A Special Economic Zone (SEZ) is an economic region in a country which is created for the purpose of promoting manufacturing exports and economic development through a wide variety of special exemptions, relating to taxes, quotas, customs and even labour regulations in some cases. In other words, the economic laws in this zone vary from the laws of the country as a whole.

These special exemptions have gained a great deal of importance for several developing countries to attract more investments because many have very complicated procedures to do business otherwise. Modern SEZs appeared in about 1950s and gained prominence in Latin America and East Asia in 1970s as a means to attract MNCs to their countries.

Types of SEZ

1) Free Trade Zones/Free Port -Goods can be traded, handled, landed, manufactured without intervention of customs authority. They are usually located at entry ports. First started in Ireland in 1959 (Shannon Free Zone)

2) Export Processing Zones -These are set up specially by governments to promote industrial and commercial exports.

3) Industrial Parks -It is an area specially zoned for economic development and is usually located on the fringes of a city. The idea is to provide infrastructure all in one place with heavy access to transport facilities.

4) Bonded Logistic Park -It is a special zone where goods may be stored, manipulated and undergo manufacturing operations without payment of duty. These are similar to free trade zones, except they may or may not have port facilities.

5) Urban Enterprise Zone -A special area in urban locations, especially under-developed neighborhoods where companies can set-up with tax relief offered.

Many of the above terms are used under the broad umbrella of SEZs and often inter-changeably in some countries.

Countries where SEZs prevail today -India, China, Bangladesh, Russia, North Korea, South Korea, Iran, Jamaica, Greece etc to name a few.

SEZ Situation in India -

Indiawas one of the first Asian countries to recognize the effectiveness of the EPZ (export promoting zone) model. Asia's first EPZ was set up in Kandla in 1965. It became imperative to attract more foreign investment and increase global competitiveness by promoting infrastructure with minimum interference by Center and State. The SEZ policy in India first came to picture in 2000, post 9 years of trade liberalization. However, its drawback was the rigidity of labor reforms in SEZ areas. However, 19 SEZs had already been set up before the upcoming new Act to rectify these loopholes.

After a great deal of debate, finally in 2005, The Special Economic Zone Act was drafted. After extensive consultations, in february 2006, the Act along with SEZ rules was implemented for drastic simplification and single window clearance on matters relating to state as well as central government.

The SEZ Rules provide for a minimum land requirement for different classes of SEZs, which are divided into processing and non-processing zones (where supportive infrastructure is developed)

Setting up an SEZ -

Any public/joint/private sector or state government or its agencies or even a foreign agency can set up SEZs.

Indian procedure-

The developer approaches the state government with proposal and within 45 days, it has to be forwarded with recommendation to Board of Approval consisting of members of Central Government.

Once an SEZ has been approved, units are allowed to be set up in the SEZ area. All the procedures pertaining to this (such as clearances for import-export code number, change in the name of the company etc) are dealt by the Approval Committee at the Zone level with guidance from the respective Development Commissioner.

The SEZ is regularly monitored by the Approval Committee, State Government on a annual basis and is liable for penalty in event of violation of Foreign Trade (Development and Regulation) Act.

All statutory functions are controlled by the Government. Government also controls the operation and maintenance function in the 7 Central Government controlled SEZs. In rest of the operation and maintenance are privatised.

Today, there are 196 operational SEZs in India.

Some Facilities of SEZs in India

1)Income Tax-

100% IT exemption (10A) for first 5 years and 50% for 2 years thereafter Reinvestment allowance to the extend of 50% of ploughed back profits

2)Central Sales Tax Act :

Exemption to sales made from Domestic Tariff Area to SEZ units.Income Tax Act:

3)Service Tax:

Exemption from Service Tax to SEZ units

4)Customs and Excise:

Duty free import/domestic procurement of goods for setting up of SEZ units. Goods imported/procured locally duty free could be utilised over the approval period of 5 years. Domestic sales by SEZ units will now be exempt from SAD. Domestic sale of finished products, by-products on payment of applicable Custom duty.

5)Foreign Direct Investment:

100% foreign direct investment is under the automatic route is allowed in manufacturing sector in SEZ units except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes , cigars and manufactured tobacco substitutes. No cap on foreign investments for SSI reserved items.

6)Banking / Insurance/External Commercial Borrowings

Setting up Off-shore Banking Units allowed in SEZs.OBU's allowed 100% Income Tax exemption on profit for 3 years and 50 % for next two years. External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions. Freedom to bring in export proceeds without any time limit.

Issues of SEZ in India -

Despite the proactive efforts of the Indian Government, the actual impact of SEZ on the majority of Indians remains highly debatable despite the obvious investment and competitiveness advantages.

1) Revenue loss to the government from various exemptions offered

2) Problems of land acquisition and displacement of dwellers, land-holders, especially the one with marginal land-holdings of less than 1 acre to be severally impacted.

3) Environmental Concerns due to relaxed norms.

4) Declining trend of export earnings of SEZ since FY 2012 - 30% growth followed by 4% growth in FY 2013 and finally a decrease of -4.79% in FY 2014. Clearly, further investigation is required to understand why earnings are falling despite the emergence of more SEZs.