Special Exconomic Zones SEZ Act 2005.

• Introduction

• SEZ Act 2005

• Key Issues

• Salient Features of the SEZ Act

The policy relating to SEZs was earlier contained in Foreign Trade Policy. However, to give a long term and stable policy framework with minimal regulation, the SEZ Act was enacted. In 2005, a comprehensive Special Economic Zones Act 2005 was passed by Parliament in May 2005. The SEZ Act 2005 and the rules of the SEZ Act came into force from February 10, 2006. Investment of the order of Rs 100,000 crore over the next three years with an employment potential of over 500,000 was also expected from the new SEZs, apart from indirect employment during construction period of the SEZs.

The SEZ Act 2005 is mainly divided into 7 different chapters and 3 schedules.

The SEZ Act deals primarily with the following matters:

• Establishment of the SEZ and the various authorities constituted in this connection.

• Appointment of the Developer, Co-developers and approval for units to be located in the notified area.

• Exemptions, drawbacks and concessions including exemptions from customs duty (on goods brought into or exported from the SEZ), excise, service tax, securities transaction tax, sales tax and income tax.

• Offshore Banking Unit & International Financial Services Centre. Setting up of offshore banking units / International Financial Services Centre in SEZs.

• Notified Offences & Civil Suits. A single enforcement agency/officer for certain notified offences as well as the designation of courts by the state governments for such offences committed in and for civil suits arising in SEZs.

Salient Features of the SEZ Act

Governance: An important feature of the Act is that it provides a comprehensive SEZ policy framework to satisfy the requirements of all principal stakeholders in an SEZ – the developer and operator, occupant enterprise, out zone supplier and residents. Earlier, the policy relating to the EPZs/ SEZs was contained in the Foreign Trade Policy while incentives and other facilities offered to the SEZ developer and units were implemented through various notifications and circulars issued by the concerned ministries/departments. This system did not give confidence to investors to commit substantial funds for development of infrastructure and for setting up units.

Another major feature of the Act is that it claims to provide expeditious and single window clearance mechanisms. The responsibility for promoting and ensuring orderly development of SEZs is assigned to the board of approval. It is to be constituted by the central government. While the central government may suo motu set up a zone, proposals of the state governments and private developers are to be screened and approved by the board. At the zone level, approval committees are constituted to approve/reject/modify proposals for setting up SEZ units.

In addition, the Development Commissioner (DC) and his/her office is responsible for exercising administrative control over a zone. The labour commissioner’s powers are also delegated to the DC. Finally, clause 23 requires that designated courts will be set up by the state governments to try all suits of a civil nature and notified offences committed in the SEZs. Affected parties may appeal to high courts against the orders of the designated courts.

Incentives: The Act offers a highly attractive fiscal incentive package, which ensures

1. Exemption from custom duties, central excise duties, service tax, central sales taxes and securities transaction tax to both the developers and the units;

2. Tax holidays for 15 years (currently the units enjoy a seven year tax holiday), i e, 100 per cent tax exemption for 5 years, 50 per cent for the next five years, and 50 per cent of the ploughed back export profits for the next five years1; and

3. 100 per cent income tax exemption for 10 years in a block period of 15 years for SEZ developers.

Infrastructure: Provisions have been made for:

1. The establishment of free trade and warehousing zones to create world class trade-related infrastructure to facilitate import and export of goods aimed at making India a global trading hub.

2. The setting up of offshore banking units and units in an international financial service centre in SEZs.

3. The public private participation in infrastructure development.

4. The setting up of a “SEZ authority” in each central government SEZ for developing new infrastructure and strengthening the existing one.

There has been a tremendous rush to set up SEZs since the Act came into effect in February 2006. The total number of approvals and in-principle approvals across 21 states as on October 27, 2006, was 212 and 152, respectively. As on date, 34 SEZs out of these approvals have been notified. Table 1 shows the current status of the upcoming SEZs.