The Hindu Business Line : Special Economic Zone Act: `Provides the right combination of facilities'

Major objectives of the SEZ Act include generation of additional economic activity, promotion of export of goods and services, investment from domestic and foreign sources and creation of employment opportunities. This Act is unique as it helps in backward and forward integration of the economy.

Mr Lalit B. Singhal, Director-General, Export Promotion Council for EoU/SEZ units

IT WAS early 2000 when the then Union Commerce and Industry Minister, the late Murasoli Maran, undertook a trip to China to get first-hand experience of how the Middle Kingdom has come to become the darling of foreign investors. Included in his itinerary was a visit to special economic zones, which led to his announcement of SEZs in India through the annual Export-Import (Exim) Policy of March 2000. It is now almost six years since the concept has been part of economic policy. The country not only has greenfield SEZs, but also the erstwhile export processing zones (EPZs) converted into SEZs.

The policy of the Central Government was to encourage and enable the establishment of SEZs in the private or joint sector in association with the States or by their governments themselves.

Meanwhile, a lot of time was spent in evolving an all-encompassing legislation called the Special Economic Zones Bill, which was introduced in Parliament earlier this year and passed subsequently. The Special Economic Zones Act, 2005, got the Presidential imprimatur in June. The Act, however, is yet to be notified, even though there has been a tremendous surge in interest for the launch of SEZs, as is evident from the growing number of big industrial houses applying to the Board of Approval for putting up SEZs in many areas.

India's SEZs are no patch on their massive Chinese counterparts for a host of reasons. Partly, it is because China divided each region into an SEZ and granted preferential treatment to foreign ventures that enabled high-cost industrialised countries to use it as an attractive outsourcing platform for manufacturing activities. Though India has, of late, emerged as the preferred destination for back-office business process outsourcing in IT and software industry, it is way behind China as an emerging outsourcing platform for manufacturing activities.

It is against this harsh reality that the new-fangled idea of SEZs could make a modest start in showcasing India's manufacturing prowess, attract foreign direct investment (FDI) and facilitate domestic manufacturers to make a foray into SEZs.

To clarify issues on the SEZs, Business Line spoke to Mr Lalit B. Singhal, Director-General of the Export Promotion Council for EoUs (export-oriented units) and SEZ units (EPCES). Mr Singhal was earlier Joint Director-General of Foreign Trade (DGFT). He was conversant with trade policy making for a number of years before joining the newly created EPCES.

Excerpts from the interview:

The original SEZ concept was floated in the 2000 Exim Policy, and the SEZ Bill was introduced and passed in Parliament only in mid-2005. In the intervening period, so many changes impacting India's foreign trade have happened. What is the rationale for the SEZs, what are their objectives and how far will the proposed Act boost exports?

The concept of export processing zones was introduced in 1965, much before the advent of the SEZ Act, in 2005. Major objectives of the SEZ Act include generation of additional economic activity, promotion of export of goods and services, as also investment from domestic and foreign sources and creation of employment opportunities.

This Act is unique as it helps in backward and forward integration of the economy. It provides exemptions to SEZ units and SEZ developers from all indirect taxes, including basic Customs duty, countervailing duty, education cess, and direct taxes.

The Act addresses the problem of inadequate infrastructure by helping SEZ developers create infrastructure at a lower cost as goods required for development of infrastructure are provided without any duties.

Power will be provided at competitive cost as power plants can be set up in SEZs and the goods required for power plants can be imported or procured from domestic sources without payment of duty.

It also addresses the problem of transaction cost by providing a single-window clearance facility at every zone level through a mechanism of Unit Approval Committee that will be chaired by the Development Commissioner of that zone.

Can you sum up the state of play in the various SEZ zones, greenfield and converted free trade zones and export-oriented units? How far will the new SEZ Act catalyse the process of attracting FDI and promoting value-added manufactured exports from India?

The total exports from 100 per cent EoUs and SEZs in 2004-05 was Rs 52,368 crore ($11.65 billion) with exports from EoUs amounting to Rs 33,753 crore ($7.51 billion) and that from SEZs worth Rs 18,655 crore ($4.14 billion). All the seven EPZs have been converted into SEZs, and seven new SEZs have started functioning.

With 14 SEZs now functioning, 61 new SEZs have been approved, entailing an investment of Rs 40,000 crore for the next five years. The EoU and the SEZ schemes are complementing each other to help augment exports. The EoUs need to be nurtured along with the SEZs by removing the Sunset Clause under Section 10B of the Income-Tax Act, providing exemption from Central Sales Tax Act and Service Tax and zero rating of VAT (value added tax) for supplies to the EoUs and the SEZs.

Do the criteria prescribed for setting up SEZs in any way help export units form clusters and benefit from these legitimate duty-free zones?

As far as the criteria for setting up of SEZs is concerned, the Act clearly lays down that the Central Government shall specify minimum area requirement for a class or classes of SEZs. Accordingly, draft SEZ Rules prescribe the following:

For setting up of multi-product SEZs, the minimum area required is 1000 hectares, for sector-specific SEZs, it is 100 hectares, for free trade and warehousing zones, it is 40 hectares with a built up area of one lakh sq. metres, for multi-product SEZ in North-Eastern States and Jammu and Kashmir, it is 200 hectares, for sector-specific SEZs in North Eastern States and J&K, the minimum area requirement is 50 hectares, and for SEZs in the IT, gem and jewellery and biotechnology sectors, it is 10 hectares.

Product-specific SEZs will certainly help in forming clusters of exporting units pertaining to that particular sector, whereas multi-product SEZs will help bring exporting units of all the products at one place.

Considering that China's SEZs were characterised by large size, tax exemption, liberal labour laws, subsidised rate of infrastructure and investor-centric detailed attention, does the Indian SEZ Act offer such advantages for attracting FDI into these zones?

The SEZ Act provides the right combination of facilities and encourages setting up of world-class infrastructure for attracting FDI. The units in SEZ are entitled for income-tax exemption for 15 years — 100 per cent exemption for first five years, 50 per cent for next five, and then in the next five years, the income ploughed back for investment in the capital goods is exempt up to 50 per cent. SEZ developers are also entitled for exemption from tax for 10 years.

The Act also enables availability of finance at international rates as it provides for setting up of Offshore Banking Units (OBUs) in the SEZs. OBUs are entitled for income-tax exemption for 10 years and they are exempt from the requirement of statutory liquidity ratio, which enable availability of more funds with OBUs. This Act also has provided exemption from tax/cess imposed under 21 other Central Government enactments such as the Coffee Act, the Rubber Act, Tea Act, and Textile Committee Act.

As for the labour laws, the SEZs have been declared Public Utility Services. But this is one area, which will have to be addressed by the Centre at some point of time. While ensuring the interest of workers, the units in SEZs will have to be provided certain flexibility in employment depending upon their requirements. Flexibility to employ based on reasonable requirements will also have to be looked into.

sAs for access to the domestic market, I believe that the present SEZ scheme needs to be amended. The current scheme provides that goods can be sold from the SEZs to the domestic market on payment of full duty on the finished products.

Whereas the same goods are imported from a country with whom we have signed RTAs/FTAs/PTAs, (preferential trading arrangement) at zero or concessional duty. This would discourage sale of goods from SEZ to the domestic market. As agreed in the Kyoto Convention, which we have signed, we also need to amend our SEZ rules and permit sale of goods from SEZ to DTA (domestic tariff area) on a duty-foregone basis.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page