Will the SEZ Act Boost Exports?

Many today question the need for the Special Economic Zones (SEZs) in the country; their point – whole of India should be treated as SEZs and this dividing factor be done away with.

Units in SEZs enjoy a tax holiday in their first five years and 50 percent exemption in the next five. All imports into SEZs are duty-free. If one is more critical, he can question as to why create a special class of units which divides producers and consumers? India today has a growing domestic market that deserves equal policy emphasis.

However, continuing with the sops bestowed upon the SEZs, the government ‘in a bid to step up investment flows into these zones and to make India a manufacturing hub,’ announced the long-awaited SEZ Act, 2005 and SEZ rules, 2006. The new SEZ rules, among other things, provide for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.

The government expects investment of Rs. 100,000 crore over the next three years with an employment potential of over five lakh from new SEZs, besides indirect employment during the construction period of the SEZs. Heavy investments are also expected in sectors like Information technology, bio-technology, textiles, pharma, petro-chemicals and auto components.

The SEZ rules , apart from the single window clearance, provides income – tax exemptions, no requirement for providing bank guarantees, contract manufacturing for foreign principals is allowed, provisions for setting up multi-product, product specific and service sector SEZs.

The minimum land area for setting up a multi-product SEZs is 1,000 hectares and for service sector SEZs the minimum area is 100 hectares or more. For sectors, where India has a competitive advantage, such as gems and jewellery, information technology, bio-technology, SEZ can be set up over an area of 10 hectares or more. For all other sectors, the area must be atleast 100 hectares

The area requirement for multi-product SEZs has been relaxed to 200 hectares and for Sector Specific SEZs to 50 hectares, for certain North – Eastern states, Himachal Pradesh, Uttaranchal, Sikkim, Jammu & Kashmir, Goa and Union Territories, keeping in view the difficulty in finding large tracts of contiguous land in such States/Union Territories.

The rules provides for setting up of the overseas banking units (OBU) that will be exempted from income tax on the lines SEZ units and Non Resident Indian deposits in these banks would not attract Tax deduction at Source on interest payments. There would be no relaxation in labour laws, but for the purposes of customs duty levies, the zones would be treated as foreign territory.

The industry’s initial response of SEZ Act is enthusiastic and corporates like Reliance Industries, Reliance Energy, Nokia, Wipro, Ranbaxy have already received approvals to set up such zones in various states. Besides, overseas companies have also shown interest. The new rules will be applicable to the seven operational SEZs.

Official figures suggests that exports from the Special Economic Zones during 2004-05 were of the order US $4 billion, representing an annual growth of over 36%. During April – December 2005, the exports from the SEZs stood at about US $ 3.5 billion. At present 948 units are in operation in the SEZs, providing employment to more than 1 lakh people.

With no restriction on the number of zones a single promoter can set up, many large, multi-product SEZ projects are expected to come up in the country, leading to increase in exports and higher foreign direct investment (FDI ) flows. However on the contrary, there is no flexibility on rigid labour laws and we can only wait to gauge the success scale.

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