How does a country of over a billion people take on the challenge of providing a better life to its citizens? The question would naturally elicit a million different responses having their roots in several social, economic and political measures. No one today, however, doubts the efficacy off as terand broad based economic development as a primary tool for providing the average Indian a better deal. The post-1991 reforms have borne results with the economy growing at more than 9% annually and all sectors from services to manufacturing recording impressive performance. While we rejoice our success, we have to be aware of the challenges in order to maintain our impressive sojourn. The country needs massive investments in manufacturing, infrastructure development and in its productive capacities. We also need to aggressively promote exports of goods & services in an ever so highly competitive global marketplace. This alone would lead to a strong edifice for sustained growth and creation of productive employment. These were the very aims for which the Government of India mooted the Special Economic Zone (SEZ) Policy in April 2000 which was further concretized through the SEZ Act 2005 and the SEZ Rules 2006 policy. The concept of SEZ is not a new one and it is an improvement to the concept of Export Processing Zones. 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. Seven more EPZs were set up thereafter. However, the EPZs were not able to emerge as effective instruments for export promotion on account of multiplicity of controls and clearances, absence of world-class infrastructure, and an unstable fiscal regime. In order to overcome these shortcomings and attract larger foreign investments in India, the SEZ Policy was announced in April 2000. This policy was intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations. The SEZ Act, 2005, supported by the SEZ Rules, 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. The main objectives of the SEZ Act are generation of additional economic activity, promotion of exports of goods and services, promotion of investment from domestic & foreign sources, creation of employment opportunities and development of infrastructure facilities. An important feature of The SEZ Act 2005 is the key role it accords to State Governments in Export Promotion and for creation of related infrastructure. Further, a Single Window SEZ approval mechanism has been provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). All decisions of the BoA are with consensus. Issues where there is no consensus are referred to the Empowered Group of Ministers (EGOM) for directions. The SEZ concept recognizes the issues related to economic development and provides for developing self-sustaining Industrial Townships so that the increased economic activity does not create pressure on the existing infrastructure. This issue is addressed in the SEZ policy by specifying a non-processing area for creation of support infrastructure. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created. The SEZ Developer would be responsible for all civic amenities and infrastructure including roads, sewerage, open spaces, green spaces, education facilities, power, water supply and housing etc. Based on the UDPFI (Urban Development Plan Formulation & Implementation) guidelines issued by the Ministry of Urban Development the minimum processing area requirement for a multi product SEZ was earlier prescribed as 35%, with a provision of relaxation up to 25% by the BoA. The minimum processing area was kept at 50% in the case of sector specific SEZs. Government has since decided to fix the minimum processing area uniformly at 50% for multi product SEZs as wel I as for sector specific SEZs. The SEZ Rules provide for different minimum land requirement for different class of SEZs. These are 1000 hectares for multi-product SEZs, 100 hectares for sector specific SEZs, 100 hectares for multi-services SEZs and 10 hectares with minimum built up processing areas of 100,000 sqm, 40,000 sqm and 50,000 sqm for IT, Bio-Technology, Gems & Jewellery SEZs respectively. Lesser minimum area requirement has been specified in respect of Union Territories including the erstwhile UT of Goa and special category States of Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim and Jammu & Kashmir. The approval mechanism for setting up SEZs is kept simple and yet thorough. For setting up of SEZ in the private/joint sector a proposal has to be submitted to the concerned State Government that in turn forwards the same to the Department of Commerce with their recommendations. Thereafter, the BoA considers the proposal alongwith the recommendation of the State Government. Applicant also has the option to submit the proposal directly to the BoA. In such cases, the applicant will have to obtain the concurrence of the State Government within 6 months from the date of such approval. Once an SEZ has been approved by the BoA and Central Government has notified the area of the SEZ, units are allowed to be set up in the SEZ. All the proposals for setting up of units in the SEZ are approved at the Zone level by the Approval Committee consisting of Development Commissioner, Customs Authorities and representatwes of State Government. All post approval clearances including grant of importer-exporter code number, change in the name of the company or implementing agency, broad banding diversification, etc. are given at the Zone level by the Development Commissioner. The performance of the SEZ units are periodically monitored by the Approval Committee and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of violation of the conditions of the approval. The Government is clear about the benefits that SEZs will bring to the country, however, the main issue that concerns the investor is what does he gain from setting up his business in the SEZ? The developers of SEZ have been given tax concessions as incentives since the SEZs, especially the multi product SEZs, have a long gestation period for it to become viable. However, Corporate tax concessions are available to units only on export income. Further, for sale in Domestic Tariff Area (DTA), 100% duty and taxes have to be paid by the SEZ unit and there are no exemptions for such sale under the SEZ regime. The SEZ scheme has generated overwhelming response amongst the investors, both in India and abroad. Since the SEZ Act 2005 and the SEZ Rules 2006 came into effect on 10th February, 2006, 341 formal approvals have been given, spread over 18 States and 3 UTs. Besides 171 in principle approvals spread over 16 States and 1 UT have been granted for setting up SEZs. Out of 341 formal approvals, notifications have been issued so far in respect of 130 SEZs (as on 10th July 2007). Benefits derived from the SEZs are evident from the investment, employment, exports and infrastructural developments additionally generated. In the SEZs notified undertheSEZ Act after 10th February 2006, investment of Rs. 43,123 crores has already been made. These SEZs have so far provided direct employment to 35,053 persons. An investment of Rs.2,59,159 crores and 17.44 lakhs additional jobs are expected from these notified Special Economic Zones. If 341 formal approvals become operational, investment of Rs.3,00,000 crores and 4 million additional jobs are expected by December, 2009. Moreover, exports from the SEZs, which were Rs. 13,854 crores during 2003-04 have gone upto Rs.34,787 crores during2006-07 i.e. an increase of about 151% inthree years. It is projected that exports from SEZs during 2007-08 will be over Rs.67,000 crores and are likely to cross Rs. 100,000 crores by 2008-09. Some of the SEZs already functional include-Nokia SEZ in Tamil Nadu, Quark City SEZ and Rajiv Gandhi Technology Park in Chandigarh, Apache Leather SEZ in Andhra Pradesh and Mundra SEZ in Gujarat. In Sriperumpudur near Chennai, an electronic hardware cluster of SEZs is slowly emerging with Nokia, Motorola, Flextronics, Foxconn, Dell & Samsung. This will provide 1,00,000 jobs within 3 years in these SEZs. While the benefits of SEZs are visible and evident, one major issue that has been often raised pertains to the acquisition of agricultural land for setting up SEZs. Acquisition of land is a matter that comes under the purview of the State Governments since land/ land usage is a State subject. While there is a Central Land Acquisition Act of 1894 extensively amended in 1971, the States have made modifications to the same and have their own compensation and Relief & Rehabilitation measures depending upon States requirements and necessities. The SEZ BoA only considers those proposals, which have been duly approved by the State Government. The total land area in the 341 valid formal approvals granted so far is approximately 44,268 hectares. It is often missed out that in all these 341 cases, there was no fresh acquisition of land since the land was in possession of either the State Industrial Development Corporations or the developers. The total land area involved in the 171 in principle approvals is about 1.49 lakh hectares. The extent of land involved in the setting up of SEZs for which formal and in principle approvals have been granted so far needs to be seen in the context of the overall land availability in the country and the extent of arable land. The total land area involved in the proposed SEZs is about 1932 sq.km as against about 29.73 lakh sq.km of land available in the country (i.e. requirement of land for these SEZs is only about 0.06% of the total land). When we compare with the total arable land of 16.20 lakh sq.km, in the country, this works out to only about 0.12%. Other concerns regarding the possible misuse of the SEZ policy have been addressed through inclusion of necessary safeguards in the SEZ Act and SEZ Rules. These include provisions that land in the SEZ cannot be sold by the Developer. Vacant land in SEZ cannot be leased to any person other than a co-developer. If a developer is not fulfilling the conditions of approval, the Central Government can take over the SEZ and appoint Administrator; land for SEZ should be vacant at the time of application for the SEZ and as such there cannot be any conversion of existing businesses; the SEZ Rules, 2006 and recently amended Section 10AA of the Income Tax Act, 1961 prevents use of previously used Capital Goods in the SEZ beyond 20% of the total asset value and as such the relocation of businesses from domestic area to the SEZs is not possible etc. The policy of such significance and import for economic growth has attracted a lot of debate and discussions. Various issues concerning the SEZ policy including acquisition of land have been engaging the attention of the Government and suitable directions have since been given by the Empowered Group of Ministers (EGOM) to the BoA. These include processing the pending applications for SEZs for in principle & formal approval and notifications subject to the condition that the State Governments would not undertake any compulsory acquisition of land for such SEZs, requesting the Ministry of Rural Development to reformulate a comprehensive Land Acquisition Act to address all relevant issues, working out a comprehensive Resettlement and Rehabilitation Policy ensuring livelihood from the project to at least one person from each displaced family, fixing the minimum processing area uniformly at 50% for multi product SEZs as well as sector specific SEZs and fixing the upper limit of the area required for multi product SEZ at 5000 hectares with provision for prescribing a lower limit by the State Governments. Thus, the process of evolution of the SEZ policy has been participative which augurs well for the success of SEZs. It is hoped that SEZs would channelise the necessary investments that the country needs for maintaining its incredible growth story. Frequently Asked Questions About SEZs What is an SEZ? An SEZ, or Special Economic Zone, is essentially an industrial cluster meant largely for exports. An SEZ is governed by a special set of rules aimed at attracting direct investment for export-oriented production. SEZs - earlier known as Export Processing Zones or Free Trade Zones - are duty free enclaves which are treated as foreign territory only for trade operations and duties and tariffs. Other salient features of SEZs are: manufacturing or service activities are allowed; full freedom for sub-contracting; no routine examination by customs authorities of export/import cargo; units in SEZs have to become net foreign exchange earners within three years; and domestic sales from the zones are subject to full customs duty and the import policy in force. Typically, an SEZ is marked by best infrastructure and least red tape. What are the incentives and facilities offered to SEZs ? Incentives and facilities offered to units in the SEZs in orderto attract investments (including foreign direct investment) include duty free import or domestic procurement of goods for the development, operation and maintenance of SEZ units; 100 % income tax exemption on the export income of SEZ units under Section 10 AA of the Income Tax Act for the first 5 years, 50 % for the next 5 years and 50 % for the ploughed back export profit for the next 5 years; exemption from central sales tax; exemption from service tax; and single window clearance for the establishment of SEZ units. What is the governments policy for approving SEZs ? There is a Board of Approvals for this purpose. The Board of Approvals is guided by parameters such as generation of additional economic activity, projected exports from the zone, projected investment, development of infrastructural facilities, and most importantly, employment opportunities to be created in the SEZs. What is the level of investment and employment expected in the SEZs ? If all the 341 SEZs for which formal approvals have been given become operational, investment of Rs 3,00,000 crore and 4 million additional jobs are expected by December, 2009. What are the sectors that will benefit from SEZs ? Based on the approvals given so far for the setting up for SEZs, many sectors will benefit in terms of investments they will attract - for example, gems and jewellery, textiles, handicrafts, pharmaceuticals, engineering goods, electronics, telecom equipments, information technology (IT) and IT-enabled services, biotechnology, petroleum and petroleum products and food processing sectors. Does the central government have any plans to set up new SEZS ? The Central government does not set up any new SEZs. SEZs are set up in the private sector or in association with the state governments in the joint sector or by the state governments and its agencies. The SEZ Success Stories Nokia SEZ in Tamil Nadu