India’s Special Economic Zones: A Primer
Special economic zones (SEZs) in India are certain localities which offer tax and other incentives to their resident businesses.
Up until 2000, India did not have SEZs, and instead had a number of export processing zones (EPZs), which, although similar in structure to the modern SEZ, failed to attract many firms to India.
The government, accordingly, introduced the SEZ in April 2000. Structured closely on the already successful model of China, they are designed to help stimulate both foreign and domestic investment, boost India’s exports, and create new employment opportunities.
India’s Special Economic Zone Act, 2005 further amended the country’s foreign investment policy and converted its EPZs to SEZs, with notable zones including Santa Cruz (Maharashtra state), Cochin (Kerala state), Kandla and Surat (Gujarat state), Chennai (Tamil Nadu state), Visakhapatnam (Andhra Pradesh state), Falta (West Bengal state), Noida (Uttar Pradesh state), and Indore (Madhya Pradesh state).
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.
Although India’s SEZs are relatively new, they have become important sourcing and manufacturing destinations for foreign investors.
Below we examine how these zones function, and highlight key information relevant for companies considering setting up in an Indian SEZ.
Incentives for setting up in an Indian SEZ
Some advantages of 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. These incentives will be withdrawn from April 1, 2020 (Sunset Clause), pending an extension, which is currently under discussion.
- 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.
- External commercial borrowing (ECB) is allowed up to US$500 million a year without restriction. For developers of an SEZ, the ECB channel may be availed after receiving government approval, and only for providing infrastructure facilities in the zone. However, ECB will not be permissible for development of integrated township and commercial real estate within the SEZ.
- Permission to manufacture products directly, as long as the goods you are producing fall within a sector which allows 100 percent FDI.
The benefits of India’s SEZ policy have been substantial and have already served to exponentially increase the amount of foreign firms operating in India.
Since 2005, exports from the country have almost continually been increasing, largely due to the rise in sourcing and manufacturing platforms there.
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, your platform should be well placed to acquire the raw materials needed for production, while at the same time being in an area suited for export (that is, on the coastline).
It used to be that this was a difficult balance to strike, but the new government’s emphasis on infrastructural investment means that procuring your materials from other parts of India is becoming a lot easier.
Developing an SEZ in India
As mentioned previously, developers can apply to the Indian Board of Approval to establish an SEZ where one currently doesn’t exist.
Companies, co-operative societies, individuals, and partnership firms are all able to file an application, and simply need to submit the Form-A that is available on the Department of Commerce’s website.
The information you have to fill out on 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 your 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).
Your 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.
Editor’s Note: The article was originally published in October 2014, and has been updated as per the latest developments.
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