The World Economic Forum

SPECIAL ECONOMIC EXPORT PROCESSING ZONE MODEL —BOON OR BANE

ORIGIN OF SEZ

In 1947 when India got independence at Puerto Rico industrialist and government was busy setting up world first industrial park. Ireland and Taiwan followed Puerto Rico in sixties and in eighties China bring the SEZ to the global map with its largest SEZ at the metropolis of Shenzhen.

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. In 2000, after thirty-five years, Murlisone Maran, then Commerce Minister made a tour to the southern provinces of China and realized the importance of SEZ. Policy of India and after five year, Special Economic Zones Act 2005 was introduced and in 2006 SEZ Rules were formulated.

 Indian government is to instill confidence in investors and signal their commitment towards a stable SEZ worked on the Special Economic Zones Act. In May, 2005 the Special Economic Zones Act was passed by Parliament, which received Presidential assent on the 23rd of June, 2005. The Special Economic Zones Act 2005, after extensive consultations, came into effect on 10th February, 2006. The Act offered drastic simplification of procedures on matters relating to central as well as state governments. It is expected that the Special Economic Zones Act will trigger a large flow of foreign and domestic investment.

OBJECTIVES OF SEZ ACT:

To generate additional economic activity,

To promote exports of goods and services,    

To promote investment from domestic and foreign sources,

To create employment opportunities, and

To develop infrastructural facilities.

INCENTIVES OFFERED BY THE GOVT:

(i)  COMPANIES IN SEZ:
• 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.
• External commercial borrowing by SEZ units upto 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.
• Exemption from State sales tax and other levies as extended by the respective State Governments.

(ii)  DEVELOPERS:

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) Allowed carrying forward losses.

• No license required for import made under SEZ units.
• Duty free import or domestic procurement of goods for setting up of the SEZunits.
• Goods imported/procured locally are duty free and could be utilized over the approval period of 5 years.
• The SEZ unit is permitted to realize and repatriate to India the full export value of goods or software within a period of twelve months from the date of export.
• “Write-off” of unrealized export bills is permitted up to an annual limit of 5% of their average annual realization.
• No routine examination by Customs officials of export and import cargo.
• Setting up Off-shore Banking Units (OBU) allowed in SEZs.
• OBU’s allowed 100% income tax exemption on profit earned for three years and 50 % for next two years.
• Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration.
• Since SEZ units are considered as ‘public utility services’, no strikes would be allowed in such companies without giving the employer 6 weeks prior notice in addition to the other conditions mentioned in the Industrial Disputes Act, 1947.

From the above, it is felt that, the advantages of the SEZ are evident from the investment, employment, exports and infrastructural developments additionally generated.

DISADVANTAGES
• Revenue losses because of the various tax exemptions and incentives.
• Many traders are interested in SEZ, so that they can acquire at cheap rates and create a land bank for themselves.
• The number of units applying for setting up EOU’s is not commensurate to the number of applications for setting up SEZ’s leading to a belief that this project may not match up to expectations.

The Economist strongly believe that the benefits derived from the investments and additional economic activity in the SEZ and the employment generated thus will outweigh the tax exemptions and the losses on account of land acquisition.

CORPORATE STRATEGY RULES:

The new period companies in India like Future Group, Wipro, Infosys, and Satyam had no strategic bent of mind. The only positive thing about the management of these companies was starting the respective business at right time which is no mean task. They utilized every opportunity in their growth path very well; they were highly flexible.

When the business landscape was simple, companies could afford to have complex strategies. But now that business is so complex, they need to simplify.

These Indian companies attained the current state of prominence by pursuing constantly evolving strategies in market spaces that were considered unattractive. Managers of these companies – both global and Indian identified the opportunity in the chaotic markets. They jump into chaotic markets, probe for opportunities, build on successful forays, and shift flexibly among opportunities as circumstances dictate. In the chaos they recognize the need for a few key strategic processes and a few simple rules.

From the above discussion, it is clear that Special Economic Export Processing Zone model is one of the important segments for the companies in promoting exports and to avail more incentives, tax benefits from the central government.

About the Author

Dr.R.SRINIVASAN is a Post graduate in commerce and Management. He received his doctoral degree from Alagappa University in 1997. He currently teaches financial management and Research Methodology Subjects in Post graduate and Research Department of Corporate Secretaryship at Bharathidasan Government College for Women (Autonomous), Pondicherry University, Puducherry. Before Joining BGCW, he was teaching in SNR College, Coimbatore, Sindhi college, Chennai& T.S.Narayanasamy College, Chennai for eight years. He was with the industry for a short term at Salzar Electronics Pvt. Ltd, Coimbatore. He has about 20 years of teaching experience and having research experience of 15 years. His interests are in Accounting and finance, Capital Market, Quantitative Methods. He underwent the Faculty Development Programme at Indian Institute of Management Ahmedabad during 2000-01. He has presented 20 papers in national and international conferences and has published twenty papers in the areas of Finance and Human resource Management in National Journals. Co-authored a book titled, ‘Investors Protection, published by Raj Publications, New Delhi He has delivered lectures in contemporary finance topics at Pondicherry University. He is involved in consultancy projects for Godrej Saralee, Chennai in the areas of Statistical Applications. He has supervised a number of research projects in the area of corporate finance and Human Resource Management. He is the Board of examiner in corporate Secretaryship and Management for the past two decades.
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