Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Key Phrases: Single-window clearance, Domestic tariff area, e-filing portal, Inward-investments, Tax heaven, Export Processing Zone, Duty free enclave, Subcontracting, Net Foreign Exchange

Why in  news?

• Commerce Secretary BVR Subrahmanyam said SEZs will manufacture both for international and domestic markets, and that a single-window clearance system and world-class infrastructure will be key points in the new legislation.

What has been proposed?

At present, companies selling products in domestic markets cannot operate in SEZs. The proposed new legislation to govern Special Economic Zones (SEZs) is likely to allow domestic suppliers to operate within such zones as the government works to remove their export focus and make them compliant with World Trade Organization norms, officials said.

• Officials said the sales and procurement transactions done by SEZ units in the domestic tariff area (DTA), which are done through a separate mechanism, will also be integrated with the customs' e-filing portal.

"The idea is to take the export focus away from SEZs and make them WTO-compliant," one of the officials said.

What is SEZ?

Special Economic Zone (SEZ) is a geographic area in which the business and trade laws are different from the rest of the country. These tax havens are located within a country's territorial borders and the objective of developing SEZs include increasing balance of trade and attracting newer inward-investments into the country, creation of newer jobs. Financial incentives are granted to those setting up SEZs and cover a wider gamut of benefits for investors across taxation, customs, labour regulations, etc.

Evolution of SEZ in India:

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.

Later, The Special Economic Zones Act, 2005, was passed by Parliament.

The SEZ Rules, 2006 came into effect on 10th February, 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.

Approval mechanism for SEZ:

• The developer submits the proposal for establishment of SEZ to the concerned State Government. The State Government has to forward the proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval.
• The Board of Approval has been constituted by the Central Government in exercise of the powers conferred under the SEZ Act. All the decisions are taken in the Board of Approval by consensus.

Current status of SEZ:

• The Ministry of Commerce and Industry data show that 265 out of the 378 Special Economic Zones (SEZs) in India are operational and have provided employment to as many as 20 lakh people.
• SEZs account for 20% of India's merchandise exports.
• SEZs across India have attracted investments of over ₹5.2 lakh crores and have current capacity utilisation of just over 50%.

Challenges faced by SEZ:

India’s SEZ experience has been disappointing till date. On November 28, 2014, the Comptroller and Auditor General stated in its report on SEZs: “Considering the significant shortfalls in achievement of the intended socio-economic objectives by all the sectors of SEZs, there is an urgent need for the government to review the factors hindering the growth of non-operational and under-performing zones.”

• Unutilised land (more than 25,000 hectares) in SEZs. Lack of flexibility to utilize land in SEZs for different sectors.
• Existence of multiple models of economic zones such as SEZ, coastal economic zone, Delhi-Mumbai Industrial Corridor, National Investment and Manufacturing Zone, food park and textile park. There is a need for “rationalization” of these models.
• Under-utilization of existing capacity: Currently, SEZ units are not allowed to do “job work” for domestic tariff area (DTA) units. The commerce ministry noted that “optimal utilization of existing capacity in SEZ units” should be done by “allowing job work for DTA”.
• The domestic sales of SEZs face a disadvantage as “they have to pay full customs duty”, as compared to the lower rates with the Association of Southeast Asian Nations (ASEAN) countries due to free-trade agreement (FTA).
• Imposition of new taxes: Imposition of Minimum Alternate Tax (MAT) on SEZs from April 1, 2012, as well as imposition of income tax on new SEZs and new units from April 1, 2017 and April 1, 2020.
• Lack of support: Specially from the state government when it comes to developing an effective single-window system for clearances.
• Requirement of payment in foreign exchange for services provided by SEZ units to the DTA area.
• Land acquisition and environmental clearance: simplification of the process of granting environment clearance by the Union environment ministry and repeal of certain sections of the Urban Land Ceiling Act, 2007 is required.

Baba Kalyani Committee Report

It had been set up with a broad objective to evaluate the SEZ policy towards making it WTO-compatible and to bring in global best practices to maximize capacity utilization and to maximize potential output of the SEZs. The committee had a key suggestion to move the SEZ philosophy from export-oriented to broad-based Employment and Economic Growth approach (Employment and Economic Enclaves-3Es).

The critical recommendations of this committee included :

• Extension of sunset clause beyond 2020 & retaining taxation benefits withdrawn earlier
• To develop integrated industrial and urban development
• Formulation of separate rules and procedures for manufacturing and service SEZs
• Infrastructure status to SEZs to improve access to finance and to enable long term borrowing
• Enhance competitiveness by enabling ecosystem development by funding high speed multi-modal connectivity, business services, and utility infrastructure.
• Procedural relaxations for developers and tenants to improve operational and exit issues.
• Broad-banding definition of services/allowing multiple services to come together
• Utilizing Multi Services SEZ and IFSC for all inbound and outbound investments
• The flexibility of long-term lease for developers and tenants
• Dispute resolution through arbitration and commercial courts

Conclusion:

• To instill confidence in investors and signal the Government's commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill is required at the moment.

Sources: Economic Times , Live Mint , Indian Express

Mains Question:

Q. SEZs in India have proved to be a success story for the IT/ITES industry. Critically analyze. [250 words]