Development Zones in India
May 13 – India was one of the first countries in Asia to recognize the effectiveness of the export processing zone model in promoting exports, establishing Asia’s first processing zone in Kandla in 1965. More recently, the Indian government moved to increase India’s attractiveness as a foreign direct investment destination by announcing its Special Economic Zones (SEZs) Policy in April 2000, and then followed that up with the SEZ Act 2005 and SEZ Rules, which jointly came into effect on February 10, 2006. The new rules further simplified and streamlined the utilization of SEZs, paving the way for the popularity these zones now enjoy. Today, the SEZ is the predominant development zone type throughout India, and its goals include:
- Generating additional economic activity;
- Promoting exports of goods and services;
- Promoting investment from domestic and foreign sources;
- Creating employment opportunities; and
- Developing infrastructure facilities.
India’s SEZs closely follow the successful Chinese SEZ model, and to promote economic competitiveness and easier exporting, they function as growth engines to boost manufacturing and create new job opportunities at a rapid pace. Business entities may be established in SEZs for the manufacturing of goods, the provisioning of services, and other activities including processing, assembling, trading, repairing, reconditioning, and the making of gold, silver and platinum jewelry.
Indian SEZs by Type
Special economic zones in India are classified into four specialized categories:
Special Economic Zones for Multiple Sectors
Multi-sector SEZs are areas where units may be set up for the manufacturing, trading and warehousing of products within two or more sectors. Requirements state that these must be spread out over an area of more than 1,000 hectares, with at least 50 percent used as an industrial area.
Special Economic Zones for Specific Sectors
Sector-specific SEZs are set up exclusively for products or services within a particular sector. Preferential policies for these zones depend on the industry, and generally include exemptions and reductions in taxes and duties. Sector-specific SEZs must be at least 100 hectares in size.
Special Economic Zones for Free Trade and Warehousing
FTWZs aim to facilitate the import and export of goods and conducting trade transactions in a free currency. FTWZs are considered “deemed foreign territory” and are essentially integrated zones used as international trading hubs. Benefits for these zones include special storage infrastructure and high-quality transportation. The minimum area allocation for an FTWZ is 40 hectares.
Special Economic Zones for the IT/ITES/Handicraft and Other Industries (Alternative SEZs)
Alternative SEZs can cover the IT, ITES or handicraft industries, and they also deal with companies operating in the bio-technology, non-conventional energy, gems and jewelry sectors. Companies in Alternative SEZs typically enjoy tax benefits and reductions in rent and utility bills, but the benefits may vary by zone and industry. Alternative SEZs occupy at least 10 hectares.
India has numerous development zones along its coastline, as well as others in internal locations. Some are currently managed by the private sector, where MNCs such as Mahindra have invested heavily in developing well-run SEZs in Jaipur and Chennai. However, not all privately managed zones have been able to reach such high standards, and it remains necessary to conduct thorough due diligence on an SEZ’s capabilities in India. The brochures do not always match the reality on the ground – but when they do, India’s SEZs are generally very effective, and can help to provide the needed boost to turn a good business into a great one.
Customs Tip: India is a stringent administrative business environment where customs officials are highly alert and on the look-out for paperwork discrepancies. It pays to engage an import-export expert to ensure all documents and manifests are precise and correctly labeled to avoid delays.
Permitted FDI Activities
FDI up to 100 percent is allowed through the automatic route for all manufacturing activities in SEZs, except for the following:
- Arms and ammunition, explosives and allied items of defense equipment, aircraft, and warships;
- Atomic substances;
- Narcotics and psychotropic substances and hazardous chemicals;
- Distillation and brewing of alcoholic drinks;
- Cigarettes/cigars and manufactured tobacco substitutes; and
- Sectoral norms as notified by the government shall apply to foreign investment in services.
Legal definition of “manufacturing”: To make, produce, fabricate, assemble, process or bring into existence a new product having a distinctive name, character or use; including processes such as refrigeration, cutting, polishing, blending, repairing, remaking and re-engineering.
Incentives for Investors
Incentives and facilities offered to units located within an SEZ include:
- Duty free import/domestic procurement of goods for the development, operation and maintenance of SEZ units;
- 100 percent income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for the first five years, 50 percent for next five years thereafter and 50 percent of the ploughed back export profit for next five years;
- Exemption from the minimum alternate tax under section 115JB of the Income Tax Act; External commercial borrowing by SEZ units up to US$500 million 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; and
- Exemption from state sales tax and other levies as extended by the respective state governments.
The Approval Committee at the zone level deals with approval of units in the SEZs and other related issues. Each zone is headed by a development commissioner, who is ex-officio chairperson of the approval committee. Once an SEZ has been approved by the board of approval and central government has notified the area of the SEZ, units are then cleared to commence operations in the zone. All the proposals for the setting up of units in the SEZ are approved at the zone level by the approval committee, consisting of the development commissioner, customs authorities and representatives of state government. All post-approval clearances, including the granting of an importer-exporter code number, change in the name of the company or implementing agency, broad banding diversification, etc., are supervised at the zone level by the development commissioner.
The performances of the SEZ units are periodically monitored by the approval committee and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act in case of violation of the conditions of the approval.
This article was originally published in the Asia Briefing Magazine, titled “An Introduction to Development Zones Across Asia.” In this issue, we break down the various types of development zones available in China, India and Vietnam specifically, as well as their key characteristics and leading advantages. It is currently available as a complimentary PDF download in the Asia Briefing Bookstore.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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An Introduction to Doing Business in India
In this guide, we introduce the basics of setting up and running a company in the country and some of the key issues investors should pay attention to. This issue is currently available as a complimentary download on the Asia Briefing Bookstore.