On 1st February, 2022 the government on proposed to replace the existing law governing Special Economic Zones (SEZs) with a new legislation to enable states to become partners in 'Development of Enterprise and Service Hubs'.
Need of this Step?
The existing SEZ Act was enacted in 2006 with an aim to create export hubs and boost manufacturing in the country. However, these zones started losing their sheen after imposition of Minimum Alternate Tax and introduction of sunset clause for removal of tax incentives.
The new act will cover all large existing and new industrial enclaves to optimally utilize the available infrastructure and enhance the competitiveness of exports.
The government will also undertake reforms in customs administration of SEZs with a view to promote Ease of Doing Business.
This reform will be implemented by September 30, 2022
What are SEZs?
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.
These zones are treated as foreign entities in terms of provisions related to customs.
Units in SEZs used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the ploughed back export profit for another five years.
To encourage businesses to set up in the zone, financial policies are introduced.
These policies typically encompass investing, taxation, trading, quotas, customs, and labor regulations.
Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.
SEZs in India
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.
With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.
This policy 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.
SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes.
The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005.
The Rules came into affect from 10 Feb 2006.
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 and foreign sources.
Creation of employment opportunities.
Development of infrastructure facilities.
The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and creation of related infrastructure.
A Single Window SEZ approval mechanism has been provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The SEZ Rules provide for different minimum land requirement for different class of SEZs.
There were 7 Central Government Special Economic Zones (SEZs) and 12 State/Private Sector SEZs prior to the enactment of the SEZs Act, 2005.
By March 2021, 378 SEZs are notified, out of which 265 are operational.
Who can set up SEZs?
It is important to mention here that any private/public/joint sector or state government or its agencies (even a foreign agency) can set up an SEZ.
Notably, the performance of the SEZ units is monitored by a Unit approval committee consisting of a development commissioner, custom, and representative of the state government on an annual basis.