Special Economic Zones: A Unique Concept
India is fast emerging as one of the top foreign investment destination in the world owing to a number of factors like a middle class estimated at 350 million out of a total population of more than 1 billion, the second largest English-speaking manpower in the world, the status of fourth largest economy in the world based on purchasing power parity, rich sources of supply of raw materials, extensive rail and road network, highly developed stock market with more than 9000 listed companies, a highly developed banking system and various other factors.
Now with the introduction of a unique concept like SEZ, foreign investment has further got a boost. With an objective to attract foreign investment in India, the government has developed a new concept termed as Special Economic Zones (SEZ), a geographical region which has more economic liberal laws economic laws than a country’s typical economic laws.
The Special Economic Zones (SEZs) Policy was announced in April 2000.
An SEZ can be understood as a set-up in the public, private, or joint sector and/or by a state government, in compliance with the Policy and guidelines issued by the Ministry of Commerce. The policy requires the minimum size of an SEZ to be 1000 hectares. A unit for the manufacture of goods, provisioning of services, processing, assembling, trading, repairing, reconditioning, making of gold, silver, and platinum jewellery can be set up under SEZ. The policy makes way for 100 per cent foreign direct investment (FDI. The government is also aiming at doing away with sectoral FDI caps in all sectors for units located in SEZs.
Prerequisites to set up a unit under SEZ:
- A minimum investment of Rs 5 million (around USD 100,000) towards plant & machinery is required to be made under every unit in an SEZ.
- Units within SEZs are required to be net foreign exchange earners, cumulatively in the first five years of operation. However, no minimum net foreign exchange earning or export performance requirement has been laid down.
- Trading units within SEZs are required to ensure a turnover of at least USD 1 million within five years from commencement of operation.
- The SEZ Policy allows unlimited access to the Domestic Tariff Area (DTA). It also allows units within SEZs to undertake job work for the DTA, without payment of any duty, as well as for temporary removal of goods into the DTA or to other SEZs/ STPs/ EOU zones.
However, access to DTA would be subject to a achievement of positive foreign exchange earning and on full payment of customs duties, trading units within SEZs are not permitted to sell goods in the DTA and SEZ units will need to maintain year-wise accounts of all sales in the DTA.
How to set up a SEZ unit:
An investor willing to set up his industry in SEZ area can go for it in two ways: Either he can get his own SEZ zone approve from the Government of India, respective state government and develop it lease the property in an already approved and developed
SEZ unit and just walk in and start running its industry. All the incentives mentioned below can be availed in both ways i.e. whether he set up his own SEZ unit or lease a property in an already approved SEZ, he is entitled for same benefits.
Benefits offered under SEZ
The SEZs have a simplified monitoring and administrative setup. All activities of SEZ units shall be through self-certification procedures. The Development Commissioner (DC) of the SEZ is the nodal authority for approvals/ performance of units within the SEZs, having the administrative control of the SEZ. All imports will be allowed on the basis of self-certification. There is no routine examination of export and import cargo by the customs department. No separate license is required for import. SEZ units can import all types of goods that are required for operations, including capital goods, whether new or second hand, (except those prohibited under the Policy), without payment of any duties. In addition, the Policy allows inter unit transfer of goods between SEZs, without any customs scrutiny. Duty remission is also available on destruction of goods within the SEZs. Units can also dispose obsolete goods on payment of the applicable customs duties. SEZs units can procure goods required for setting up of units, from domestic or foreign markets, without payment of any customs/import duties. Duty-free is also material is permitted to be utilised over a period of five years, unlike EOU/EPZ schemes where the period is limited to one year.
SEZ also offers 100% corporate tax exemption for the first 5 years and 50% exemption for the next 5 years thereafter and 50% of the ploughed back profits for the next 5 years. Similarly exemption form central excise duty and other levies on goods from the domestic tariff area, exemption of taxes on purchase of goods from domestic markets and exemption from payment of service tax.
Units within the SEZs have been allowed to pay for all their transactions, including payments for inter-unit transactions and suppliers, in dollars, except for domestic expenses like salaries.
Overseas Banking Units
The Government had permitted the setting up of Overseas Banking Units (OBUs) in the SEZ under its EXIM policy 2002-2007. OBUs are exempted from CRR and SLR norms laid down by the Reserve Bank of India (RBI). This would allow units and developers to raise cheaper capital from the international market. Units in the SEZ’s are permitted to undertake hedging of commodity price risks. SEZ units are also exempted from External Commercial Borrowing (ECB) restrictions as laid down by the RBI. SEZ units are also allowed to ‘write off’ unrealized export bills, exemption from interest rate surcharge on import finance flexibility to keep 100% of export proceeds in EEFC account and freedom to make overseas investments from it. Such export proceeds can be brought back into the country within a period of 365 days.
Profits from operations within the SEZ zones can be repatriated freely, without any dividend balancing requirements. SEZ units also enjoy Public Utility Status under Industrial Dispute Act, under which workers cannot resort to strikes without having recourse to conciliation proceedings. Local legislation provides for registration of trade unions and prevention of unfair labour practices by employees and amicable settlement through mutual negotiation. In case conciliation and arbitration is not possible, the Government assumes the right of intervention.
Other important benefits:
exchange earning, as percentage of exports, SEZ units to have unrestricted access to the domestic markets, on payment of applicable taxes/duties. Reservation policies for Small-scale Industries (SSIs) would not be applicable within the SEZ zones, enabling units within the SEZ to engage in industries that have traditionally been reserved for SSIs. Sub-contracting of part of production abroad is also permitted, subject to certain conditions and restrictions.
100 per cent FDI is to be allowed under the automatic route in the manufacturing sector. The Government is also looking at removal of sectoral caps for FDI investments in other sectors. 100 per cent of foreign exchange receipts from customers can be retained in the form of credit.
However, units will be required to maintain year-wise accounts on forex inflow by way of exports and other receipts and all forex outflow on account of payment of dividend, royalty, fees etc.
SEZ also offers numerous benefits to developers. Developers of SEZs will be granted full autonomy to develop townships within SEZs. Allocation and pricing of land, facilities and services in SEZs are not governed by existing regulations. Goods or services required by developers for the development of the zone can be procured from the DTA, without payment of any duty. Specified goods could also be imported at concessional rates of duty. SEZ developers would be accorded infrastructure status, and thereby entitled to claim all concessions and incentives available to infrastructure players, under the Income Tax Act.
Besides the above mentioned benefits, various state governments are also providing a number of facilities, subsidies and benefits to the SEZs established in their respective states to attract foreign investment in their states.
Thus it seems to be just the right time for investors to make best use of India’s foreign investment policies