India’s Special Economic Zones: A Primer
Special economic zones (SEZs) in India are areas that offer incentives to resident businesses. SEZs typically offer competitive infrastructure, duty free exports, tax incentives, and other measures designed to make it easier to conduct business. Accordingly, SEZs in India are a popular investment destination for many multinationals, particularly exporters.
While India’s SEZs are similar to those found in other parts of Asia, business leaders that are considering setting up in a SEZ should seek to understand how SEZs work in India. Each SEZ is unique. Many business leaders conduct market entry studies that compare sites, resources, incentives, and costs before making site visits.
The development of SEZs in India
The Indian government had long used export processing zones (EPZs) to promote exports. In fact, Asia’s first EPZ was established in 1965 at Kandla, Gujarat state. While these EPZs had a similar structure to SEZs, the government began to establish SEZs in 2000 under the Foreign Trade Policy.
The government sought to use SEZs to redress the infrastructural and bureaucratic challenges that were seen to have limited the success EPZs. The government’s SEZs are structured closely on China’s successful model. They are designed to encourage domestic and foreign investment, boost India’s exports, and create new employment opportunities.
The Special Economic Zone Act, 2005 further amended the country’s SEZ policy. Many EPZs were converted to SEZs, with notable zones in Noida (Uttar Pradesh state), Falta (West Bengal state), Visakhapatnam (Andhra Pradesh state), Chennai (Tamil Nadu state), Cochin (Kerala state), Santa Cruz (Maharashtra state), Indore (Madhya Pradesh), as well as Kandla and Surat (Gujarat),
Since the Act’s promulgation, the Indian government has also accepted proposals for additional, far smaller SEZs, which must be proposed by developers to the Indian Board of Approval. The SEZ Rules, 2006 lay down the complete procedure to develop a proposed SEZ or establish a unit in an SEZ.
At least 232 SEZs are in operation, and 351 SEZs have been notified under the SEZ Act, 2005. While some observers argue that India’s SEZs have not become as successful as those in China, India’s SEZs remain an important sourcing and manufacturing destination for foreign investors.
Incentives for setting up in an Indian SEZ
Some incentives for setting up a sourcing or manufacturing platform within an Indian SEZ include:
- Duty free import and domestic procurement of goods for the development, operation, and maintenance of your company;
- 100 percent income tax exemption on export income for first five years, 50 percent for five years thereafter, and 50 percent of the export profit reinvested in the business for the next five years;
- Exemption from the goods and services tax (GST) and levies imposed by state government (supplies to SEZs are zero rated under the IGST Act, 2017, meaning they are not taxed);
- Single window clearances for all state and federal government approvals;
- Exemption in electricity duty and tax on sale of electricity by certain states in India;
- Presence of customs officer in the SEZs to facilitate and expedite the trade processes; and
- Some states also offer land to SEZ developers at concessional rates to promote industries in accordance with the state’s prevailing Industrial Policy.
After making a shortlist of SEZs for further examination, investors may find that specific SEZs offer other advantages that complement their business plans in India.
Ultimately, however, the benefits of India’s SEZ policy have been substantial as it is one of the reasons why there is an increase in the number of foreign firms operating in India. Since 2005, exports from the country have increased substantially, largely due to the rise in sourcing and manufacturing platforms.
Choosing an SEZ location
There are many SEZs for your company to choose from – a list of which can be obtained from the Department of Commerce’s website – and so deciding on which is best for you can often be a difficult and stress-inducing process.
For companies directly sourcing from or manufacturing in India, the site should be well placed to acquire the raw materials needed for production, while at the same time being in an area suited for export.
Special Economic Zones and Warehousing Clusters in Delhi NCR
Special Economic Zones and Warehousing Clusters in Mumbai
Special Economic Zones and Warehousing Clusters in Bengaluru
The Bengaluru (formerly Bangalore) area hosts at least 18 SEZ, which are mostly located on the city’s outskirts. Read more here.
Meanwhile, Tamil Nadu has the highest number of operational SEZs (40), followed by Karnataka (31), and Maharashtra (30).
Developing an SEZ in India
Developers can apply to the Indian Board of Approval to establish an SEZ where one currently doesn’t exist.
The required information for the form ranges from basic details, such as the name, address, and personal information of the applicant, to more specific details of the proposal, such as the type of land it will be set up on and its means of financing.
The amount of land that the proposal requires will determine what type of SEZ it will be. The different types are:
- Multi sector SEZ (requiring a minimum of 1000 hectares of land);
- Sector specific SEZ (requiring a minimum of 100 hectares);
- Free Trade and Warehousing Zone (FTWZ) (requiring a minimum of 40 hectares); and
- IT/ITeS/handicrafts/bio-technology/non-conventional energy/gems and jewelry SEZ (requiring a minimum of 10 hectares).
Any proposal will be first considered by the respective state government where the SEZ is to be located, before it receives formal backing from the Board of Approval.
Impact of the COVID-19 outbreak – relaxations and opportunities
A few weeks back, the telecom department and the software technology parks of India (STPI) issued a notification last month, allowing employees working at IT and BPO firms in SEZs to work from home until April 30, 2020.
Last month, the commerce ministry announced certain relaxations in filing compliance reports for units and developers of SEZs as the nationwide lockdown is underway until April 14, 2020 to prevent the spread of COVID-19.
In cases where compliance is not met, no punitive action will be taken against the companies or developers operating in the SEZs. Relaxation will be applicable to the requirement to file quarterly progress report, and filing of annual performance reports by SEZ units.
Further, extension of Letters of Approval (LoAs) will be facilitated for the following:
- Developers/co-developers who are in the process of developing and operationalizing the SEZ;
- Units which are likely to complete their five-year block for net foreign exchange (NFE) assessment; and
- Units that are yet to commence operations.
As per the commerce ministry, any interim extension or deferment of the expiry date may be granted till June 30, 2020.
COVID-19 pandemic may be good news for Indian competitiveness and capital inflows as long as the government can match mid-2020 recovery by providing incentives for foreign investors. With disruption in supply chain from China, and economies in the US and Europe taking a hit, multinational companies will have to look out for cheaper alternative destinations to meet their manufacturing needs.
This production requirement could be partially met by India as it provides incentives and opportunities for foreign firms to manufacture in SEZs.
(The article was originally published on October 23, 2014 and was last updated on April 7, 2020 to include the latest developments.)