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What are Special Economic Zones (SEZs)?

GS Paper 3

Topics Covered: Infrastructure related issues.

 

Context:

The government has proposed to free up unused built-up area worth about ₹30,000 crore and idle land inside Special Economic Zones (SEZs) for other economic activity.

 

Need for:

SEZs account for about 30% of India’s exports. But, there is 10 crore square feet of space idle in built-up accommodation in over 250 SEZs. In money terms, at ₹3,000 per square foot, that is ₹30,000 crore of built-up area idle, which can be brought into play for anything else.

 

What are SEZs?

  • Special Economic Zones (SEZs) are geographically delineated ‘enclaves’ in which regulations and practices related to business and trade differ from the rest of the country and therefore all the units therein enjoy special privileges.
  • The basic idea of SEZs emerges from the fact that, while it might be very difficult to dramatically improve infrastructure and business environment of the overall economy ‘overnight’, SEZs can be built in a much shorter time, and they can work as efficient enclaves to solve these problems.

 

Objectives of the SEZ Act:

  1. To create additional economic activity.
  2. To boost the export of goods and services.
  3. To generate employment.
  4. To boost domestic and foreign investments.
  5. To develop infrastructure facilities.

 

Facilities and incentives for SEZs:

  1. Duty-free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
  2. 100% Income tax exemption on export income for SEZ units under the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.  (Sunset Clause for Units are effective from 01.04.2020)
  3. Exemption from Minimum Alternate Tax (MAT). (withdrawn w.e.f. 1.4.2012)
  4. Exemption from Central Sales Tax, Exemption from Service Tax and Exemption from State sales tax. These have now subsumed into GST and supplies to SEZs are zero rated under IGST Act, 2017.
  5. Other levies as imposed by the respective State Governments.
  6. Single window clearance for Central and State level approvals.

 

Concerns with present SEZ:

  1. SEZs in India have not been as successful as their counterparts in many other countries. Several Asian economies, particularly China, Korea, Malaysia, and Singapore, have greatly benefited from these zones.
  2. Most of India’s new generation SEZs came up not for exporting, but for avoiding taxes. Large fiscal sops, in the form of a bunch of reliefs from central and state taxes, lured developers into building SEZs.
  3. Most manufacturing SEZs in India have performed below par due to their poor linkages with the rest of the economy. Weak connections of coastal SEZs with their hinterlands inhibited these zones from utilising their full potential.
  4. Many states did not match the central SEZ Act with State-level legislation, which rendered the single window system ineffective.
  5. Lack of a robust policy design, efficient implementation and effective monitoring have seriously jeopardize India’s effort to industrialise through SEZs.

 

Insta Curious:

Did you know that the Special Economic Zones Act was passed in 2005? However, SEZs were operational in India from 2000 to 2006 (under the Foreign Trade Policy).

Did you know that the Baba Kalyani led committee was constituted by the Ministry of Commerce and Industry to study the existing SEZ policy of India? What are its recommendations? Reference

 

Sources: the Hindu.