SPECIAL ECONOMIC ZONE (SEZ)

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 increased 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.

The definition of an SEZ is determined individually by each country. According to the World Bank in 2008, the modern-day special economic zone typically includes a “geographically limited area, usually physically secured (fenced-in); single management or administration; eligibility for benefits based upon physical location within the zone; separate customs area (duty-free benefits) and streamlined procedures.

Objectives of SEZs

In an era of intense competition for markets and investment, SEZs attract export-oriented foreign direct investment and develop industrial skills and resources to successfully compete in the international economy.

• They can promote foreign trade.
• They can create employment.
• They can develop relatively less developed areas, and thus reduce disparities in socio-economic development, besides accelerating industrialization and urbanization.

The SEZ Scenario in India

The Union government notified SEZ rules in February 2006 operationalizing the Special Economic Zones Act, 2005.

Some eight working SEZs were there initially, all converted from what were export processing zones. These SEZs are in Gujarat (Kandla and Surat), Kerala (Kochi), Maharashtra (Santa Cruz, Mumbai), West Bengal (Falta), Tamil Nadu (Chennai), Andhra Pradesh (Visakhapatnam) and Uttar Pradesh (Noida).

Some other SEZs that have come up in the; countries as of 2009-10 were as follows:

(i) Nokia Special Economic Zone, Tamil Nadu (telecom equipments)

(ii) Apache SEZ, Andhra Pradesh (footwear)

(iii) Mahindra City SEZ, Tamil Nadu (apparel and fashion accessories, IT, hardware-auto ancillary)

(iv) Wipro Limited, Andhra Pradesh (IT)

(v) ETL Infrastructure IT SEZ, Tamil Nadu (IT)

(vi) Flextronics SEZ, Tamil Nadu (electronic hardware)

(vii) Divvy’s Laboratories Ltd., Andhra Pradesh

(viii) Wipro Limited, Karnataka—2 SEZs in Sarjapur and Electronic City (IT)

(ix) Biocon Limited, Karnataka (biotech)

(x) Manyata Promoters Private Ltd., Karnataka (IT)

(xi) Hyderabad Gems Ltd, Hyderabad (gems and jewellery)

(xii) Serum Bio-Pharma Park, Maharashtra (pharma)

(xiii) Mundra Port and Special Economic Zone Gujarat

(xiv) Moser Baer SEZ, Noida, Uttar Pradesh (non- conventional energy)

(xv) Chandigarh Administration, Chandigarh (IT)

(xvi) Maharashtra Airport Development S Corporation Ltd, Maharashtra (multiproduct)

The SEZ scheme got mired in controversy leading to a freeze on them for some time.

On April 5, 2007, the government lifted the freeze on approving new SEZs but changed several parameters to make the policy more acceptable. The empowered Group of Ministers (eGoM) which gave the go-ahead heeded the political concerns over crucial features of the policy.

The eGoM introduced a 5,000-hectare ceiling on the size of SEZs, tighter norms for utilization of land for core activities (raising the minimum share of the processing area within them from 35 per cent to 50 per cent and reviewing list of non- processing activities), and barring states from getting into land acquisition. More importantly, – the eGoM said that at least one member of each displaced family be given a job in the SEZ.

However, no cap on the number of SEZs was fixed and the objections raised by the finance ministry, particularly those related to loss of revenue because of tax sops to developers, was turned down by the eGoM.

The eGoM also settled for a new comprehensive policy on land acquisition. To ensure that existing projects do not get hit, the ministerial panel decided to fix February 10, 2006 as the cut-off date.

The eGoM’s new norms for the SEZs have provided a partial solution to this controversy- marred concept. Firstly, the main objective of the policy—promoting the production of goods and services rather than real estate and commercial development—is sought to be strengthened by raising the processing area in an SEZ uniformly to 50 per cent of its extent.

Secondly, a ceiling of 5,000 hectares is fixed on the size to keep the administrative and social costs of dislocating people from farms and homes manageable. Thirdly, the most significant change is the ban on the exercise of the state’s power of eminent domain to compulsorily acquire land in the case of pending applications for SEZs.

Compulsory acquisition has been the lightning rod for protests by farmers, social activists and political parties and the change in policy should serve to defuse much of the opposition to SEZs on the ground. The use of the Land Acquisition Act of 1894 involves the obvious inequity in compulsorily acquiring land at low prices from farmers, ostensibly for a public purpose, and handing it to industries and real estate developers.

The change of use invariably saw land values increase several fold, the gains of appreciation going to government agencies, industries, and real estate developers rather than to the farmers. With SEZ developers now having to buy land from willing sellers possibly at much higher prices, farmers will no longer be uprooted against their will.

Still, two major policy areas remain unaddressed. Firstly, income tax concessions and exemption from import duties, service tax, Central sales tax, and state taxes are offered to SEZ developers and units. These results in a substantial loss of revenue and the question arise if such tax incentives-led industrialization is sustainable.

Secondly, rapid growth and industrialization have brought to the fore the issue of conversion of farmland and wasteland to industrial, commercial, and residential uses. The reform of land use planning laws and regulations to make them more transparent and rule-based and the development of efficient land markets brook no delay. An important component of the policy should be the rehabilitation of farmers and farm labour, who will be unsettled from their traditional avocations.

(i) Area of an SEZ capped at 5,000 hectares; States can fix lower ceiling.

(ii) State governments barred from acquiring land; developers will have to do it on their own.

(iii) At least one job per family of those displaced.

(iv) Developers to devote at least 50 per cent area to core activities like manufacturing.

(v) List of non-processing activities may be reviewed.

(vi) No cap on number of SEZs.

(vii) Tax exemptions.

The Appearance of Modern SEZs

The first modern SEZs appeared in the late 1950s in industrialized countries. They were designed to attract foreign investment from multinational corporations. The first was in Shannon Airport in Clare, Ireland. In the 1970s, zones were established in Latin America and East Asia. The first one in China appeared in 1979, the Shenzhen Special Economic Zone. The first four Chinese SEZs were all based in southeastern coastal China and included Shenzhen, Zhuhai, Shantou, and Xiamen. China allowed, and continues to allow, these areas to offer tax incentives to foreign investors and develop their infrastructure without approval. The SEZs essentially act as liberal economic environments that promote innovation and advancement within China’s borders. The SEZs continue to exist with great success.

The success of Shenzhen and the other SEZs prompted the Chinese government to add 14 cities plus Hainan Island to the list of SEZs in 1984. The 14 cities include Beihai, Dalian, Fuzhou, Guangzhou, Lianyungang, Nantong, Ningbo, Qinhuangdao, Qingdao, Shanghai, Tianjin, Wenzhou, Yantai, and Zhanjiang. New SEZs are continually being declared and include border cities, provincial capital cities, and autonomous regions.

Benefits of SEZ

The benefits of operating within an SEZ include tax breaks for business owners and independence. However, the macroeconomic and socioeconomic benefits for a country using an SEZ strategy are a subject of debate.

In the case of China, mainstream economists agree that the country’s SEZs helped liberalize the once traditional state. China was able to use the SEZs as a way to slowly implement national reform that would have been otherwise impossible. Studies have also found that SEZs elsewhere 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 also create an excessive bureaucracy that funnels money away from the system, which makes it less efficient.

• SEZs are subject to unique economic regulations that differ from other areas in the same country.
• SEZs are supposed to facilitate rapid economic growth by leveraging tax incentives to attract foreign investment and spark technological advancement.
• The first four SEZs in China were all based in the southeastern coastal region, including Shenzhen, Zhuhai, Shantou, and Xiamen.