Role of Special Economic Zones towards Corporate

Social Responsibility: A Conceptual Study

Mr. Deepak Kumar* and Sahila Chaudhry**

*Project Fellow, Department of Business Administration,

Chaudhary Devi Lal University, Sirsa (Haryana)-125055
**MBA Student, ITM University, Gurgaon

Abstract
SEZs in various states as of now have no or minimum environmental or
labour obligations. Therefore, a corporation may concentrate purely on
profit-maximization, without worrying about the social overheads that
might be caused by it. In a way, it takes
us back to pre-Great Depression U.S., where a basic minimum set of laws
regulated the functioning of corporations. Corporations on the other hand
functioned with impunity, their labour subsisting on basic minimum
wages, a hire-and-fire policy in practice, and little or no employment
benefits. The researcher does not expect corporations to function on those
very lines again, for reasons of simple efficiency. For example, while
employment benefits may not be great, they shall be adequate to attract
cheap and dedicated labour. Working hours shall be longer, though not
unregulated. But availability of surplus labour will be a reason for not
providing proper work-security. This is an attempt to know the role of
SEZs in the society and to come forward towards Corporate Social
Responsibility.

I. INTRODUCTION
A Special Economic Zone (SEZ) is a geographical region that has economic and
other laws that are more free-market-oriented than a country's typical or national laws.
"Nationwide" laws may be suspended inside a special economic zone. The category 'SEZ'
covers a broad range of more specific zone types, including Free Trade Zones (FTZ),
Export Processing Zones (EPZ), Free Zones (FZ), Industrial parks or Industrial Estates
(IE), Free Ports, Urban Enterprise Zones and others. Usually the goal of a structure is to
increase foreign direct investment by foreign investors, typically an international business
or a multinational corporation (MNC). The basic motto behind this is to increase foreign
investment. The SEZ was first established by the PRC (Peoples republic of China) for a
variety of reasons like, increase in investment and increase job opportunities and
technical knowledge and bring about certain tax reforms.
India has also played a significant role in the founding and establishment of
Special Economic Zones. It has the largest outsourcing industry in Asia. According to
World Bank estimates of 2007 there are more than 3,000 projects taking place in SEZs in
120 countries worldwide. SEZs have been implemented using a variety of institutional
structures across the world ranging from fully public (government operator, government
developer, government regulator) to 'fully' private (private operator, private developer,
public regulator). In many cases, public sector operators and developers act as quasi-
government agencies in that they have a pseudo-corporate institutional structure and have
budgetary autonomy. SEZs are often developed under a public-private partnership
arrangement, in which the public sector provides some level of support (provision of off-
site infrastructure, equity investment, soft loans, bond issues, etc.) to enable a private
sector developer to obtain a reasonable rate of return on the project (typically 10-20%
depending on risk levels). Special Economic Zones are considered to be growth boosters
and employment providers. Today, there are more than 114 SEZs all around India. Now
there has been given another 500 more approvals. States are in competition with one
another to grab the chances to have FDIs. Andhra Pradesh has 109 approvals so far in the
list of 500 newly approved ones.

II. The incentives for 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 minimum alternate tax under section 115JB of the Income Tax
Act.(In the Union Budget 2010-11, there is no more exemption on SEZ
developers and SEZ units.)
• External Commercial Borrowing by SEZ units up to US $ 12500 billion in a year
without any maturity restriction through recognized banking channels.
 • Exemption from Central Sales Tax.
• Exemption from Service Tax.
• Single window clearance for Central and State level approvals.
• Exemption from State sales tax and other levies as extended by the respective
State Governments.

The major incentives and facilities available to SEZ developers include:-

• Exemption from customs/excise duties for development of SEZs for authorized
operations approved by the BOA.
• 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.
• Exemption from minimum alternate tax under Section 115 JB of the Income Tax
Act.
• Exemption from dividend distribution tax under Section 115O of the Income Tax
Act.
• Exemption from Central Sales Tax (CST).
• Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ
Act).
III. BENCHMARKING: INTERNATIONAL ROLE MODELS
The objective of the entire zone is consonance with the state economic policies
for overall economic development. Nevertheless, these have aroused out of different
economic compulsions. JAFZ and SAIF were more concerned with depending economy
to diversify and not to be over dependent on oil sector. Poland on the other hand had
severe employment problems, so their emphasis was more on labour intensive industries.
China’s objective was to initially attract high level of foreign investment with open
foreign investment policy and later on to infuse high technology in to the economy.
Indian SEZ’s are primarily being geared to attract FDI, export promotion, employment
generation and technology infusion. International experience shows that the size of SEZ's
generally varies from 2 to 800 square kilometers. Size is influenced by the degree of self-
sufficiency and integration in the zone. However, a minimum land area is necessary to
support a desired level of economic activity. The areas of the zones are remarkably large
unlike India, In China the Shenzhen SEZ is 327 Sq. Km and Hainan is 34,000 Sq. KM
(Entire province is declared as SEZ). As per the latest policy, in India the size of SEZ
should be 1000 Hectares (10 Sq. KM) It hardly needs reiteration that only large sized
zones can generate economic activity on some reasonable scale In a small zone, the
requisite infrastructure and services can not be provided nor multiple economic activity
be promoted. The SEZ's promoted at various parts in India are much bigger than existing
EPZ, though compared to the Chinese SEZ's their size is by and large still small.
Strategic location and multi modal connectivity with major trading destinations are
critically factors for success of SEZ's. In most cases, it has been observed that the zones
are strategically located giving the investors/units in the zone an easy gateway to
international trade. For example, the location for Chines SEZ's and FTZZs were
consciously selected along the east coast close to Hong Kong, Macau and Taiwan. Thses
countries have served not only as transshipment points for international markets but also
as consumption centres. Proximity to the seaports and airports of Hong Kong and Taiwan
has played a critical role in the growth and success of these SEZ's . Likewise, freeze
zones in Malaysia, Indonesia and Thailand are located near the capital cities with
minimum distance from seaports and airports. Middle East and Caribbean free zones are
also favourable allocated case to airports and seaports. Industry focus International
experience shows that countries have focused on attracting investments in specific
industries considered strategically important for the economy. Industries having
pronounced host country comparative cost advantage or revealed comparative advantage
have been specifically targeted for attracting investments. This strategy has helped
leverage the inherent host country advantages such as cost effective labour, raw materials
availability or other factors of production Further, industry focus combined with
minimum size has been observed to help attract a wide range of industries or economic
activities. Diversity in industries operating in the zone helps in effectively balancing the
swings and cyclicality in individual industry performance. Diversity in multiple
economic activities including a range of manufacturing and services activities is critical
for a free zone to evolve as an economic entity in itself. Diversity has also helped such
zones become economic zones. Availability of skilled labour, cost effective labour and
resource advantages such as raw materials have been projected as key advantages by the
Chines SEZ's Investors in manufacturing activities involving a combination of these
inherent factor advantages have bean attracted to such zones in China.
Well developed infrastructure facilities are a major attraction for investors International
experience also shows that government participation in developing zone infrastructure,
especially in the initial stages, has played an important role in their success. Quality
infrastructure and reliability of services help improve efficiency of operations.
Availability of integrated facilities and services such as housing, recreation, educational
and health care are added attractions to investors. A larger domain of infrastructure
facilities and supporting services make SEZ's more attractive for investors. In China the
SEZ's are part of the larger cities and enjoyed good social infrastructure and urbanization.
The Shenzhen transport infrastructure is best service industrial infrastructures in terms of
ready to move in furnished offices, per built warehouses and onset staff accommodation.
In Chine the more emphases is on good transport and other external infrastructure.
Another key success factor in successful zones has been the involvement of private sector
in developing, operating and maintaining core infrastructure components. This has been
achieved through private infrastructure concessions. International investors attach
significant importance to "sustainable and reliable" infrastructure that would ensure
assured service standards. Governments have also played an important role in developing
infrastructure through direct funds support and by providing contentment liability support
such as revenue shortfall support, credit enhancement, guarantees and exchange interest
rate protection. In the last 10-15 years, there has been a steady growth in privately owned
or managed zones.
IV. Policy framework for SEZs
The success of any zone is strongly attributed to the policy framework. An
attractive policy framework mainly covers areas such as fiscal incentives, zone
administration, preferential police & procedures, labour laws, flexibility in foreign
investment and repatriation. Governments have on a regular base made alterations,
amendments to their policies to come up with an attractive framework to induce zone
investment. Many countries have also enacted overriding Special Economic Zones Laws/
Policies. Incentives are aimed at the specific expectations and requirements of various
stockholders such as developers & operators occupant enterprises, outshone suppliers and
residents. While incentives have been primarily focused on occupant enterprises, greater
private participation in developing and operating free zones is bringing a sharp focus on
incentives specifically aimed at developers and operators.
Incentives are also influenced by the stage of development of these zones. For example
fiscal incentives are emphasized in the initial stages whale infrastructure advantage and
amplification of procedures are stressed at later stages of development. Most zones offer
attractive fiscal incentives such as exemption from corporate tax, value added tax, import
duties, local taxes, exception from tax on reinforcements and 100 percent foreign
ownership. Administrative simplification and mechanisms for speedy approval are the
other important features of many of the these zones. Efficient and effective zone
administration is another factor contributing to the success of such zones. In may
countries it has been seen that the zone administration authority is usually a
representative of the Municipal Government in which the zone is located. These authority
are primarily responsible for the development and maintenance of the zones. In many
zones, Customs functions are also co-coordinated by these administrative authorities.
Procedural aspects are streamlined thus offering "single-handed' facility to the investors.
This is achieved by clear evolvement of local body powers and functions at the zone level
and by testing the zone administration authority with these powers. For instance, Policies
such as clearance within 24 hours have helped rebel Ali and Sharjah free zones (LIAE) in
attracting large investments in a short span of time. In addition to the above mentioned
incentives a relaxed and flexible labour law is a key determinant of foreign investments
into these zones. Flexibility in labour laws such as engaging contract labour, wage
setting, labour retrenchment and closure of units in response to market farces have played
an important role in attracting foreign investment. Relaxed labour law besides giving
comfort to foreign investors has provided operating units the flexibility to alter their
manufacturing activities in response to changes in the marketplace without being
constrained by restrictive local laws.
Traditionally, export-processing zones have been characterized by narrow industry focus
with high import intensity in exports. This resulted in may such zones being insulated
from the rest of the economy, thereby giving rise to fewer economic spin offs. Backward
linkages with the local economy in the form of movement of raw materials, labour and
sub contracting in the domestic tariff area, i.e. out-zone processing, are necessary for
susceptibility of such zones. Countries such as China and South Korea have pursued this
strategy of uniting with the interior in developing their SEZ's This has contributed to
rapid indigenization of production, technology absorption and import substitution
Similarly Forward linkages in the form of sales in domestic tariff area (DTA) have been
an important motivation for investors especially when the domestic market size is large
and growing. Investors in the SEZ's in China view the vast domestic market in China as
extremely promising in the long run. This has been an important determinant of their
investment decisions. Also, limited sales in DTA provide a safety net to hedge against
possible swings in international markets besides providing the opportunity to test
domestic markets. Most countries have well defined policies for sales made from SEZ to
DTA. The policies are combination of quantitative restrictions and concessions duty
structure. Most of the countries allow a certain percentage of the output to be sold to
DTA. In many countries the DTA sale attracts concessions duties. The customs regime in
Chinese SEZ's have less cumbersome regulations than existing EPZ's. The entrepreneurs
will be free from routine inspections. Enterprises will be allowed to utilize duty free raw
material for over 5 years. Recovery of duty, if any due to non performance positive
ENVELOP will be limited to the proportional shortfall. DTA sales are critical success
factor for large countries. In Chines SEZ's about 50% of production is sold in domestic
market. 30% of country's PC market is met by SEZ's. As per the Indian SEZ policy, the
DTA sales are allowed by paying import duties. This will bar units based on indigenous
inputs into SEZ, since such sales will not be viable for them. At the same time in
EPZ/EOU scheme DTA sales are charges at 50% import duties. For units based on inhibit
entrepreneurs to set up shops in SEZs .

V. CORPORATE SOCIAL RESPONSIBILITIES AND FREE TRADE ZONES

It is easy to discern that as far as state regulation and governance is concerned,
SEZs are a class apart. On a number of critical issues such as environment, labour and
electricity the states are giving free rein to the developers of SEZs. States such as
Maharashtra, Andhra Pradesh and Uttar Pradesh have enacted their own SEZ policies and
different sets of rules. For example, these states have gone ahead and amended various
laws such as the Contract Act, Industrial Disputes Act etc., since labour is a state subject
under our constitution. More strikingly, state governments are promising developers and
their clients a quick, trouble-free process by exempting industries from environmental
impact assessments, thus providing quick and trouble free environmental clearance.
Instead some of these states have decreed that environmental approval will be given by
the development commissioner of the SEZs in consultation with an officer of the state
pollution control board. Moreover, Section 49 of the SEZ Act, as we have seen earlier,
effectively puts SEZs outside the constitutional limitations by giving the Central
government the discretion to exempt any central law from operating within an SEZ.
Perhaps the most disturbing factor here is that SEZs in India are being developed by the
private sector vis-à-vis other countries. Moreover, as the article previously cited
succinctly points out, what happens when large SEZs eventually become townships
whose populations could eventually run into millions?
As the SEZ Act promulgates, the SEZ shall be governed by the private entrepreneur in
co-operation with the Development Commissioner, what it essentially states is that there
is no third rung of governance to oversee its functioning. So, all the functions usually
overseen by civic authorities would be under the SEZ Developing Authority. What this
essentially constitutes, is a parallel system of government largely overseen by private
entrepreneurs. In such a scenario, it is imperative to understand aspects of Corporate
Social responsibility that may be applicable here.

VI. The framework of Corporate Responsibility

The concept of a Corporation or an entrepreneur having a social responsibility
towards his community has come a long way since the rise of mercantilism. Eberstadt
classifies its historical evolution into the classical, medieval, mercantile and industrial
periods. The concept of profit-maximization itself was only first advocated with the rise
of mercantilism. Prior to that, profit-motive was often branded as anti-Christian, the
ethics of profit-making questioned. Businessmen were expected to care for not only
themselves, but members of their guild, the poor and other needy communities. The
industrial period first witnessed large companies (with limited liabilities and legal
personalities), dominating the economy, with their self-professed, social-Darwinist
virtues of laissez faire, while also rejecting the proposition that business was responsible
for the state’s social welfare. This gradually led to the present day period where
companies are perceived as institutions discharging social obligations.
One of the main features of Corporate Social Responsibilities (CSR) is to provide a ‘good
service’ to the community. This idea was advanced by Berle and Means in the 1930’s.
They propounded that the modern corporation should be a social institution involving the
wide interrelation of a wide diversity of economic interests. What it consequently boils
down to, is the managerial task of implementing social policies to make the corporation
socially responsive to the community at large.
Perhaps, in the context of a SEZ, the most pertinent facet of CSR is the aspect of
Corporate Social Rectitude, or corporate ethics. This concept forms the basic core of
CSRs and propagates a minimum standard of responsible behaviour for incorporated
entities. And more so more than anything else, it conflicts largely with the free-market,
profit-maximization principle. For, if profit maximization is indeed the only goal of the
Corporation, as long as its activities are not illegal, they need not necessarily be moral.
The question that arises is what justifies the inclusion of a social-philanthropic element
within the working of a corporate entity formed to maximize the interests of its
shareholders?
One of the main justifications for corporate social involvement in philanthropic activities
is provided by the doctrine of ‘enlightened self-interest’. According to this doctrine, the
motive and interest for companies engaging in social responsibilities is to enhance their
reputation and image both locally and internationally. According to the Committee for
Economic Development in America, this doctrine is based on the proposition that a
company’s image can be affected if it does not engage in social activities. A company’s
insensitivity to the growing demands of society will lead to public pressure for growing
intervention and regulation of corporate social activities.
George A Steiner has a different perspective towards the rationale for social
responsibility. He regards social responsibility as an attitude, “…of the way a manager
approaches his decision making. It is a philosophy that looks at the social interest of a
business over the long run as compared with the old, narrow, unrestrained short-run self
interest. This new view can accommodate substantial sections in the social interest
without eroding the profit motive.”
The fact however remains, that a corporation still operates under municipal laws and
international regime that are in fact, regulated. Such regulations vary from minimum
wage and social security for employees and labourers, to respecting environmental
concerns, traditional rights of indigenous people, etc. it will be interesting therefore, to
conjecture what social responsiveness a corporation will have in a de-regulated zone such
as Special Economic Zones, as set up in India.

VII. Legal Aspects of Corporate Social responsibilities.

Let us now move on to different models of implementing CSRs propounded
around the world. The International Seminar on Social responsibilities of Business states
that “In addition to making a fair and adequate return on capital, business must be just
and humane as well as efficient and dynamic. The modern business has manifold
responsibilities – (i) to itself, (ii) to its customers, (iii) workers, (iv) shareholders, (v)
community, and (vi) the state. The task of the management is to reconcile and harmonise
separate and sometimes conflicting responsibilities.” Writers have also tried to bring in a
difference between social obligations and social responsibilities. They argue that social
obligations imply corporate functioning within legal and social constraints, whereas
social responsibility implies keeping in step with the prevailing social norms, values and
expectations of performance. So it basically implies initiating steps and measures that
will minimize the negative side-effects of their activities before the State has to step in
and enforce new sets of legal constraints. However, in the view of the researcher the most
comprehensive explanation of the purview of CSRs is given by the American Committee
for Economic Development. It suggests three concentric circles of social responsibility.
The inner circle includes basic responsibilities such as products, jobs and economic
growth. The intermediate circle encompasses the responsibility to exercise this function
with a sensitive awareness of changing social values and priorities, e.g. relations with
employees; fair treatment and protection from injury etc. The outer circle outlines newly
emerging responsibilities that business should assume to become more broadly involved
actively improving the social environment, for problems such as poverty and
unemployment. These models of CSRs would however, lose some of their significance in
a SEZ set up under the SEZ Act. As has already been pointed out, the Indian SEZ is more
or less a private area, acquired by private capital, and developed and operated by a
private corporation. It is de-regulated atmosphere where some of the basic guarantees
employees, and the affected community at large from the State are shown away in the
name of promoting investment, production and export. Therefore, a Corporation within
the SEZ not only has the basic responsibility of providing the basic guarantees that a
State has hitherto provided, but also provide some of the assurances that are part of the
outer circle of the model developed by the American Committee for Economic
Development.
Let us then be clear on what our expectation of a corporation within an SEZ is – It is not
to be a role of social change, of bringing about social equality, and to improve the
‘quality of life’, though that would be welcome as well. Our expectation is a conservative
one, concerned with ethics and laws and the intention to transform business into a moral
community acceptable to the public. We merely expect an overlay on the traditional
economic mission of business. The traditional entrepreneurship and profit ethic is
amended to include the concept of social ethics, and to provide a value-framework for
decision-making, therefore restraining the mad pursuit of profit-maximization.

VIII. Conclusions
Civic administration within an SEZ shall also be a cause for great concern. While all
employees and workers in white-collar jobs shall be assured of a comfortable lifestyle,
the low-end workers have the most to loose. Whether the government shall be able to
meet its constitutional and international obligations with respect to global labour
standards, is a question time will tell. What is proposed is that while a new labour policy
may be drafted, a labour court on the lines of the Industrial Tribunal, as existing under the
Industrial Disputes Act be constituted under every SEZ, to resolve all disputes in a time-
bound and effective manner. Presently this is a function the Development Commissioner
is empowered to do. It is needless to state that such a commissioner might lack the
necessary adjudicatory expertise, to say the least. Even more worrying is Section 49 of
the SEZ Act. What if, for example, the Central Government notifies the Companies Act,
1956 not applicable inside an SEZ? Is a corporation registered within an SEZ not to be
under the purview of the Companies Act? Will the officers of the company be able to
escape all liability under the Companies Act if its registered office is within an SEZ? To
this end, it is proposed that either the Companies Act be immediately notified as
applicable within an SEZ, or parallel regulatory bodies, similar to those under the
Companies Act be instituted within an SEZ. On a final stock-taking, it is evident that a
new initiative towards industrialization and manufacturing cannot violate basic
fundamentals of corporate ethics and responsibility. It is another matter for the state to set
up an SEZ and promote investment within it, and yet another to give away vast tracts of
land with a de-regulated atmosphere, relaxed legal regimes and other sops, allowing
investors to set up virtual parallel governments beyond the constitutional pale.

IX. REFERENCES
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2. http://in.answers.yahoo.com/question/index?qid=20070917001252AAU0lGb
3. http://www.uiowa.edu/ifdebook/faq/faq_docs/SEZ.shtml
4. www.sezindiaweb.com/
5. http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1119
6. Neeraj Mishra, SEZ (Special Economic Zone) – An Overview, Challenges, and
Future, (July 26, 2008) http://neerajmishra.wordpress.com/2008/07/26/sez-
special-economic-zone-an-overview-challenges-and-future/
7. Aniruch Burman, Special Economic Zones: Issues in Corporate Governance,
SSRN, Dec. 15 2006.
8. Sumana Chatterjee, The Economics of Special Economic Zones in India: Ground
Realities and Key Considerations, Department of Business Economics, SSRN,
Jan. 11, 2008.
9. Special Economic Zones ‘An Indian Perspective, Seth Associates, (Oct. 30,
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