Special Economic Zones (SEZs)

Introduction

An SEZ, or Special Economic Zone, is an area within a country that offers fiscal concessions and different business and commercial laws to encourage investment and create employment. SEZs are established to address infrastructural and bureaucratic challenges and improve the ease of doing business.

Types of Special Economic Zones (SEZs)

Salient Features of Special Economic Zone

• A Special Economic Zone is a designated duty-free area deemed to be foreign territory for the purpose of trade operations, duties & tariffs.
• There is no requirement for a license for import.
• Other notable features are:
• The units in SEZ must become net foreign exchange earners within a period of 3 years.
• Full freedom for subcontracting.
• Special Economic Zones are allowed for trading, manufacturing, and other service activities.

SEZs in India enjoy several facilities and incentives, such as:

1. Duty-free import/domestic procurement of goods for development, operation, and maintenance of SEZ units.
2. 100% Income tax exemption on export income for SEZ units under the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.  
3. Exemption from Central Sales Tax, Service Tax, and State sales tax (now subsumed into GST).
4. Other levies imposed by respective State Governments.
5. Single window clearance for approvals at the Central and State levels.

Government Measures to Revamp SEZs

1. Baba Kalyani Committee 

• The government has constituted Baba kalyani committee to study the existing SEZs of India and prepare a policy framework to adopt strategic policy measures.

• Recommendations of Baba Kalyani committee 2018

1. Rename SEZs in India as 3Es- Employment and Economic Enclave.
2. Framework shift from export growth to broad-based employment and economic growth
3. Separate rules and procedures for manufacturing and service SEZs
4. Ease of Doing Business (EoDB) in 3Es such as one integrated online portal for new investments
5. Extension of Sunset Clause and retaining tax or duty benefits
6. Unified regulator for IFSC
7. Dispute resolution through arbitration and commercial courts

2. Development of Enterprise and Service Hubs (DESH) Bill 2022

• It is an outcome of the recommendations of Baba Kalyani committee constituted in 2018.

• Objectives:

• It will replace the SEZ Act of 2005 and aims to develop more inclusive economic hubs.
• SEZs will be renamed as ‘Development hubs’. They will facilitate both export-oriented and domestic investment. It combines the role of the domestic tariff area and SEZ.
• DESH legislation provides for an online single-window portal for the grant of time-bound approvals for establishing and operating the hubs.
• A larger role for State boards would be set up to oversee the functioning of the hubs.
• It allows partial denotification of SEZ to free up unused built-up area & idle land inside SEZ for other economic activities.

Challenges with SEZs

• International competition - SEZs in India have not been as successful as their counterparts in many other countries. ASEAN countries have tweaked their laws to attract investments at the cost of Indian SEZs. 
• Limited exports  SEZs account for only 30% of India’s total exports (China – > 60%).

• Challenges of Manufacturing SEZ - SEZs have failed to bolster manufacturing and only IT SEZs have been successful to some extent. For eg. more than 60% of SEZ are in IT/ITES sector.

• Dismal performance - Most manufacturing SEZs in India have performed below par due to their poor linkages with the rest of the economy. 

• Under - utilization of Area - About 50% of land has remained unutilized in SEZs due to presence of sector specific constraints in utilization of land. 
• Disparity between States - Majority of the SEZs are in just in coastal states while NE states, Bihar and Jharkhand have a minimum number of SEZs and very low FDI.

• Barrier in Single Window Clearance System - as many states have not synced their state laws with central SEZ Act leading to delayed approvals.

• Unfavourable Tax regime - Uncertainty in government policies, specifically tax ie. withdrawal of MAT, Dividend Distribution Tax benefit, introduction of sunset clause etc. 

• Other challenges - Lack of a robust policy design, efficient implementation and effective monitoring have seriously jeopardized India’s effort to industrialise through SEZs.

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.

Conclusion

Special Economic Zones are globally recognized tools for promoting economic growth. They offer various incentives to attract investment and boost exports. Although SEZs in India face challenges, the benefits they provide far outweigh the drawbacks.