GS-3, Indian Economy, Uncategorized

Special Economic Zones (SEZ) policy in India: Issues & Challenges

Special Economic Zones (SEZ) policy in India: Issues & Challenges

  • India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965.
  • With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000 and followed by SEZ Act 2005.

Main objectives of SEZ Act:

(a)generation of additional economic activity
(b) promotion of exports of goods and services
(c) promotion of investment from domestic and foreign sources
(d) creation of employment opportunities
(e) development of infrastructure facilities

Incentives and facilities offered to the SEZs

  • Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units
  • 100% Income Tax exemption on export income for SEZ units under Section 10AA of 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.
  • Exemption from MAT (minimum alternate tax) under section 115JB of the Income Tax Act.
  • External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.
  • Exemption from Central Sales Tax.
  • Single window clearance for Central and State level approvals.

Failed SEZ policy:

  • As of September 2014, there were 564 formally approved SEZs. But only 192 were operational. Barring a few, we haven’t seen big investments.
  • The incremental employment generated was about 11 lakh in nine years.
  • Exports from SEZs grew by only 4% in 2013-14 and decreased by 6% in the next year.
  • A Comptroller and Auditor General (CAG) audit last year found that 52% of the land allotted has remained idle, even though permissions were given as far back as 2006.
  • One severe indication from CAG was that 57% of SEZs were in the IT (information technology) and ITES (information technology-enabled services) sector, and only 9.6% were for multi-product manufacturing sectors.

MAT(Minimum Alternate Tax) provisions are covered under section 115JB of the income tax act 1961. This is the minimum amount of tax which every corporate assesse is required to pay irrespective of its taxable income (Calculated as 18.5% of book profits). Such tax was initiated to improve the tax collection which was greatly affected because of majority of companies using tax holiday under section 80 IA.

Dividend Distribution Tax is the tax which is required to be paid by the company who has declared, distributed or paid any amount as dividend.

Some possible reasons for failure of SEZs:

  1. The income tax benefits were neutralized by the introduction of the 20% minimum alternate tax (MAT) and the 20% dividend distribution tax (DDT) in 2011-12.This led to companies moving out from from SEZs.
  2. The absence of complementary infrastructure outside the SEZs, like port connectivity, proved to be an hinderent for manufacturing investment.
  3. Export incentives like Focus Product and Focus Market Schemes were not extended to SEZs, making them less attractive. Exports from outside SEZs, called the domestic tariff area (DTA), enjoyed duty drawback and other duty neutralization.
  4. The force of free trade agreements made import of manufactured goods much cheaper than domestic manufacturing.

Why SEZs in china are doing better than Indian SEZs?

The SEZ model in India was inspired by China’s SEZs which were critical instruments of its export-led growth. Reasons for better functioning of SEZs in china are

  1. Location: All the zones in china are located strategically. Many are located close to ports. This makes water transport cheaper than it already is. Only some are not located close to ports. They are located close to borders. This facilitates easy trade with nearby nations.
  1. Size: China’s zones are not many in number but they are huge in size. Hainan, a province in china is one complete SEZ, which covers an area of 33,000 sq. km. Mumbai covers an area of almost 1000 sq. km. This means that China has an SEZ almost 33 times the area of Mumbai.Size means everything in an SEZ. India has SEZs which are barely 10-20 hectares in size.
  1. Laws: China has amazingly business friendly laws. Corporates need to give only one month’s notice to an employee before firing him. Contrast that to India, where you need to follow a lengthy to fire an employee if your company has more than 100 employees.
    China’s labour laws are highly flexible to the detriment of the labour class. In India the labour class is highly pampered because of the previous government’s faulty policies

Way Forward:

The SEZ policy needs a comprehensive overhaul. Piecemeal repair won’t do, and a non-partisan holistic approach is a must.

Connecting the dots:

  • Critically examine the reasons for failure of SEZ policy in India.
  • SEZ policy 2000, indicate a failed policy status. Comment on the need for continuation of SEZ policy in India.
  • Compare and contrast SEZs of China and India.

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