Will the SEZ law boost exports?
Today many question the need for Special Economic Zones (ZEE) in the country; his point: all of India should be treated as SEZ and this divisive factor should be removed.
Units in SEZs enjoy a tax holiday for their first five years and a 50 percent exemption for the next five years. All imports to the SEZs are duty free. If one is more critical, one may wonder why create a special class of units that divides producers and consumers. India today has a growing domestic market that deserves the same political emphasis.
However, continuing to give aid to SEZs, the government “in a bid to increase investment flows into these zones and make India a manufacturing hub” announced the long-awaited SEZ Act 2005 and the rules of SEZ of 2006. new The rules of the special economic zones, among other things, provide for a drastic simplification of procedures and the authorization of a single window in matters related to the central and state governments.
The government expects an investment of Rs 100 000 crore in the next three years with employment potential of more than 5 lakh of new SEZs, in addition to indirect employment during the construction period of the SEZs. Strong investments are also expected in sectors such as information technology, biotechnology, textiles, the pharmaceutical industry, petrochemicals and automotive components.
Special economic zone rules, in addition to single window authorization, provide for income tax exemptions, bank guarantees not required, contract manufacturing for foreign companies allowed, provisions for establishing special economic zones for various products , specific products and service sectors.
The minimum land area to establish a multi-product SEZ 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 jewelry, information technology, biotechnology, SEZ can be established in an area of 10 hectares or more. For all other sectors, the area must be at least 100 hectares.
The area requirement for multi-commodity SEZs has been relaxed to 200 hectares and for sector-specific SEZs to 50 hectares, for certain North East states, Himachal Pradesh, Uttaranchal, Sikkim, Jammu & Kashmir, Goa and the territories of the Union, taking into account the difficulty in finding large tracts of contiguous land in such States/Union Territories.
The rules provide for the creation of overseas banking units (OBUs) that will be exempt from income tax on SEZ lines and non-resident Indian deposits in these banks would not attract source tax deduction on interest payments. There would be no relaxation in labor laws, but for customs tax purposes, the zones would be treated as foreign territory.
The initial industry response to the SEZ Act is enthusiastic, and companies such as Reliance Industries, Reliance Energy, Nokia, Wipro, Ranbax and have already received approvals to establish such zones in several states. In addition, foreign companies have also shown interest. The new rules will be applicable to the seven operational ZEEs.
Official figures suggest that exports from the Special Economic Zones during 2004-05 were in the order of US$4 billion, which represents an annual growth of more than 36%. During April-December 2005, exports from SEZs were around US$3.5 billion. Currently, 948 units are in operation in SEZs, providing employment for more than 1 lakh people. .
With no restrictions on the number of zones a single developer can establish, many large multi-product SEZ projects are expected to spring up in the country, leading to increased exports and higher FDI flows. On the contrary, however, there is no flexibility in rigid labor laws and we can only wait to measure the scale of success.
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