). Obviously a free port is also a free trade zone.

Only those imports, which are meant for export processing(like capital goods, raw materials, components etc, used for productionof exportable), are freely (i.e. without restrictions) allowed to a purelyexport processing zone. The exports from an EPZ should satisfy thecondition that the export products have undergone certain specifiedminimum value addition by way of processing activities to becomeeligible for free export. There are no such conditions with respect tofree ports, which are not export processing zones. Thus, an item, whichis imported to a free port, may be re- exported even in the samecondition, i.e., without any modification to the product. The conditionof value addition is insisted upon to realize the objectives like increasein net foreign exchange earnings, employment generation and overalleconomic growth.

The EPZs/SEZs provide the required infrastructure facilitiesfreely or at concessional rates.

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After launching the SEZ Scheme in month of March 2000, aseparate chapter on SEZ was added to EXIM policy for the five-year

period in April 2001. SEZs are specifically delineated duty-freeenclaves, deemed as foreign territory for the purposes of tradeoperations and application of duties and tariffs. SEZs can be set up for the manufacture of goods and the rendering of services, production,

processing, assembling, trading, repair, remaking, reconditioning, re-engineering including making of gold/ silver/ platinum/ jewelry andarticles thereof or in connection therewith. Units for generation/distribution of power can also be setup in the SEZs. Goods going intothe SEZ area from the Domestic Tariff Area (DTA) are treated asdeemed exports and goods coming from the SEZ area into DTA aretreated as if the goods are being imported. The existing export

promotion zones have been converted into SEZs.

As a RBI Report observes, the economic rationale for establishing Special Economic Zones is not clearly laid down in tradetheory. It is, however, obvious that these zones can be justified either on consideration of equity where a less developed area is accordedspecial tax and non-tax benefits or a consideration of efficiency, wherea region has a spatial advantage in terms of cost. SEZ, as aninstitutional measure, supports the economic policy shift from importsubstitution to export promotion with a view of promoting export-ledgrowth to facilitate larger incomes and employment. For these reasons,a large number of countries have taken initiatives to set up SEZs over the last half-century or so. India followed suit in recent year, with aview to improve its competitive position.

The incentives offered under the SEZ Scheme includeduty free importation and domestic procurement of goods for thedevelopment of SEZ and setting up of units, 100% Foreign DirectInvestment (FDI) in manufacturing sector under the automatic route,100% income tax exemptions for the five years and 50% tax for twoyears thereafter. Other incentives include sub-contracting of a part of

production abroad, reimbursement/ exemption of Central Sales Tax on

domestic purchases by the SEZ units and retention of 100% foreignexchange earnings in the Exchange Earners Foreign Currency (EEFC)Account.

In the Exim Policy for 2002-07 as announced in March2002, SEZs were given the following concessions: Overseas BankingUnits (OBUs), which would, inter alia, be exempt from CRR andSLR requirements would be permitted to be setup in SEZs. These

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OBUs would give access to SEZ units and SEZ developers tointernational finance at international rates. SEZ units would beextended income tax exemptions and would be exempt from ExternalCommercial Borrowing (ECB) restrictions and would be allowed tomake overseas investment and carryout commodity hedging. SEZswould be exempted from Central Sales Tax in respect of supplies fromDTA and transactions from DTA to SEZs would be treated as exportsunder the Indian Income Tax and Customs Act.

Until March 2003, eight SEZ were established and approvalhas been given for setting up of 17 SEZs in the states of Gujarat,Maharashtra, Tamil Nadu, West Bengal, Orrisa, Uttar Pradesh, AndhraPradesh, Madhya Pradesh, and Karnataka.

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