Special Economic Zones In India

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1 page 22 of 50 pages Introduction Inspired by the success of Zones ( SEZs ) in the eastern provinces of mainland China and in countries such as Indonesia, India too wanted to have its own SEZs. India s policy on SEZs initially took the form of announcements in its annual export import policy. However, the concept of an Indian SEZ has now arrived following the passage of the Zones, 2005 and the Zones Rules, which came into effect on 10 February. SEZs are specifically designated duty free enclaves deemed to be outside the customs territory of India for the purpose of carrying out certain authorised activities. They create small islands of free enterprise for exports with liberal tax regimes and unfettered capital flows. This is an attractive package for multinationals hoping to do business in or from India. Currently there are 14 functional SEZs in India and 69 SEZs which have been cleared for approval. One of the biggest SEZs to be set up is a joint venture between Reliance Industries and the State government of Haryana, which will be spread over 10,000 hectares. SEZs may be set up by any public, private, or joint sector or by the Central or any State government or its agencies. An added advantage lies in the fact that SEZs can be set up by foreigners on a whollyowned basis or in conjunction with Indian partners. Incentives have been accorded to both the developers of SEZs as well as to the commercial units which will potentially occupy units in the SEZs. The SEZs may be multi-product, single-product, single-sector or non-specific sector. This article provides a brief look at SEZs in India. In particular, it considers issues such as the types of SEZs, incentives for the devloper and approvals for SEZs.

2 Types Of SEZs Multi-Product SEZs A multi-product SEZ can be set up with a minimum land area of 1,000 hectares. It should be noted that for SEZs set up in certain less developed states such as Himachal Pradesh and Meghalaya, the minimum area requirement is reduced to 200 hectares. A processing area must be set up on land comprising a minimum of 35% of the land area of a multi-product SEZ. Applications may, however, be approved by the Board of Approval ( Board ) in the Ministry of Commerce for a processing area constituting less than 35% as long as the minimum area is 25% and provided that: the developer made an application for the smaller area; and the Board gave its reasons in writing for approving that application. This is an important concession for developers as it potentially permits them to take advantage of the buoyant real estate market in India to the extent of 75% of the land area and commercially develop the land area. An example of a multi-product SEZ is Mahindra World City at Chennai which has three sector specific SEZs for IT, apparel and auto ancillaries and houses well-known names such as Ascendas, Infosys, BMW and Nera. Sector Specific SEZs A sector specific SEZ can be set up with a minimum land area requirement of 100 hectares with 50% of the land area being the minimum processing area required. For SEZs set up in the spheres of IT, gems and jewellery and biotechnology, the minimum land area is 10 hectares. Bio-Park by Serum Institute at Pune is one such example. Incentives For The Developer To encourage people to undertake the development of SEZs, developers are entitled to several incentives, some of which are listed below: income tax holiday for any 10 consecutive years within the 15-year period from the beginning of operations on all profits and gains from development; exemption from payment of dividend distribution tax; page 23 of 50 pages

3 exemption from payment of interest on long term finance; exemption from payment of long term capital gains on transfer of shares in the company; exemption from payment of Minimum Alternate Tax; exemption from import duty; exemption from excise duty; exemption from payment of service tax; and exemption from tax on sale of electricity for self generated and purchased power. The potential gains from developing an SEZ appear attractive and several major Indian corporates have applied to develop SEZs. Benefits Of Setting Up A Unit In An SEZ Apart from the incentives available to foreign investors who set up SEZs either as developers or as co-developers, there exists a multitude of incentives for entrepreneurs who set up units in SEZs. These units can engage in manufacturing or service-related activities. Offshore banking units can also set up as a unit in an SEZ subject to approval from the Reserve Bank of India. The main focus of SEZs in India is earning foreign exchange as opposed to merely attracting foreign direct investment, which is the focus of SEZs in China. As such, units set up in SEZs in India are required to be net foreign exchange earners ( NFEs ) for blocks of five-year periods, with approvals being dependant upon the unit proving its status as an NFE. Accordingly, a commercial unit is not restricted to doing business for the purpose of export as long as it can be an NFE. However, it should be noted that the income tax exemption only applies to profits and gains from exports and that customs duties must be paid on goods when they are sold into the domestic tariff area. The incentives available to commercial units set up in an SEZ include: income tax exemption on profits and gains from exports for five consecutive years, 50% exemption for the next five years and up to 50% exemption for a further five years subject to the creation of certain reserves; exemption from payment of central sales tax; page 24 of 50 pages

4 exemption from payment of customs duty; exemption from payment of dividend distribution tax; exemption from payment of Minimum Alternate Tax; exemption from payment of excise duty; exemption from payment of service tax; a substantially higher limit of managerial remuneration is permitted, as compared to the Companies restrictions; and waiver of the general requirement for a managing director to have 12 months residence in India. Approvals The Board evaluates the proposals of developers wanting to set up SEZs. The Board has jurisdiction over the Development Commissioner, who functions as a point of single window clearance and monitors performance of developers and units in an SEZ. Given that different States have passed s on SEZs offering a plethora of incentives, the Development Commissioner also co-ordinates issues between the Central government and the respective State governments. Land It is difficult to locate contiguous plots of land with clear title required to meet the minimum land area requirement for SEZs. As such, acquisition of the land by the government would be the best route to obtaining clear title as well as to overcoming any opposition. The relevant State government acquires the land on request of either the developer or the relevant State department / agency and then after taking possession of the land, transfers the same to the said State agency on payment. The State agency can transfer the land to the developer for the cost of acquisition plus a facilitation fee, as was done in the case of Reliance Haryana, which is a special purpose vehicle ( SPV ) formed by Reliance Industries Ltd and the Haryana State Industrial and Infrastructure Development Corporation ( HSIIDC ). HSIIDC acquired the land and then transferred the land to the SPV. The other option available in respect of land acquisition for SEZs is for the relevant government / agency to lease the land to the developer for a minimum period of 20 years, page 25 of 50 pages

5 which in turn could lease it to entrepreneurs for setting up commercial units. Conclusion SEZs provide foreign investors with an unparalleled opportunity to invest in a hitherto untapped market For more information, contact: Leena Pinsler Consultant, South Asia Practice Group DID: leena.pinsler@rajahtann.com in India while at the same time creating a world class investment infrastructure for India. Recognising this potential, the Singapore government is exploring the possibility of facilitating the development of an SEZ in India. Nisha Kaur Uberoi Foreign Lawyer, South Asia Practice Group DID: nisha.kaur@rajahtann.com page 26 of 50 pages