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An introduction to the workings of a special economic zone

An introduction to the workings of a special economic zone
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First Published: Sun, Dec 21 2008. 10 21 PM IST

 Jayachandran / Mint
Jayachandran / Mint
Updated: Sun, Dec 21 2008. 10 21 PM IST
Think ports, think information technology companies setting up shop in India, think troubled farmers, think even more troubled land acquisitions by big corporations, and what invariably comes to mind is a special economic zone (SEZ).
Jayachandran / Mint
SEZs are specifically delineated duty-free enclaves within a country and are deemed to be foreign territories for the purposes of trade operations, duties and tariffs. Indian SEZs are governed by the SEZ Act, 2005, and its allied rules.
The SEZ regime aims at generating additional economic activity, employment opportunities, exports of goods and services, domestic and foreign investment, and development of infrastructure. SEZs can be set up either by the Union government or state government or both jointly, under a public-private partnership model or by a private enterprise alone. Such private enterprise includes but is not limited to a Hindu undivided family, resident or non-resident individual, a partnership firm and an Indian or foreign company.
The key players in an SEZ are the developer, co-developer and entrepreneur, each of whom requires to secure approval from the relevant authorities under SEZ legislation. The authority granting approval to the developer and co-developer is the SEZ Board of Approval (BoA) through the Union government, and that granting approval to the entrepreneur is the approval committee through the development commissioner.
The developer’s role is that of starting the process of setting up the SEZ by identifying land on which the SEZ is to be set up. The co-developer focuses on the development of infrastructure facilities or undertaking of authorized operations in the SEZ, after executing an agreement with the developer and securing approval from the Union government. The benefits and concessions available to a co-developer are the same as those applicable to a developer.
Another key player in the SEZ is the entrepreneur, who sets up a unit in the SEZ to manufacture goods or render services.
SEZs may be multi-product or multi-service, sector-specific, or for a free trade and warehousing zone. The legislation prescribes certain minimum land area requirements for each type of SEZ. It also provides that if a developer, subsequent to approval or notification of the SEZ, acquires more contiguous and vacant land, which makes the total area, including the area already approved or notified as SEZ, more than the minimum area required for another class of SEZ, the BoA may allow conversion of the SEZ from one class to another. Where a developer does not have the minimum prescribed contiguous land area, the Union government may approve more than one developer in the SEZ, based on approval by the BoA.
Where a private enterprise seeks to develop an SEZ, it may directly make an application to the BoA, which shall grant an in-principle approval where land is not in the possession of the proposed developer, and a formal approval where land is in the possession of the developer, subject to obtaining concurrence of the relevant state government. Where the approval granted is merely an in-principle approval, the developer is required to submit a suitable proposal to obtain the formal approval. The land for development of SEZ by the private enterprise can be either privately acquired or can be obtained from the government.
The developer is also required to furnish to the Central government particulars in respect of the land, including a certificate from the relevant state government or its authorized agency stating that the developer has legal possession of the land, irrevocable rights to develop the land as SEZ, and that the land is free from all encumbrances. In addition, the land acquired by the developer must be vacant, contiguous and without public thoroughfare. Each of these conditions in respect of land may be waived by the BoA except for the condition requiring land to be vacant. After examination of such data and acceptance by the developer of the terms and conditions of the letter of approval, the Union government has to notify the identified land area as an SEZ. It is only after this that the developer is entitled to the benefits and concessions. A developer, among other things, is entitled to a 10-year income-tax holiday in respect of profits and gains derived from the business of developing an SEZ.
The developer may submit the details of the operations to be undertaken in the SEZ at the time of seeking approval for setting up an SEZ or thereafter. However, the BoA will authorize such operations only after notification of the SEZ. The Union government has notified the authorized operations that may be approved by the BoA depending on the type of SEZ.
Lastly, an entrepreneur who sets up a unit in the SEZ after getting approval from the development commissioner is entitled, among other things, to a 15-year graded income-tax exemption (100% tax exemption on profits for the first five years of operation, a 50% tax exemption on profits for the next five years, and a further 50% tax exemption for the next five years on profits subject to such amount being transferred to the SEZ re-investment reserve account to be used for capacity expansion).
SEZ legislation in India is evolving, with a few teething troubles. However, with the passage of time, the Indian SEZ regime should hopefully achieve the objectives it seeks to meet through the SEZ legislation.
Send your comments to lawfullyyours@livemint.com
This column is contributed by Namrata T. Vishwanath of AZB & Partners, Advocates & Solicitors.
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First Published: Sun, Dec 21 2008. 10 21 PM IST