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Assignment on Business Environment Article On the topic

SEZ in India: Inception, Evolution, Sector-wise contribution and reforms/amendment of rules for promotion of IT centric SEZs

Submitted as partial fulfillment of Course Assessment For the Internal Course 02074110 Called Introduction to Business Environment

SIOM 2012-2014 Dated: 16-06-2012

Submitted to Mrs. Paluri Achuta Ratna Assistant Professor "Finance"

Submitted by Neha Kale Sumedha Gole Sasanka Pritom Bhuyan Gaurav Upadhayay Pranay Gossain Ali Maruf Hassan 032 104 053 017 043 005

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

SEZ in India: Inception, Evolution, Sector-wise contribution and reforms/amendment of rules for promotion of IT centric SEZs
What is an SEZ? SEZs are designated areas in countries that possess special economic regulations, different from those existing for other areas in the same country. Moreover, these regulations tend to contain measures that are conducive to foreign direct investment. Conducting business in an SEZ usually means that a company will receive tax incentives with the opportunity to pay lower tariffs. In short, SEZ is a geographical region where economic laws are more liberal than the usual economic laws in the country. The basic motto behind this is to increase foreign investment, augment development of infrastructure, create job opportunities and increase the income level of the people. So, SEZs are basically the blocks of land that the government allocates to the investors to set-up industries by offering enticing breaks like tax benefits and land at cheaper rates among various other incentives.

SEZ in India Govt. of India guidelines define SEZ as Special Economic Zones (SEZs) which are specifically delineated duty-free enclaves and which are treated as a foreign territory for the purpose of industrial, service and trade operations, with exemption from customs duties and a more liberal regime in respect of other levies, foreign investment and other transactions. The Special Economic Zone (SEZ) policy in India first came into inception on April 1, 2000. The prime objective was to enhance foreign investment and provide an internationally competitive and hassle free environment for exports. The idea was to promote exports from the country and realizing the need that level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally. Legislation has been passed permitting SEZs to offer tax breaks to foreign investors. Over half a decade has passed since its inception, but the SEZ Bill has certain drawbacks due to the omission of key provisions that would have relaxed rigid labor rules. This has lessened India's chance of

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

emulating the success of the Chinese SEZ model, through foreign direct investment (FDI) in export-oriented manufacturing.

In India, the first zone was set up in Kandla as early as 1965. It was followed by the Santacruz export processing zone which came into operation in 1973. The government set up five more zones during the late 1980s. These were at Noida (Uttar Pradesh), Falta (West Bengal) Cochin (Kerala), Chennai (Tamil Nadu) and Visakhapatnam (Andhra Pradesh). Surat EPZ became operational in 1998. The EXIM Policy, 2000 launched a new scheme of Special Economic Zones (SEZs). Under this scheme, EPZs at Kandla, Santa Cruz, Cochin and Surat were converted into SEZs. In 2003, other existing EPZs namely, Noida, Falta, Chennai, Vizag were also converted into SEZs. In addition, approval has been given for the setting up of 26 SEZs in various parts of the country. Apparently, India is now promoting the EPZ program much more vigorously than in the initial phases of their evolution. Huge amounts of public resources are being invested in the zones. SEZs in India were announced by the government in March 2000. To provide a stable economic environment for the promotion of Export-import of goods in a quick, efficient and Hassle-free manner, Government of India enacted the SEZ Act, which received the assent of the President of India on June 23, 2005. The SEZ Act and the SEZ Rules, 2006 (SEZ Rules) were notified on February 10, 2006. Since then 15 SEZs including 8 EPZs (Export Processing Zones) have been set up at Kandla, Surat, Mumbai, Kochi, Noida, Chennai (3 SEZs), Visakhapatnam, Indore, Jaipur and Jodhpur, Falta, Manikanchan, and Salt Lake.

Objectives of SEZ

The objective behind an SEZ is to enhance foreign investment, increase exports, create jobs and promote regional development. To put in the governments own words, the main objectives of the SEZs are:

(a) Generation of additional economic activity; (b) Promotion of exports of goods and services;

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

(c) Promotion of investment from domestic and foreign sources; (d) Creation of employment opportunities; (e) Development of infrastructure facilities.

The incentives for developers of SEZs include

Exemption from duties on import/procurement of goods for the development, operation and maintenance of SEZs. Income tax exemption for a block of 10 years in 15 years. Exemption from Service Tax FDI to develop townships within SEZs with residential, educational, health-care and recreational facilities permitted on a case-by-case basis.

Advantages of setting up SEZs

15 year corporate tax holiday on export profit 100% for initial 5 years, 50% for the next 5 years and up to 50% for the balance 5 years equivalent to profits ploughed back for investment.

Allowed to carry forward losses. No licence required for import made under SEZ units. Duty free import or domestic procurement of goods for setting up of the SEZ units. Goods imported/procured locally are duty free and could be utilized over the approval period of 5 years.

Exemption from customs duty on import of capital goods, raw materials, consumables, spares, etc.

Exemption from Central Excise duty on the procurement of capital goods, raw materials, and consumable spares, etc. from the domestic market.

Exemption from payment of Central Sales Tax on the sale or purchase of goods, provided that, the goods are meant for undertaking authorized operations.

Exemption from payment of Service Tax.

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

The sale of goods or merchandise that is manufactured outside the SEZ (i.e., in DTA) and which is purchased by the Unit (situated in the SEZ) is eligible for deduction and such sale would be deemed to be exports.

The SEZ unit is permitted to realize and repatriate to India the full export value of goods or software within a period of twelve months from the date of export. Write-off of unrealized export bills is permitted up to an annual limit of 5% of their average annual realization.

No routine examination by Customs officials of export and import cargo. Setting up Off-shore Banking Units (OBU) allowed in SEZs. OBU's allowed 100% income tax exemption on profit earned for three years and 50 % for next two years.

Exemption from requirement of domicile in India for 12 months prior to appointment as Director. Since SEZ units are considered as public utility services, no strikes would be allowed in such companies without giving the employer 6 weeks prior notice in addition to the other conditions mentioned in the Industrial Disputes Act, 1947.

The Government has exempted SEZ Units from the payment of stamp duty and registration fees on the lease/license of plots.

External Commercial Borrowings up to $ 500 million a year allowed without any maturity restrictions.

Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration.

Disadvantages of SEZs

Revenue losses because of the various tax exemptions and incentives. Many traders are interested in SEZ, so that they can acquire at cheap rates and create a land bank for themselves.

The number of units applying for setting up EOUs is not commensurate to the number of applications for setting up SEZ's leading to a belief that this project may not match up to expectations.

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

SEZ Distribution in India The SEZ distribution (state wise) in India is depicted in the following bar graph.

Exhibit 1: SEZ distribution (state wise) in India

SEZ stages of approval Formal approval: This approval is given when the land is available to set up the SEZ. In-principle approvals: Given when the land has not yet been secured but all the other criteria have been fulfilled. Notified SEZ: It is the final stage after which the physical development work begins.

SEZ Distribution Sector Wise While India still remains a poor country in terms of both Per Capita Income and Human Development Index, IT sector acts as the major hope economic growth. Though the year 2009 was tough due to Global financial meltdown Indian IT sector came back on track quickly and

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

showed growth in 2010. It is expected that 2011 will be even more promising. Indian IT sector is poised to cross $70 billion-mark by the end of current fiscal. The following pie chart depicts the SEZ distributions in India sector wise

Exhibit 2: SEZ distribution (industry wise) in India It can be interpreted from the pie chart that the IT sector dominates the SEZ distribution in India. This can be attributed to a plethora of factors. The following factors have helped in the rise of the IT industry:

has been a tremendous improvement in computer technology. Evolution of high

performing personal computers has made it an integral part of the people of developed nation and urban people of developing nation. Computer users prefer to use computer wherever possible.

of internet technology and internet speed has helped people to go for online

method for payment, ordering, banking etc.

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists


competition among the MNCs has forced them to focus on operational efficiency.

Enterprise Resource Planning or ERP has become an integral part of companies. A significant number of IT projects are ERP based.

Retailers and many other service sectors consider use of IT as the most effective way of

customer care. Most, if not all, take the help of IT to remain competitive. Impact of Global recession in 2008 Financial meltdown in 2008 had a huge impact on IT sector. In 2008, approximately 60% IT revenues were from US Major revenue for IT companies come from Banking and Financial sectors. The recession was a result of the collapse of financial sector in US. So, all such companies had to cut back their IT spending. In all 43% western companies reduced their IT cost. Other sectors were also affected and decided to go for reduction in IT spending. Since Indian IT sector has very high dependency on export market had to go through some tough times. The following graph shows how growth was affected:

Exhibit 3: Effect of Recession on IT growth

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

The total impact can be divided in terms of the following segments: Verticals: Major vertical is Banking, financial services and insurance popularly known as BFSI. Other important verticals are retail, healthcare, manufacturing and telecom. Companies with greater dependency on BFSI were more severely affected. The after-effect of this was a shift of focus to other verticals. BFSI, however, remained the most important vertical. Cost cutting: IT companies were forced to adopt various methods of cost cutting due to recession. The implementation of this strategy was easy because of the flexibility that is present for the cost model. Most of the cost cutting was done through reduction of annual increment or variable pay. In some cases underperformers were asked to leave. Recruitment: Employee recruitment declined drastically due to the effect of the meltdown. Fresher recruitment was not as much affected as the lateral recruitment. In case of fresher recruitment joining got delayed in most of the cases.

What Does SEZ promote: Objectives of a Special Economic Zone? There have been various meanings carved out for SEZs or Special Economic Zones. Maharashtra Economic Development Council (MEDC) along with its knowledge partner

PricewaterhouseCoopers (PwC), 2008, defined SEZ conceptually as a geographical region that has economic laws different from a countrys generally applicable economic laws, with the underlying objective being an increase in economic growth and activity through increased foreign investment. Through the introduction of SEZs, India wants to enhance her infrastructural requirements, which, once they have been improved, will invite even more foreign direct investment. As far as trade and commerce are concerned, SEZs are regarded as international territory. Local raw materials bought by producers within SEZs are regarded as exports whereas those goods that are produced in SEZs and sold in the DTA (Domestic Tariff Area) are regarded as imports. The concept of an SEZ is not a new one. Since 1896 the world has been opening up to the idea of Free Trading Zones to liberalize the trade and investment environment. Where countries like Ireland and Taiwan in the 1960s, China in 1980s have given fuel to the Free Trading Zones

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

concept by giving SEZ its global currency status, India has never been far behind. The Special Economic Zone Act 2005 seeks to create a transparent system by introducing simplified procedures for enhancing productivity and making it easier to do business. The objectives are clearly set when the SEZ Act came into being. However among all the objectives that an SEZ seeks to accomplish it can be majorly drafted into instilling confidence in investors and signaling the Governments commitment to a stable SEZ policy regime with a view to generating greater economic activity and employment through the establishment of SEZs. The major objectives that the SEZ Act 2005 laid down are 1. Generation of additional economic activity. 2. Promotion of exports of goods and services. 3. Promotion of investment from domestic and foreign source. 4. Creation of employment opportunities, 5. Development of infrastructure facilities and 6. Maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign States. Achievement of the above objectives through SEZs is typically facilitated through the following Income tax Holidays Hassle Free Environment Exemption from Indirect duties and taxes No currency restrictions Relaxed foreign investment norms Excellent infrastructure facilities

The SEZ Act was created to trigger a huge flow of domestic investments as well as FDIs and FIIs which in turn will lead to additional economic activity and will create a plethora of job opportunities. It envisages a key role for state governments in Export Promotion and creation of related infrastructure. The tangible and intangible benefits that can be associated with the implementation of SEZs are:

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

Tangible benefits Contribution to respective States GDP Employment generation (Direct & Indirect) Creation of world class self-contained infrastructure Improve fiscal position of the state due to consequential benefits- cascading effect on economic activity Increase in States revenues from VAT, Property taxes, Stamp Duty etc.

Intangible benefits National and International recognition as Preferred Investment Destination Facilitates urbanization shift from agriculture to industry Creation of high quality social infrastructure Reduction in pressure on existing urban infrastructure Better standard of living Improved competitiveness of the local industry Absorption of latest technology and managerial capabilities Environmental benefits from planned developments. Rehabilitation of Project Affected Persons

IT services contribution in the GDP and its effects due to MAT & DDT The ITITES sector has been contributing substantially to increase in GDP, employment, and exports. The sector has increased its contribution to India's GDP from 1.2% in FY1998 to 7.1% in FY2011. The exports from SEZ are going up. Investors from across the world have pumped in Rs. 1.72 lakh crore in SEZs over the past five years. About 580 SEZs have been formally approved by the Commerce Ministry. However removal of exemption given to SEZ Developers and SEZ Units is proving to be a major setback to the industry. SEZ Units are required to pay MAT @ 18.5%, with effect from April 1, 2011.Also removal of Dividend Distribution Tax(DDT) with effect from June 1, 2011further added to the woes of the SEZ units IT centric cities like Bangalore, where a lot of investment is going into creation of IT SEZs, suffered a huge blow.

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

The imposition of MAT and dividend distribution tax on developers and MAT on units coupled to the DTC proposal to withdraw profit-linked deductions has led to a fall in investments in SEZs. There has also been a significant decline in new proposals and an increase in applications from companies to withdraw their projects. Significant decrease in the number of operational SEZs and an increase in the no. of denotification is a testament of the same. 37 denotifications and 0 operational SEZs is the statistics data for the last two years. Given the fact that SEZ contribute to about 28% of the countrys total outbound shipments and provide employment to 8 Lakh people, SEZ policies need amendments making it investor friendly. The industry in the Gurgaon is the worst hit. The imposition of MAT has made the SEZ unviable for doing business and under these circumstances the industrial houses have no option but to shed the SEZ tag from the projects. Exporters are having second thoughts before coming to a decision because of uncertainties surrounding SEZ tax policies. Exporters want SEZ units to be treated on a par with units in the domestic tariff area (DTA). Unlike their counterparts in DTA, units in special economic zones do not get the benefits of duty drawback, focused product and focused market schemes. Government should take a long term view (10-15 years) view on the development of SEZs, given the common problems facing the SEZs. Frequent changes act as a dampener to the overall objective of attracting investors. Reforms in SEZ rules: The effects (Analysis of reports/data of Last five years) Exports from SEZ for last 5 years Year 06-07 07-08 08-09 09-10 10-11 11-12 Growth 34,615 66,638 99,689 2,20,711 3,15,616 3,64,000 92.51192 49.59783 121.3996 42.99967 15.33002 Growth

Growth Rate

140 120 100 80 60 40 20 0 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Exhibit 3: Exports from SEZ for last 5 years


SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

Analysis As observed in the table above, there is a sharp rise in growth rate of exports of SEZ from 2006-07 to 2009-2010. Till the financial 2010-11 the SEZ units were exempted from the levy of Minimum Alternate Tax (MAT') and Dividend Distribution Tax (DDT'). SubSection (6) of Section 115JB of the Income tax Act, 1961, had exempted SEZ Developers and SEZ Units from the operation of the Minimum Alternate Tax (MAT') Scheme. As the depreciation rates are higher in income tax act as compared to companies act, units in SEZ were sitting on huge book profits, adding to the exports from SEZ. This can be verified from the graph and the statistics provided in the table above. There is a steady rise in the growth rate over the years. The industry was able to overcome the economic slowdown of 2008-09 due to relaxation in MAT and DDT SEZ exports achieved a peak of 121% growth rate in the financial year 2009-2010.The trend reversed after the imposition of MAT and DDT. As seen from the graph above there is a sharp decline in the growth in exports since 2009-10. The exports slowed to 15.4% in 2011-12, from 43.1% in 2010-11. Proposed changes in the SEZ Act to woo in more investors in companies covered under the SEZ Act.

Special Incentives to promote the IT-related export hubs in Small towns: The IT sector account to about forth of the exports in SEZs, investment in this sector can greatly increase the exports. Hence special incentives have been planned for IT sector SEZ zones.

Sharp reduction in the minimum area requirement for the different categories of the SEZ: The various types of SEZs and the minimum area requirement as per the existing SEZ Act are shown in Table 1. The minimum area requirement will be relaxed which will help more companies to come and set up units in the SEZ zones. (see table 1 )


SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

Broad banding of the Sectors to allow ancillary units to come up in sector-specific SEZs: By Broadbanding of the sectors i.e. clubbing similar industry units together the ancillary units, which produce the parts, components, sub-assemblies and tooling for supply against the known demand from the bigger manufacturing units of a particular sector will also develop. This in turn will cause overall development and improve the efficiency of the Sector. This will help in the scope of the overall development in that sector and hence will attract more investors in the Companies in the SEZ Zones.

Easier norms for building social infrastructure like schools, shopping complexes and residential blocks in SEZs in smaller cities: When the SEZ zone is developed, a large amount of employment is created in that area. This would more over attract a huge amount of crowd from the other cities to these areas. With the large scale migration of population to these areas taking place there is also a need to ensure adequate social infrastructure like houses, hospitals, schools etc. These facilities are built in the nonprocessing area in the SEZ zones. Relaxation of norms in smaller cities will give rise to investors for the infrastructure which will further benefit the industry in these SEZ zones and hence attracting more investors in these zones even in the smaller cities.

Relaxation in contiguity or continuity norms: The developers in the SEZ zone have to invest in building the bridges, flyovers over railway lines or water bodies falling within

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

such zones even if they are located in the non-processing area. This ensures the continuity within the SEZs without affecting the local area around the SEZ zone. Relaxation in the contiguity or continuity norms will attract more developers and eventually help in development of the SEZ zone. Also the norms related to the physical fencing required for the SEZ will be revised by examining on a case-to-case basis, thus the IT sector may not require the same nature of physical fencing as required for the Manufacturing SEZ. These contiguity aspects have been dealt in detail later.

Issue clarifications in advance on investment and regulatory issues: Since the change in the policies related to the MAT and the DDT in 2009 created a stir in the investors as investments had been made in the SEZ considering the tax-free status in these areas. In an attempt to gain the confidence of the investors, the government will issue clarifications in advance on investment and regulatory issues. This will attract investment in the SEZs.

There are certain other major factors that are affecting the Investment in the companies in the SEZ zones. The MAT and the DDT were levied in the SEZ Act, which still remain unchanged. The new changes proposed in the SEZ Act do not talk about relaxations in these, hence giving the investors a reason to stay apprehensive about the investment in the SEZ.

Minimum Alternate Tax (MAT):

As per the Income Tax Act, a company is liable to pay tax on the income whereas the profit and loss account is prepared as per the provisions of the Companies Act. There were a lot of companies classified as the zero tax companies for which the income calculated as per the Income Tax rules comes to either insignificant, nil or negative either due to tax exemptions or actual losses; even though they have book profits as per the Profit and Loss account. Due to this; as per the SEZ Act before 1996, even though the companies enjoyed profits and declared dividends for their shareholders, they were not paying any income tax. In order to bring these companies under the income tax law, the Minimum Alternate Tax (MAT) was formulated in the section 115JA. According to this section, if the taxable income of a company computed under this Act, in respect of previous year 1996-97 and onwards is less than 30 % of its book profits,

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

the total income of such company is chargeable to tax for the relevant previous year shall be deemed to an amount equal to 30 % of such book profits.

A new tax credit scheme was introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent five year period subject to certain conditions, as under

When a company pays tax under MAT, the tax credit earned by it shall be an amount, which is the difference between the amount payable under MAT and the regular tax. Regular tax in this case means the tax payable on the basis of normal computation of total income of the company.

MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the five year carry forward limit.

In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available.

The credit allowed will not bear any interest.

Minimum Alternate Tax (MAT) levied on the companies under the SEZ Act was 10% of book profits and the period allowed to carry forward the tax credited under MAT was 7 years up till 2009. In financial year 2009-2010 the SEZ Act was altered to increase the MAT to 15% of the book Profits and the period to carry forward the tax credit was also increased from 7 years to 10 years. Further the Budget 2011-12 proposed an increase in MAT to 18.5% on the books of profit. In comparison to this, the Companies in Domestic Tariff area i.e. companies which are outside the SEZ areas are offered various incentives under the foreign trade policy and have no obligations to be net foreign exchange earners. Hence, due to the imposition of the 18.5% MAT the scenario would be more profitable for the companies engaged in exports, outside the SEZ zones rather than the ones covered under the SEZ Act.


SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

For instance consider a scenario of a Company engaged in 100% exports in an SEZ area against the one in the Domestic Tariff Area: Say the unit has a turnover of Rs.100 and earns Rs.10 on this, thus has a profit of 10%. If the Unit is in the Domestic Tariff Area, it would have to pay a tax of 33.5% on profit, which comes up to Rs.3.5, but at the same time it would get a minimum 3% incentive for the exports which would be Rs.3. Hence a net of only 50 paisa tax will have to be paid by the company. Now considering the same company in the SEZ zone, the MAT will be 18.5% i.e. Rs.1.85 and will not gain any export incentive. Hence the tax being paid in the SEZ zone will be more than that in the domestic Tariff Area. To add to this the companies in the Domestic Tariff Area can import inputs at concessional rates but the companies in the SEZ Zone had to pay the customs duties. Hence the special incentives being offered in the SEZ zone were no more attractive to the investors and the companies. In order to bring in the investors to invest in the SEZ, the MAT needs to be further decreased again to provide more benefits to companies covered under SEZ Act. Dividend distribution Tax (DDT) Dividends are generally paid by the companies out of their post-tax profits. Thus, the dividendpaying company first pays income tax on its profits and then pays dividend out of the balance profits. The dividend received by the shareholder is out of profits, which have already suffered tax. Section 10(34) of the Income-tax Act exempts any income in the hands of the recipient (including foreign company) by way of dividends on which Dividend Distribution Tax (DDT) has been paid under section 115-O. DDT has been levied on the companies covered under the SEZ Act, which discouraged investments in the SEZ zones. Reduction and relaxation in the DDT will attract more investors to invest in the SEZ zones.


SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

Contiguity Norms and their implications on SEZs (for future growth and investor friendliness) Contiguity, under the SEZ act rules, defines the stipulated conditions regarding the land identified for any proposed SEZ development taking into its purview the following aspects: Size of available area Continuity in vacant/open spaces available Built-up processing area Alignment with National/State highways Nature of terrain regarding existence of public thoroughfares/utilities (measures to maintain contiguity) Infrastructure development of nearby areas for improving connectivity and area development and Proximity/contiguity to urban areas or another SEZ

Size of available area As per the international standards, areas of SEZ zones are remarkably large. Size determines the degree to which a SEZ can be self-sufficient and receptive for integration with similar activities nearby the zone. A minimum land area is necessary to support a desired level of economic activity. In a small zone, the requisite infrastructure and services cannot be provided nor multiple economic activities be promoted. However, for IT SEZs, a large land area is not a necessity, where multi-storied buildings can cater for the purpose. IT sector with lower minimum land area requirement can have an operational SEZ in a quicker time-frame, even in cities where land is scarce but manpower is available. Table 1 exhibits the SEZ act rules for area allocation to sector specific SEZs. Continuity of vacant/open spaces According to the SEZ rules the identified area shall be contiguous and vacant. However, it is also provided that the Board may relax any or all of the conditions, except the condition regarding identified area to be a vacant land, specified in this sub-rule on a case to case basis on merits for

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reasons to be recorded in writing and with such conditions as the Board may decide. The guidelines also direct that cultivable land should be considered only if adequate quantum of other land is not available. First preference should be for acquisition of waste and barren land, followed by single crop land and double crop land necessary to meet the contiguity requirements. Built-up processing area Rule 5 of the SEZ act stipulates the various criteria for allocation of built-up processing areas of the total area allocated to the SEZs. Table 1: Present rules on SEZ area size


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Alignment with National/State highways Second Amendment of the SEZ Rules, 2007 dated 16th March 2007, has specified that the entire processing area of SEZs would be located on one side of the National Highway. It also states that the formal approval from authorities concerned like NHAI and others would be submitted to the Department of Commerce and work for establishing contiguity would be started only after obtaining the requisite approvals. Nature of terrain regarding existence of public thoroughfares/ utilities (measures to maintain contiguity) The original SEZ act rule maintained that the developer shall maintain contiguity by dedicated security gates/over bridges/underpass/culverts and also fence side of the road facing the processing area. No tax benefits would be available for measures taken to establish contiguity. However, BoA (Board of Approval) noted that in terms of the SEZ Rules, the Board may relax conditions regarding contiguity. (BoA is an inter-ministerial body set up under the chairmanship of the commerce secretary.) Given the nature of land acquisition and the terrain, even small SEZs have been facing problems of contiguity due to a public thoroughfare or a water channel etc. passing through their SEZs. Further, the investment on construction of structures only adds to the cost of the project and also impacts the economic viability. There have been a number of large SEZ projects stalled up like those promoted by Reliance, Raheja Developers and IFFCO, which have often faced the problem when a highway, water pipeline, railway tracks, canals and sewage line pass through the enclaves, in view of the present norms which mandated that the land had to be in contiguity in order to set up an SEZ. In order to provide contiguity developers had been building flyovers, skywalks or underpasses to connect both portions of the land and make it seamless. But this has put severe financial pressures on them, making the entire project economically unviable. In view of these issues, in the Board Meeting held on 9th April 2010, the Board directed that a policy in this regard be framed and placed before its consideration. The Board noted that there will be no insistence on providing contiguity if any public utility service such as roads, water supply lines, sewerage lines, drains, canals or railway lines passing through the non-processing area of the zone.

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Infrastructure development of nearby areas for improving connectivity and area development In the April meeting it was also considered that if a developer builds a bridge, flyover and underpass to provide connectivity, he can procure the materials for the construction duty free, which would be subjected to prior approval from the Board. Approval for this has been entitled to be given by the Unit Approval Committee as part of the zone. However, BOA has to consider each case on merit basis. Also, as per general guidelines, developers have to strive to create facilities such as industrial training centers, ITIs, vocational training programs and other such community development programs for the benefit of the people impacted by the establishment of the Zone in association with the Government or Non-Governmental agencies as considered appropriate. Proximity/contiguity to urban areas or other SEZs The developmental plan of the guidelines maintains that sector wise infrastructure plan, including fast track and efficient linkages/provision of transportation with the mother city and other urban centers of the region, non-processing zones, housing residences, hospitals and schools not to be mandatory if the SEZ is located near a major urban centre. The Guidelines regarding conditions for relaxation of contiguity criteria in respect of SEZs, however, maintained that the movement shall be restricted between two SEZs till contiguity is established. The guidelines also noted that planning of SEZs may adopt different kind of development low-rise and low density development or high rise, medium density or high-rise and high-density urban form depending on the availability of land requirement for the units. The summary (as reported by Business standard dated, October 12 2010) Govt. to relax minimum land requirement for multi-product SEZs from 1,000 ha to 250 ha. Threshold for multi-service SEZs to be reduced from 100 ha to 40ha. Minimum land requirement likely to remain 10 ha for IT and gems & jewelry SEZs. Easier contiguity norms to help large projects like the stalled 1,233-ha multi-product Navi Mumbai SEZ.

SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

Contiguity norms to apply only to processing areas where manufacturing and export take place. Definition of vacant land to be wider. Non-processing zones housing residences, hospitals and schools not to be mandatory if the SEZ is located near a major urban centre.

Conclusion With the recession period waning away slowly, it is high time for measures to be taken and effected so that the economic backbone resurges back and surges ahead. Backed up by pressures and industry moods, there have been a few reforms and serious thought process being put into action. A number of SEZs being stalled for a relaxation in the existing norms in the SEZ rules, like the Reliance-promoted Navi Mumbai SEZ Pvt Ltd had stirred debates and generated widespread industry demand for reforms. This has led to amendments and discussions on relaxing financial norms through the MAT & DDT and relaxations in the contiguity norms. Results have indicated a positive sign in the way the SEZs have spurred growth starting from the reforms of 2008-09. It is also a positive sign, contribution of IT has been reaffirmed and it has been endeavored to extent its base even to tier-II and tier-III cities. Coupled with the financial & tax relaxations and extensive contiguity reforms, the SEZ s can help penetrate the growth in a holistic level .This is a pragmatic approach too, for there are still large tracts of fallow lands in the tier II and tier-II city areas, which easily conform to contiguity norms. SEZ development has a huge potential to bring along all other infrastructural developments into those areas and thus contribute to equitable growth. The one concern where there has to be deliberations and reforms is the land acquisition for SEZs. There should be a serious thought in the practice of acquiring farms lands for SEZ considering displacement of livelihoods. Driven by reforms and augmented spirited investments, SEZ can be the solution to holistic equitable growth with converging regional imbalances.


SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

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SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

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SIOM 2012-2014 Article on Business Environment: Assignment submitted on 16-06-2012 by team Business Strategists

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