What Is a Special Economic Zone?

Economic | 20th February 2022 | Virtual Wire


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At the start of the current millennium, the Government of India announced a new scheme for setting up Special Economic Zones (SEZs) in the country.

The policy called for establishing SEZs in the public sector, private sector, joint sector, and state governments. The policy allowed MNCs to set up SEZs in the country.

What is a Special Economic Zone?

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A Special Economic Zone (SEZ) is a specifically delineated duty-free territory and is deemed to be foreign territory for the purposes of trade operations and duties and tariffs (taxes). In other words, an SEZ has a different set of laws, rules, and regulations, which are different from the laws applicable to the other parts of the country. The units in the SEZ must be net foreign exchange-earners but shall not be subjected to any pre-determined value addition or minimum export performance requirements. Further, offshore banking units may be set up in the SEZ. The most important objective behind the creation of the SEZs is to increase the inflow of foreign investment into India. Another major aim is to provide an internationally competitive setup and an obstacle-free economic environment to boost India’s exports.

Highlights of the SEZ Act

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The main objectives of the SEZ Act are:

  1. Generation of additional economic activity;

  2. Boosting exports of goods and services;

  3. Promotion of investment from domestic and foreign sources;

  4. Creation of employment opportunities, and

  5. Development of infrastructure facilities. The policy is directed at generating a large inflow of foreign and domestic investment into SEZs and building infrastructure and productive capacity, thus creating additional economic activity and creation of employment opportunities.

The SEZ Act, 2005, envisages a key role for the state governments in export promotion and the creation of related infrastructure. A Single Window SEZ approval mechanism has been provided through the inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective state governments/UTs are considered by this BoA periodically. All decisions of the BoA are with consensus. The SEZ Rules provide for the different minimum land requirements for different classes of SEZs. Every SEZ is divided into a processing area where alone the SEZ units come up and a non-processing area where the supporting infrastructure is created.

Incentives & Facilities for SEZ Developers

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Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. x Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. x Exemption from Minimum Alternate Tax (MAT) under Section 115 JB of the Income Tax Act. x Exemption from Dividend Distribution Tax (DDT) under Section 115O of the Income Tax Act. x Exemption from Central Sales Tax (CST).

x Exemption from Service Tax (Sections 7 & 26 and Second Schedule of the SEZ Act). As of 31 December 2021, there are a total of 268 Operational SEZs. In total, formal approval has been given to 425 SEZs, spread across the length and breadth of the country. These SEZs, both under central and state governments, employ 25.6 lakh persons. The total investment in these SEZs was ₹6.28 lakh crore while the total exports from these SEZs were ₹7.59 lakh crore in 2020–21.

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