Special Economic Zone

Special Economic Zone

A special economic zone (SEZ) is an area in a country that is subject to different economic regulations than other regions within the same country. The SEZ economic regulations tend to be conducive to—and attract—foreign direct investment (FDI). FDI refers to any investment made by a firm or individual in one country into business interests located in another country.

When a country or individual conducts business in an SEZ, there are typically additional economic advantages for them, including tax incentives and the opportunity to pay lower tariffs.

KEY TAKEAWAYS

• A special economic zone (SEZ) is an area in a country that is subject to different economic regulations than other regions within the same country.
• The economic regulations of special economic zones (SEZs) tend to be conducive to—and attract—foreign direct investment (FDI).
• Special economic zones (SEZs) are typically created in order to facilitate rapid economic growth by leveraging tax incentives to attract foreign investment and spark technological advancement.
• While many countries have set up special economic zones (SEZs), China has been the most successful in using SEZs to attract foreign capital.

Understanding Special Economic Zones (SEZs)

SEZs are usually created in order to facilitate rapid economic growth in certain geographic regions. This economic growth is accomplished by leveraging tax incentives as a way of attracting foreign dollars and technological advancement.

SEZs may also increase export levels for the implementing country and other countries that supply it with intermediate products. However, there is a risk that countries may abuse the system and use it to retain protectionist barriers (in the form of taxes and fees). SEZs can also create a high level of bureaucracy due to their regulatory requirements. This can have the effect of funneling money away from the system, making it less efficient.

A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country’s national borders, and their aims include increasing trade balance, employment, increased investment, job creation and effective administration. To encourage businesses to set up in the zone, financial policies are introduced. These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations. Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

The creation of special economic zones by the host country may be motivated by the desire to attract foreign direct investment (FDI).The benefits a company gains by being in a special economic zone may mean that it can produce and trade goods at a lower price, aimed at being globally competitive In some countries, the zones have been criticized for being little more than labor camps, with workers denied fundamental labor rights

Free zones and have been used for centuries to guarantee free storage and exchange along trade routes. Modern SEZs appeared from the late-1950s in industrial countries. The first was in Shannon Airport in Clare, Ireland.

From the 1970s onward, zones providing labour- intensive manufacturing have been established, starting in Latin America and East Asia. The first in China following the opening of China in 1979 by Deng Xiaoping was the Shenzhen Special Economic Zone, which encouraged foreign investment and simultaneously accelerated industrialization in this region. These zones attracted investment from multinational corporations

• SEZs in India:
  
  • Asia’s first EPZ (Export Processing Zones) was established in 1965 at Kandla, Gujarat.
  • While these EPZs had a similar structure to SEZs, the government began to establish SEZs in 2000 under the Foreign Trade Policy to redress the infrastructural and bureaucratic challenges that were seen to have limited the success of EPZs.
  • The Special Economic Zones Act was passed in 2005. The Act came into force along with the SEZ Rules in 2006.
  • However, SEZs were operational in India from 2000 to 2006 (under the Foreign Trade Policy).
  • India’s SEZs were structured closely with China’s successful model.
  • Presently, 379 SEZs are notified, out of which 265 are operational. About 64% of the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra.
  • The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce (Ministry of Commerce and Industry).
  • The Baba Kalyani led committee was constituted by the Ministry of Commerce and Industry to study the existing SEZ policy of India and had submitted its recommendations in November 2018.
    
    • It was set up with a broad objective to evaluate the SEZ policy towards making it WTO (World Trade Organisation) -compatible and to bring in global best practices to maximise capacity utilisation and to maximise potential output of the SEZs.
• Objectives of the SEZ Act:
  
  • To create additional economic activity.
  • To boost the export of goods and services.
  • To generate employment.
  • To boost domestic and foreign investments.
  • To develop infrastructure facilities.
• Major Incentives and Facilities Available to SEZ:
  
  • Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
  • Exemption from various taxes like Income Tax, minimum alternate tax, etc.
  • External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.
  • Single window clearance for Central and State level approvals.
• Performance so far:
  
  • Exports: Exports of Rs. 22,840 Crore (2005-06) has increased to Rs. 7,59,524 Crore (2020-21).
  • Investment: Investment of Rs. 4,035.51 Crore (2005-06) has increased to Rs. 6,17,499 Crore (2020-21).
  • Employment: Employment from 1,34,704 persons (2005-06) has increased to 23,58,136 persons (2020-21).
• Challenges:
  
  • Unutilized Land in SEZs:
    
    • Due to lack of demand for SEZ space and disruptions caused by the pandemic.
  • Existence of Multiple Models:
    
    • There are 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 which pose challenges in integrating the various models.
  • Competition from ASEAN Countries:
    
    • In the past few years, many of the ASEAN countries have tweaked their policies to attract global players to invest into their SEZs and have also worked on a developmental set of their skilling initiatives.
    • Consequently, Indian SEZs have lost some of their competitive advantages globally and hence need to have fresher policies.

Way Forward

• Promotion of MSME investments in SEZs by linking with MSME schemes and allowing alternate sectors to invest in sector-specific SEZs is among the recommendations by the Baba Kalyani Committee on SEZs.
• It had also batted for additional enablers and procedural relaxations as well as granting SEZs infrastructure status to improve their access to finance and enable long-term borrowings.