Table of Contents. Sr. No. Topics. Page No. Fundamentals of SEZ. SEZ concept in India Past and Present. Institutional framework for SEZs

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3 Table of Contents Sr. No. Topics Page No Fundamentals of SEZ SEZ concept in India Past and Present Institutional framework for SEZs Operating Structures of SEZs Eligibility criteria for a developer Area requirement for SEZ Distribution of SEZs in India Operational SEZs in India Fiscal Benefits and Incentives SWOT SEZs outside India Chinese SEZs a story in contrast Infrastructure Need Issues facing SEZs in India Latest developments on SEZs Final Word Annexure

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5 THE CONCEPT of special zone has existed for over six decades now! Typically, special zones are the regions designated for economic development, oriented towards Foreign Direct Investment (FDI) and export promotion, both fostered by special policy incentives. Traditionally, the concept of Export Processing Zones (EPZs) evolved to facilitate exports. The standard definition applied by international organizations (World Bank, 99 and UNIDO, 995) defines EPZ as an industrial area that constitutes an enclave with regard to customs tariffs and the commercial code in force, in the host country. In other words, EPZs are industrial clusters of units concentrated in a geographical area, share some common infrastructure and have a pool of trained human capital. EPZs were thus considered a best policy to promote exports and earn foreign exchange. Eventually, the concept of Special Economic Zones (SEZs) emerged which covers a broad range of more specific zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others. An SEZ is a geographical region having minimum bureaucracy, best infrastructure and special economic laws related to export and import that are more liberal than a country s typical economic laws. By offering liberalized terms, they attract investment and foreign exchange, impel employment, and propel the development of improved technologies and infrastructure. International experience indicates that The size of SEZ varies from to 500 sq. kilometers» Size is influenced by the extent of self sufficiency and integration in the zone» A specified minimum land area is necessary to support desired level of economic activity Strategic location and connectivity with major trading destinations are critical factors for success of SEZs» In most cases, it has been observed that the zones are strategically located giving an easy gateway to international trade Countries have focused on attracting investments in specific industries considered strategically important for the economy Diversity in multiple economic activities is critical for an SEZ to evolve as an economic entity in itself Government participation in infrastructure development, particularly at initial stages, has played a key role in success of SEZs» Private participation in developing, operating and maintaining infrastructure is another key factor» Simplification of administrative procedures and mechanisms for speedy approvals is also an important feature in success of SEZs Evidently, an SEZ is almost a self contained area with high class infrastructure for commercial operations and residential inhabitation. It is believed that SEZs could facilitate infrastructure development through forward and backward linkages not only within zones but also enhance the economic activity in the peripheral areas. In other words, they can act as catalyst for foreign exchange earnings, employment generation and overall economic growth. The world s first known instance of SEZ dates back to 947 wherein an industrial park was set up in Puerto Rico. In the 980s, China made the SEZs gain global attention with its largest SEZ Shenzhen. 5

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7 A LITTLE OVER 30 YEARS AGO, there were 80 Special Economic Zones (SEZs) in 30 countries generating about USD 6 billion in exports and employing about one million people. Today, there are more than 3,000 SEZs in 0 countries and they account for over USD 600 billion in exports and 50 million direct jobs (Source: Economic Times, 9 April 007). As of today, India has 0 operational SEZs. Out of these, 58 are IT/ ITES, Multi product and 3 other sector SEZs. The total number of operational units in these SEZs is 30 (Source : Department of Commerce). India was one of the first in Asia to introduce the concept of EPZ. Way back in 965, the first EPZ in Asia was set up in Kandla, in the state of Gujarat. The EPZ was set up with an intention of promoting exports in the country. However, the EPZ faced some drawbacks in terms of location issues, burdensome operations and limited policies focused on import minimisation (vs. trade enhancement through export promotion). To overcome these issues, in April 000, the government announced the SEZ Policy with an objective of introducing worldclass infrastructure, creating a firm economic administration and to draw larger foreign investments in India. This policy aimed to make SEZs the driver for economic growth supported by quality infrastructure and attractive fiscal package, with the minimum possible regulations. The primary objective of the policy was to provide a globally aggressive and smoother environment to promote exports and attract foreign and domestic investments. Thus, the main objectives of this revised policy were to: Provide an enabling policy environment Provide flexible labour laws Provide currency convertibility Provide stable legal and administrative regime Commit to the tenets of an open economy Earn foreign exchange and promote FDI Generate additional economic activity Promote exports of goods and services Promote investment from domestic and foreign sources Create employment opportunities Develop infrastructure facilities SEZs offer wide range of privileges like single window management, streamlined procedures and dutyfree trade. Within SEZs, units may be setup for the manufacture of goods and other activities including processing, assembling, trading, repairing, reconditioning etc, i.e. to carry out the notified activities only. SEZ units are selfcontained and integrated having their own infrastructure and support services. As per law, SEZ units are deemed to be outside the customs territory of India. Goods and services coming into SEZs from the Domestic Tariff Area (DTA) are treated as exports from India and goods and services rendered from the SEZ to the DTA are treated as imports into India; while DTA implies the whole of India (including the territorial waters and continental shelf), it does not include the SEZ areas. This scheme, however, did not witness significant private sector participation. To overcome the same, a comprehensive draft SEZ bill was prepared in 005, which came into effect in February 006. The Act clearly laid down legal backup for establishment of SEZs and the constituents of approval and administrative machineries like Board of Approval, Development Commissioner and SEZ authority etc. SEZ Rules that came into effect in February 006, deal with the procedures to be followed for establishment of SEZs, nature of units in the SEZ, terms and conditions for the developers and entrepreneurs in SEZ, the movement of goods from / to domestic Tariff Area (DTA), monitoring by the authorities etc. The rules also provide for simplification of procedures and single window clearance on matters relating to the central as well as the State Government. 7

8 SEZs in India at a glance Details Nos Land Area (In Hectares) Set up before 006 No. of SEZs set by Govt. 9,60 No. of valid InPrinciple Approvals 47 5,63 Set up Post 006 No. of Formal Approvals ,73 (incl. notified SEZs) No. of Notified SEZs ,803 As on Dec 09 No of operational SEZ 0 6,66 Source: Ministry of Commerce & Industry, Dept. of Commerce and ICICI PSG Services estimates Formal approval: given when land is available to set up the SEZ In principle approval: given when the land has not yet been secured but all other criteria are fulfilled Notified : final stage after which physical development begins Investments and employment in SEZs as on June 009 The SEZs in India cater to various labour intensive manufacturing industries such as Textiles and apparels, leather footwear, automobile components, engineering etc. Particulars Incremental Investment (Rs. in Million) Total Investment (Rs. in Million) Incremental Employment Total Employment Set up post 006 Notified SEZs,045,893,045,893 34,67 34,67 State/ Private SEZs 49, , ,4 55,890 Set up before 006 Government SEZs, , ,686 96,9 Total,06,050.0,46, , ,439 Source: Ministry of Commerce & Industry, Dept. of Commerce 8

9 Exports from SEZs Additional investment, generation of employment, rising exports and development in infrastructure are some of the benefits derived from the development of SEZs. These benefits further give a boost to the economic activities in the country Exports from SEZs 9% % % 39% % 3% 5% (E) Value (Rs. Million) Growth Rate ( in % ) 00% 90% 80% 70% 60% 50% 40% 30% 0% 0% 0% Exports from these taxfree industrial enclaves nearly doubled from Rs 346,50 million in to Rs 666,380 million in Exports from the SEZs amounted to Rs. 996,890 million in thereby recording 50% growth over previous year. The first quarter of FY 0090 has already recorded exports worth Rs. 45,00 million. Summary of physical exports from SEZs in AprilJune 009 (Rs. in million) Particulars Exports (Rs. in Million) Set up before 006 Central Government SEZs State Govt SEZs 80, ,57.00 Set up post 006 Notified SEZs 68, As on date Total 45,07.60 Key points : During the period 00406, exports from SEZs were growing at a CAGR of 8.4% whereas during the period 00609, exports grew at a CAGR of 63.43% Every additional Rs. million invested in SEZs during the period has yielded Rs. 0.8 million of additional exports Every additional employment during the same period has yielded Rs.3.39 million in incremental exports 9

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11 LEGAL FRAMEWORK for setting up sez is defined under SEZ Act and State SEZ policy. The Central Government had brought out Model State SEZ Act to be followed by State Governments while forming their respective SEZ Acts. The state SEZ Acts provide for a regulatory framework for SEZ development in consonance with the SEZ Act. They also provide for single window clearance to the developer and fiscal benefits to the SEZ developers and units within SEZs. Following State SEZ Acts have already been notified: The Indore Special Economic Zone (Special Provisions) Act, 003 West Bengal Special Economic Zone Act, 003 The Gujarat Special Economic Zone Act, 004 The Haryana Special Economic Zone Act, 005 State SEZ Act The SEZ Rules provide for Simplified procedures for development, operation, and maintenance of the SEZs and for setting up units and conducting business in SEZs Single window clearance for setting up of an SEZ and setting up a unit in a SEZ Single window clearance on matters relating to Central as well as State Governments Simplified compliance procedures and documentation with an emphasis on self certification Administrative set up of SEZs The functioning of the SEZs is governed by a three tier administrative set up, viz., (i) Board of Approval (BoA), the apex body, (ii) Unit Approval Committee (UAC) at the zonal level, dealing with approval of units in the SEZs and related issues, and (iii) Each Zone headed by a Development Commissioner, who is also the head of the UAC. SEZ Act, 005 Legal Framework SEZ Rules, 006 Any proposal for setting up of SEZ in the Private / Joint / State Sector is routed through the concerned State Government who in turn forwards the same to the Ministry of Commerce with its recommendations for consideration of BoA. BoA issues a formal approval in case land is available with the developer to set up the SEZ. If the land is yet to be secured for setting up of the SEZ, BoA issues an in principle approval. SEZ Act, 005 The policy relating to SEZs was earlier contained in Foreign Trade Policy. However, to give a long term and stable policy framework with minimal regulation, the SEZ Act 005 was enacted. The Act envisages a key role for the state governments in export promotion and creation of related infrastructure. Besides, a single window SEZ approval mechanism has been provided through a 9 member interministerial SEZ Board of Approval (BoA). The applications duly recommended by respective state governments are considered by this BoA periodically. All decisions of the BoA are with consensus. SEZ Rules, 006 SEZ Rules, 006 are the rules which lay down the complete procedure which an individual is required to follow if one intends to develop an SEZ or one intends to establish a unit in SEZ. The benefits of various taxes available to a developer and a unit are also given in the SEZ rules.

12 OPERATING STRUCTURES OF SEZS Who Can Operate Sector Specific. State Govt. Agency + Private Sector. One Major Industrial House + Other Small Houses 3. Syndicate / Association of Major Industrial Players 4. Single Industrial House Multi Product. Central / State Govt / State Govt. Agency +Private Sector. Public Sector +State Govt. Agency +Private Sector 3. Public Sector Alone Free Trade, Warehousing Zones and SEZ in port / airport. Industrial House + Logistics Company. Syndicate / Association of Logistics Companies 3. Syndicate / Association of Logistics, Warehousing and Trading Companies IT / ITES. Syndicate / Association of Pvt. Sector Companies with or without Govt. Agencies. One or more IT / ITES Companies 3. Single Company

13 Sector Specific SEZ (Rule zb of SEZ Rules, 006)» Units set up for one or more products in a sector» One or more services in a sector Multi Product SEZ (Rule za of SEZ Rules, 006)» Units set up for manufacturing of two or more goods in a sector or goods falling in two or more sectors» For trading and warehousing or rendering of two or more services in a sector» Rendering of services falling in two or more sectors Free Trading and Warehousing Zones» To create trade related infrastructure to facilitate import and export of goods and services with freedom to carry out trade transactions in free currency» Atleast 50% of the area shall be earmarked for developing processing area (in a standalone case)» Can be set up as a part of multiproduct SEZ (G.S.R 470 (E) )» SEZ can be set up in an existing port or airport IT/ ITEs» IT / ITEs SEZs come under sector specific SEZs» Can be established to provide hardware/ software and related services Activities in SEZ Both manufacturing/trading and service activities can be carried out in an SEZ. Following activities are permitted to be carried out in SEZ: Manufacturing / Trading Apparel, Garments & Leather Automobile & Auto Components Computer Hardware & microelectronics Consumer Electronics & Appliances Engineering Light, Heavy & Application Food Processing Gems, Jewellery & Diamonds Handicrafts Pharmaceuticals Telecom Equipment Service Business Services (Convention / Exhibition) Entertainment, Leisure & Recreation Financial Services Health Care IT enabled services Biotechnology Knowledge (Education) Services Organized Retail R & D Services Sports & Related Activities Warehousing & Trade Related Services Wood, Rubber, Plastic & Leather Products Source: SEZ Rules ( CoDeveloper in SEZ Any person who intends to provide any infrastructure facilities in the identified area in the SEZ or wants to undertake authorised operations can apply to the BoA for approval as CoDeveloper. As such codeveloper can be appointed for provision of infrastructure facilities in the processing area as well as nonprocessing area of the SEZ. There is no restriction on number of codevelopers for an SEZ and as such there can be more than one codeveloper in an SEZ providing/developing/maintaining infrastructure in different parts/areas of the SEZ. 3

14 ELIGIBILITY CRITERIA FOR A DEVELOPER Net worth and investment criteria: To ensure that only financially sound entities are applying for SEZs, the BoA has fixed a minimum net worth and investment criteria for promoter firms. Category of SEZ Minimum Net worth Criteria (Rs. in Million) Minimum Investment Criteria (Rs. in Million) Multi product SEZ,500 0,000 Sector Specific SEZ 500,500 IT SEZs,000 (Source : Economic Times dt. nd September 006) FDI in SEZ The SEZ Act allows for 00 % FDI in the manufacturing sector through the automatic route, barring a few sectors, for establishment of units in the SEZs and also 00 % FDI to develop townships within the SEZs. External commercial borrowings (ECBs) of up to USD 500 million can be raised by the SEZ units in a year without any maturity restrictions and with flexibility to keep 00 % of export proceeds in an Exchange Earner s Foreign Currency (EEFC) account. SEZ units are eligible to make overseas investments up to any amount under the automatic route to be funded out of EEFC balances of the unit. Such investments will be subject to an overall ceiling of USD 500 million. 4

15 AREA REQUIREMENT FOR SEZ The SEZ Rules provide for different minimum land requirement for different class of SEZs. For area other than special category states / UTs For special category states / UTs Type Minimum Area Requirement Processing area Requirement Minimum Area Requirement Processing area Requirement Multiproduct 000 hectares 35% 00 hectares 35% One / More Services 00 hectares 50% 00 hectares 35% Sector Specific / Port/ Airport 00 hectares 50% 50 hectares 50% Electronic Hardware & Software or IT enabled services 0 hectares with a minimum built up area of 0. million sq. meters 50% 0 hectares with a minimum built up area of 0. million sq. meters 50% Gems and Jewellery 0 hectares with a minimum built up area of 0.05 million sq. meters 50% 0 hectares with a minimum built up area of 0.05 million sq. meters 50% Bio Tech/ Non conventional energy including solar energy equipment cells 0 hectares with a minimum built up area of 0.04 million sq. meters 50% 0 hectares with a minimum built up area of 0.04 million sq. meters 50% Free Trade Warehousing Zone 40 hectares (minimum built up area of 0. million sq. meters) 50% 40 hectares (minimum built up area of 0. million sq. meters) 50% Source: SEZ Rules ( Financial Express 07th June 006, Assocham, Special category states are Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir and Goa Processing and nonprocessing area Every SEZ is divided into a processing area where alone the SEZ units would come up and the nonprocessing area where the supporting infrastructure is to be created. The DC of the concerned SEZ shall be the authority for demarcating the areas falling within the SEZ (under the provisions of section 6). Notified Area of SEZ Entry / Exit Points(s) The processing area and Free Trade and Warehousing Zone NonProcessing shall be fully secured by boundary wall or wire mesh fencing Area with specified entry and exit points. Source: CII India SEZ Summit 006 Processing Area IFSC FTWZ 5

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17 Zonewise distribution of SEZs in India based on formal approvals, in principle approvals and notified SEZs is as below: Zonewise distribution of SEZs Formal Approvals In Principle Approvals 34% 7% 44% % 7% 43% % % North South East West North South East West Notified 3% 6% 5% 48% Source: Ministry of Commerce & Industry, Dept. of Commerce North South East West From the above, it is evident that, South zone has maximum number of formal and notified SEZs which constitute more than 40% of the approvals. West zone has maximum in principle approvals (44%) and is followed by South zone at %. Statewise distribution of SEZs in India Maharashtra Andhra Pradesh Tamil Nadu Karnataka Gujrat Haryana Uttar Pradesh West Bengal Kerala Madhya Pradesh Orissa Punjab Rajasthan Goa D&N Haveli Uttarakhand Nagaland Chandigarh Jharkhand Chhattisgarh Pondicherry Delhi Statewise Approved and Notified SEZs Notified Formal Approvals Investors have shown interest in developed states like Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka and Gujarat. Though the developers have obtained in principle approval for a number of SEZs the same could not be notified due to land acquisition issues. 7

18 Statewise distribution of SEZs in North Zone Statewise distribution of SEZs in West Zone States Formal Approvals In Principle Approvals Notified States Formal Approvals In Principle Approvals Notified Chandigarh Dadra & Nagar 4 Delhi Haveli Haryana Goa 7 3 Himachal Pradesh 3 Gujarat 50 8 Punjab 0 7 Madhya Pradesh Uttar Pradesh Maharashtra Uttarankhand 3 Rajasthan 8 7 Total Total Statewise distribution of SEZs in South Zone Statewise distribution of SEZs in East Zone States Formal Approvals In Principle Approvals Notified States Formal Approvals In Principle Approvals Notified Andhra Pradesh Chhattisgarh Karnataka Jharkhand Kerala 4 0 Nagaland Pondicherry Orissa Tamil Nadu West Bangal 5 3 Total Total Source: Ministry of Commerce & Industry, Dept. of Commerce, Statewise distribution of formally approved SEZs clearly indicates the proactiveness of the southern states in attracting investors and mobilising investments in terms of formal approvals and notified SEZs. South has the maximum no. of notified SEZs (6) in India. West is closely following South in terms of formal approvals and notified SEZs but East and North are much behind the south zone. North and East Zone need to implement effective processes to reap the benefits of SEZ policy. Sectorwise distribution of notified SEZs Though the aim of the SEZ policy is to encourage infrastructure development through multiproduct SEZs, specific product SEZs have been approved in large numbers Sectorwise shares reflect that IT/ ITEs got a major share. This can be as a result of small size of the SEZ as compared to sector specific /multi product SEZs. It results in speedier land acquisition and commencement of activities in the SEZ. The number of formal approvals and notifications thereon for multi product SEZs are very low due to large scale land requirements of over 000 hectares in this category Sectorwise distribution of notified SEZs IT ITES Pharma / Chemicals & Bio Tech Textiles 8% 0% 6% 4% 63% Others Multi Product / Sevices Source: Ministry of Commerce & Industry, Dept. of Commerce, 8

19 Sectorwise distribution of notified SEZs within each zone Distribution of notified SEZs in East Distribution of notified SEZs in West 0% 39% 6% 7% 47% 7% IT / ITES, Electronics & electronic H/W Others IT / ITES, Electronics & Electronic H/W Pharma / BioTech / Chemicals Others Multi product / Sevices Distribution of notified SEZs in North Distribution of notified SEZs in South 6% 4% 8% 83% 0% 8% 5% 67% IT / ITES, Electronics & Electronic H/W Pharma / BioTech / Chemicals IT / ITES, Electronics & Electronic H/W Pharma / BioTech / Chemicals Others Multi product / Sevices Others Multi product / Sevices Source: Ministry of Commerce & Industry, Dept. of Commerce, Even within each zone, IT / ITES continues to be the leader amongst SEZs in India Except in the west, IT / ITES SEZs have more than a 50% share South and West zone have a significant no. of other SEZs (SEZs apart from IT / ITES, Pharmaceuticals and Biotech and multiproduct and multiservices SEZs) as well Other industry SEZs (SEZs apart from IT/ITES, Multi Product/Multi Services, Pharmaceuticals and Biotechnology): The activities that can be carried out in SEZs prove the fact that the government of India is trying to promote almost every industry by taking the route of SEZs. Even industries like garment, leather, and food processing that are predominantly small scale in nature can give a boost to their export business by availing the various fiscal benefits that a SEZ offers. Various states in India already have SEZs notified for such industries. Other Industry SEZs in East Other Industry SEZs in West 4% % 7% 5% 86% 4% % % Food Processing / Agro Processing Others Aerospace & Engineering products Gems & Jewellery Textiles / Apparels Food Processing / Agro Processing Others Free Trade zone / port based Other Industry SEZs in North 5% 50% Other Industry SEZs in South 3% 3% 9% 5% 3% 5% 3% 6% 9% Textiles / Apparels Aerospace & Engineering products Others Source: Ministry of Commerce & Industry, Dept. of Commerce, Others Aerospace & Engineering products Textiles / Apparels Food Processing / Agro Processing Free Trade zone / port based Footwear Writing & Paper Mill Gems & Jewellery Maharashtra (3) followed by Andhra Pradesh (), Tamil Nadu () and Gujarat (8) have maximum no. of other SEZs (SEZs apart from IT/ITES, multi product/multi services, pharmaceuticals and biotechnology). 9

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21 THE SEZ POLICY was introduced in India in the year 000 with a purpose of boosting exports. It was also decided to convert the existing Export Processing Zones (EPZs) into SEZs. Accordingly the following Central Government EPZs were converted into SEZs. Brief details about these SEZ are as below : No. Name of the SEZ Location Type Year of commencement Area in acres Exports during the year (Rs. in mn) Kandla Special Economic Zone Kandla, Gujarat Multi product ,788.5 SEEPZ Special Economic Zone Mumbai, Maharashtra Electronics and Gems and Jewellery , Noida Special Economic Zone Uttar Pradesh Multi product , Cochin Special Economic Zone Cochin, Kerala Multi product , Falta Special Economic Zone Falta, West Bengal Multi product , MEPZ Special Economic Zone Tamil Nadu Multi product , Visakhapatnam SEZ Vishakhapatnam, AP Multi product ,606.9 Source : ICICI Property Services Group Some state government / private sector SEZs were operational prior to commencement of SEZ Act. Brief details about these SEZs are as below: No. Name of the SEZ Location Type Year of commencement Area in acres Exports during the year (Rs. in mn) Surat Special Economic Zone Surat, Gujarat Multi product 000 Indore SEZ SectorIII, Pithampur, Multi product 003 District Dhar (MP) 3 Jaipur SEZ Jaipur, Rajasthan Gems and 004 Jewellery 4 Manikanchan SEZ, W. Bengal Kolkatta, West Bengal Gems and 004 Jewellery 5 Jodhpur SEZ Jodhpur, Rajasthan Handicrafts Salt Lake Electronic City Kolkatta, West Bengal Software development and 005 WIPRO, West Bengal ITES Moradabad SEZ Mahindra City SEZ (Autoancillary), Tamil Nadu Mahindra City SEZ (IT), Tamil Nadu Mahindra City SEZ (Textiles), Tamil Nadu Nokia SEZ Moradabad, UP Tamil Nadu Sriperumbudur, Tamil Nadu Handicrafts Telecom IT/Hardware and Bioinformatics Apparel and fashion accessories Telecom equipments / R&D services 007 Tamil Nadu Auto NA Tamil Nadu NA NA NA Surat Apparel Park Surat, Gujarat Textiles NA Source : ICICI Property Services Group

22 The below graphs depict the exports and employment per acre from the Central Govt., State Govt. and private sector SEZs established prior to enactment of the SEZ Act. Potential of SEZs 8,000 7,000 6,000 5,000 4,000 3,000,000,000 0 Electronics / Gems & jewelary IT/ ITES Multi product Telecom equipments Others Exports per acre (Rs. In mn) Employment per acre Potential of SEZs Zonewise details 7,000 6,000 5,000 4,000 3,000,000,000 0 North East West South Exports per acre (Rs. In mn) Employment per acre The total area occupied by notified SEZs is around 39,803 hectares and that by operational SEZs around 6,66 hectares. The zonewise distribution of the land area is as below : Zonewise area distribution of Notified SEZs % 4% 4% 5% West South East North Source : ICICI Property Services Group

23 Sectorwise distribution of area 00% 80% 60% 40% 0% 0% East North South West Pharma / Bio Tech / chemicals Multi product /services Gems & jewellery Textile / Apparels Food processing / Agro processing Aluminium / Stainless Steel / Mineral based IT / ITES, Electronics & electronic H/w Footwear Writing & paper Mill Aerospace & engineering products Free Trade zone / port based Others The West zone contributes highest in terms of area with 5% of the total notified area located in this zone. East is the lowest with a share of around %. Within the West Zone, Multi product / services SEZs are highest contributors in terms of area with around 73% of the area being occupied by such SEZs. This might be on account of larger area requirement for multi product SEZs as compared to stand alone. South Zone has a wide range of activities notified within SEZs like Pharma Bio Technology, IT / ITES, Footwear, Gems and Jewelry, Textile, Food Processing port based SEZs etc. Such variety is not seen in any of the other zones. Zonewise area distribution of operational SEZs % % 35% 63% West South East North Source : ICICI Property Services Group Sectorwise distribution of operational SEZs 00% 80% 60% 40% 0% 0% South North West East Electronic Hardware Footwear Gems and Jewellery Engg. Products IT/ITES Multi product Textile Pharma & Biotechnology Others West Zone has the highest operational area with a share of around 6% of the total SEZ operational area, currently, followed by South that accounts for almost 35% Within the West zone, Multi product SEZs are the highest contributors in terms of operational area with a share of around 90% of the area within the zone 3

24 Details of some of the operational SEZs in India are as below: No. Name of the SEZ Location Type Key Occupiers ETL Infrastructure Services Limited Tambaram Taluk, Kancheepuram, Tamil Nadu IT/ITES TCS 8 Laks sq. ft. Fully Operational, Wipro 74,000 sq. ft. fully operational, HCL 74,000 sq. ft. fully operational, Ford 37,000 sq. ft. fully operational, Siemens 55,000 sq. ft. fully operational, Polaris 5,000 sq. ft. fully operational Manyata Embassy Business Park Bangalore, Karnataka IT/ITES IBM, Philips, NXP, Target, ANZ, Cerner, Fiedility, Nokia Siemens 3 DLF Infocity Developers Ltd. Manapakkam & Mulivakkam Vill., Kancheepuram District Tamil Nadu IT/ITES There are around 33 Clients. IBM has lakhs sq. ft. but has occupied only 6 Lakhs sq. ft., balance is in various stages of development, CSC.5 lakhs sq. ft. fully operational, Mphasis lakhs sq. ft. Fully opeartional, Symentec corp tech.5 lakhs fully operational, CTS lakhs sq. ft. fully operational, Logica.5 lakhs sq. ft. fully operational, TCS.0 laks sq. ft. fully opeartional, Sony erricsson.5 lakhs sq. ft. fully opearational. Other clients include Barclays, I Gate, Lyca, Virtusa, Syntel, Zenta, Technosoft, Perot systems etc. 4 Cessna Garden Developers Pvt. Ltd. Bangalore, Karnataka IT/ITES Cisco 5 DLF Commercial Developers Ltd. Ranga Reddy District, Hyderabad, Andhra Pradesh IT/ITES Mahindra Satyam, App Labs 6 L&T Phoenix Infoparks Pvt. Ltd. Mandal, Andhra Pradesh IT/ITES UBS, HCL 7 DivyaSree NSL Infrastructure Private Limited Ranga Reddy District, Hyderabad, Andhra Pradesh IT/ITES IBM, Wells Fargo 8 Unitech Hitech Structures Ltd. Rajarhat, Kolkata, West Bengal IT/ITES Genpact, HCL, Capgemini, Cognizant, Infosys 9 M/s Hiranandani Builders Powai, Maharashtra IT/ITES TCS 0 Shriram Properties and Infrastructure Private Limited Perungalathur village, Chennai, Tamil Nadu IT/ITES Accenture, Mahindra satyam, Trianz, Mobius, Sybrent technologies, Redington Gulf, Take solutions Source : ICICI Property Services Group 4

25 Total Space Available for Comm. Activity Vacancy Rate Lease Rental (per sq. ft. per month) Operational Date Total Area of SEZ 4.7 million sq. ft., Phase.43 M sq. ft. is up and ready. Phase.3 million sq. ft. is under various stages of construction and will be ready by April 0.6 Lakhs sq. ft. is available in Phase. And Phase is fully available Rs.50/ per sq. ft. for warm shell +Rs. 7/ per sq. ft. as CAM charges Phase is functional since December 006 Million sq. ft. Available for construction, till date 5.7 Million sq. ft. area constructed 5% Rs. 48/ per sq. ft. for warm shell 006 Entire campus is of 6 Million sq. ft. approx. out of which, 3. m sq. ft. is occupied & operational.8 million sq. ft. is available in various stages of construction. This includes Non processing office space also, like service appts & Corp. office etc. IT space Rs.50 per sq. ft. (Approx.) Year 007 first quarter.3 Million sq. ft. RS. 35/ to Rs. 40/ per sq. ft lakhs sq. ft. 70% Rs.35/ per sq. ft. /0/ lakhs sq. ft. 9% Rs.38/ per sq. ft. /0/ lakhs sq. ft. 79% Rs.35/ per sq. ft. /0/ million square feet of office space and (approx.) 00,000 square feet of commercial space 60% Rs. 35/ to Rs. 40/ per sq. ft. Partly operational since Lakhs sq. ft. 0% NA 009 NA 3 Lakhs sq. ft. available for fitouts Rs.36/ per sq. ft. for warm shell + CAM charges. NA 5

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27 Direct Taxes Corporate Tax (Developers) Corporate Tax (Units in SEZ) Dividend Distribution Tax Minimum Alternate Tax Capital Gain Deducion of 00% of profits derived from developing a SEZ for a period of 0 consecutive assessment years out of the first 5 years from the year in which the SEZ is notified by the Central Govt. Units in SEZ are eligible for tax exemption. Details are as below: For first five years: 00% of the eligible profits or gains Next five years: 50% of the eligible profits or gains Next five years: 50% of the eligible profits or gains subject to creation of specified reserve Exemption of Dividend distribution tax declared or paid after April, 005 by an enterprise engaged in developing and / or operating and / or maintaining an SEZ Exemption from the provisions of minimim Alternate Tax for Developer as well as SEZ Unit Exemption from capital gains on transfer of specified assets in consequence to shifting of industrial undertaking from urban or other areas to an SEZ subject to certain conditions Indirect Taxes Customs Duty Excise Duty Service Tax Central Sales Tax Exemption from payment of any duty of customs on import of capital goods, consumables, spares, etc. by a Developer or a Unit in a SEZ for authorized operations Exemption from payment of any Excise duty goods bought from DTA to an SEZ or a Unit for authorized operations Exemption from payment of service tax on taxable services received by a Developer or a Unit in an SEZ for authorized operations Exemption from payment of Central Sales tax on interstate sale of goods to a Developer or a Unit in an SEZ for authorized operations Exemption from local taxes like VAT / sales tax, octroi, entry tax, electricity duty etc, as per state SEZ Act / policy is available Exemption from stamp duty : Many states have exempted all the transactions in a notified SEZ from stamp duty while some states have exempted only transactions relating to processing area from stamp duty Supply from DTA to SEZ treated as physical export entitled for all exports benefits like DEPB, duty drawback, advance licenses and others Exemption of interest income of NRI in respect of deposits in offshore banking units Duty free goods for development of SEZs as well as for setting up SEZ units 7

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29 Strength Weaknesses Recognized legal redress system Bureaucracy and red tape Easy availability of skilled English speaking manpower High cost of capital and availability World class banking and financial service institutions Deficient institutional support Established prowess in stateoftheart, low cost design, development, research and field / clinical trials Emergence of a global manufacturing & IT / ITES hub Growing and evolving consumerism Pull of the growing Indian market Burgeoning middle class with increasing purchasing power Opportunities Major infrastructural bottlenecks roads, railways, ports, warehouses, etc. leading to long time and cost overrun Frequent changes in the political scenario Old and outdated labour laws Capital account convertibility Complicated foreign exchanges laws and regulations Threats Consistent GDP growth Inadequate government support for land acquisition Government thrust on infrastructure development Modernisation of airports across the country Fresh investments in the logistics and warehousing sector Rising wage cost, India is facing competition on skilled manpower from other developing countries Possibility of clash of interests between authorities, central and state, delaying the decision making process Presents an alternate stateoftheart manufacturing base Focus on service oriented SEZs : No movement of physical goods would reduce infrastructural dependence Over reliance on sector specific SEZs Imposition of export embargoes Relocation of industries / technology transfer to other third world countries Emergency of smaller ports 9

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31 Shenzhen SEZ China Features Source: Asian Development Bank (ADB), Report on Special Economic Zones and Competitiveness Ras Al Khaimah Free Trade Zone, UAE, Dubai Features First SEZ to be set up in China Total Area of Shenzhen:,95.84 sq. Kms Area of SEZ: 37 square kilometers Harbouring 3.5 million people USD30 billion in FDI 3 million employment Equipped with the stateoftheart infrastructure Effective port facilities Simplified procedures Fully flexible labour policy in terms of hiring and firing Advantages The Central Government has provided a special policy framework for the Shenzhen SEZ that has helped to create a soft enabling environment to enhance the city s industrial competitiveness Liberal economic policies both in terms of attracting FDI and engaging in international trade»»»» Permission to set up wholly foreignowned firms, Enabling easier access to land and infrastructure, Allowing the repatriation of profits, and Favourable export and import polices Well established infrastructure in Shenzhen Location advantage Shenzhen has benefited hugely from its proximity to Hong Kong, China as a major international financial, information, and services centre,684 square kilometers of land (about. percent of the total UAE land area), including a coastline of 55 kilometers Fourth largest of the UAE s seven emirates Strategic location with access to more than billion customers Transparent rules and regulations International access easier Abundant energy supply Advantages 00% tax exemption and 00% foreign ownership No restrictions on capital and profit repatriation Strategic location within proximity to Dubai Stateofthe art communication facilities Easy access to Ras Al Khaimah international airport and a sea port Long term renewable lease Source: Website RAK Free Trade Zone Subic Bay Freeport, Philippines Features The total land area of the Subic Bay Freeport Zone (former U.S. Military Reservation) is about 3, Hectares Subic Bay Freeport (SBF) is located southwest of the Luzon Island in the Philippines Easily accessible by all the means of transport i.e. Water, air and land. Approximately half of the world s container fleet passes by its doorway. The Subic Bay International Airport (SBIA), the gateway to Subic Bay Freeport, is a modern, international airport. It is well equipped with 0,000 sq. m. passenger terminal and is capable of handling 700 passengers at any given time and featuring the very latest technology for security and comfort. Advantages Highly skilled manpower» Subic s wage rate is highly competitive compared to that of other Asian countries Liberal Business Incentives» Exemption from all local and national taxes such as advalorem and excise taxes. Investors are only required to pay a corporate tax of 5 percent from their gross adjusted income. Subic Bay Freeport Enterprises (SBFEs) may also avail of tax holidays if they register with the Philippine Board of Investments (BOI).» Dutyfree importation of raw materials, supplies, capital equipment and other items for consumption within the Freeport» Foreign investors may invest up to 00% equity in almost any economic activity in the SBF except for businesses where foreign ownership is limited by the Constitution» There are no foreign exchange controls in the Freeport and full repatriation of profit is allowed» The Subic Bay Marine Authority (SBMA) also processes and grants special resident and investor visas. Temporary work permits and Subic Special Work Visas could also be granted to foreign nationals subject to certain requirements Source: Website Subic Bay Free Port 3

32 INCHEON FREE ECONOMIC ZONE, KOREA Features The Incheon Free Economic Zone [IFEZ] consists of three different Incheon City Districts with a total area of 5,739 acres: Songdo, Yeongjong and Cheongna Its goal is to transform these areas into logistics, international business and leisure and tourism hub of the Northeast Asian region Songdo international City» Total investment for the project: 0,45,300 million Korean Won (equivalent to USD 8,905.0 million)» Project period: 003 ~ 00 (Phase : 009, Phase : 04, Phase 3: 00)» Major projects: International Business Complex, Knowledge Information Industrial Complex, Hightech Bio Complex, Songdo Landmark City, Hightech Industry Cluster, Port and Support Complex (New port logistics complex, Aam Logistics Complex) etc. Yeongjong Island»»»» Cheongna»»»» A hub of international logistics, tourism and leisure Project cost: 37,50,000 million Korean won (equivalent to USD 3, million) Project period: 006 ~ 07 (Phase : 0) Function: exhibition, lodging, business, education, Eurostyle town etc. Global entertainment and theme park Consists of International business facilities, multi shopping mall etc. Project cost: 6,00,000 million Korean won (equivalent to USD 5,99.3 million) Project period: 007 ~ 05 Source: Website IFEZhttp://eng.ifez.go.kr/front.asp 3

33 There are six distinctive aspects which have played a key role in the success of SEZs in China: large size, unique location, investment oriented labour laws, exportled growth, sales in domestic markets and decentralisation of power in favour of provinces and local authorities for administering the zones. CHINESE SEZs: A STORY IN CONTRAST India s growth potential stems from the fact that India has lagged behind in building fullfledged SEZs with foreign territory status, till the turn of the century; although it had the advantage of building its first export processing zone in 969 with certain minimum infrastructure and fiscal sops (seven more followed later). Chinese SEZs Size a. Each SEZ well over,000 hectares, the minimum recommended area b. Five mega SEZs Shenzhen, Zhuhai, Santou, Xiamen, and Hainan built by the Chinese government (the largest being Shenzhen built over 49,500 hectares) Indian SEZs a. Sectorspecific SEZs with minimum recommended area of 0 hectares of land b. Among the EPZs converted into SEZs, the one in Noida is the largest but extends to around 30 hectares. The SEEPZ, the first SEZ in India, is only 93 hectares. The economies of scale, which seems to have worked so well in China by reducing production costs, may not have the same effect in Indian SEZs. Location a. All Chinese SEZs are located near coastal regions b. The Chinese SEZs are close to internationally reputed commercial destinations like Hong Kong, Macau and China thus gaining easier access to foreign investments, modern technology and managerial expertise a. Several SEZS are located in landlocked states b. SEZs are scattered across the country Location of Chinese SEZs makes it easier for SEZ units to export their products and import inputs Labour Laws a. Flexibility in labour laws b. Workers in state sector are accorded generous job guarantees whereas those in the nonstate sector (including the SEZs) are not guaranteed employment c. Labour policy in China is investment oriented a. Stringent (Old and outdated) labour laws b. Workers in both the public and the private sector, once employed, cannot be laid off without governmental permission c. Labour policy in India is worker oriented The hireandfire policy in SEZs has been one of the biggest attractions for foreign investors in China Exportled growth Achieved brisk growth on the whole driven by rapid manufacturing led exports Managed reasonable success in overall exports growth as compared to China, though the growth rate has picked up considerably only over the last few years. Exportled growth, largely in the labourintensive manufacturing sector, has been the elemental difference in India s and China s economic performance during the past two decades Sales in domestic markets Decentralisation of Power About 50% of SEZ sales are to the domestic market Policy impediments to sales in the domestic market In China the thrust of SEZs has been to attract foreign investments and modern technology whereas in India the emphasis has been on exports Provincial and local authorities were made partners and stakeholders, by delegating to them powers to approve foreign investment Only State governments are allowed to set up SEZs and the powers for foreign investment approvals are vested with the Development Commissioners, who are the representatives of the Central Government Decentralisation of power was also a major reason for SEZ success in China 33

34 INFRASTRUCTURE NEED Infrastructure is a key for growth of any economy. Basic infrastructure consists of roads, railway lines, sea ports, air ports and energy resources at a reasonable cost. In absence of the basic infrastructure, movement of goods gets affected, production is interrupted and supply chain can not function properly, which adversely impacts the overall economy. Though SEZ policy provides a means for world class infrastructure within SEZs through private sector participation, the need for connecting these business centers with other business districts and ports / airports needs to be addressed Significant investments in infrastructure to the tune of INR 5,000 billion over the next few years is required with an increased emphasis on Public Private Partnerships (PPP) Funding SEZs Infrastructure status accorded to industrial and social infrastructure activities in SEZs (as per the EGoM dt. October 5, 008) are meant to help SEZs raise loans at cheaper rates from domestic banks Infrastructure carries lesser risk weightage than the commercial sector. Accordingly lending norms for SEZs should be more liberal as compared to those for the commercial sector Unlike commercial real estate projects, the major objective of SEZs is to develop industrial, commercial and social infrastructure hence they can not be treated in the same way as the commercial sector In view of the same, the government has set up a special dedicated fund to provide loans to infrastructure projects. The proposed fund has a corpus of around INR 500 billion. 34

35 ISSUES FACING SEZs IN INDIA Sector Specific SEZs Sector specific composition of approved SEZs reflects that more than 60% of the SEZs are from the IT / ITES sector due to the erstwhile boom in IT related business» One of the reasons for growth in IT SEZ could be that land requirement for IT SEZ is much less as compared to land requirement of multiproduct SEZ Sector Specific SEZs are vulnerable to economic cycles as could be seen from the fact that the IT related industry, particularly BPO sector faced severe impacts due to the global slow down. As a result, significant number of approved SEZs of IT / ITES segment may not start their business due to uncertainty in the sector and insecurity over the future outlook. Thus, large scale development of sector specific small and fragmented SEZs may not be a viable option in the long run and ultimately multi product SEZs appear to be a key for overall economic development. Denotification of SEZs In view of the global economic slowdown, many developers have put on hold their plan to go for SEZs and many of them have applied for denotification of the SEZs. Though there are no provisions for denotification of zones in the SEZ Act or rules till now, the law ministry had informed its commerce counterpart that the board has the power to denotify SEZs with the condition that the developer will have to give back the government all the benefits it availed while constructing it. The units cannot be surrendered after they become operational. The commerce ministry, which approves the SEZ projects, allows it s derecognition to change the enduse of the land earmarked as SEZs, if no construction work has started at the site. DLF had sought for the denotification of four IT SEZs proposed in Sonepat, Gandhinagar, Bhubaneswar and Kolkata, which was recently approved by the government thus providing the developer an exit from the project. DLF has informed the government that it wants to withdraw from the project because of less demand for space from the IT and BPO industry because of the economic slowdown. (Source: Outlook, Dec 008). With this, DLF has scrapped plans for five of the 5 IT SEZs envisaged across the country. The SEZs where denotification has been sought are yet to be constructed hence all four projects qualified for denotification. Real Estate Developer, K. Raheja Universal Private Ltd. had approached BoA for denotification of its 3 hectares IT zones based in Navi Mumbai. While applying for denotification, the company sighted lack of demand for space for IT related zones. It also stated that prospective clients have halted their expansion plans indefinitely due to ongoing economic slowdown. BoA recently accepted the said proposal and approved K Raheja Universal s request to scrap its Navi Mumbai SEZ. (Source : business standard dt. 0th June 009) Maytas properties Limited had also approached government to denotify one of its SEZ located at Gudlapochampally at Andhra Pradesh. The company applied for denotification of Biotech SEZ due to weak business outlook in the sector. (Source : The Hindu, 4th July, 009, AP issue) Delhibased Ansal Properties and Infrastructure Ltd and Parsvanath Developers have also gone slow on their proposed SEZs. The global downturn in the IT business and the overall environment of the real estate industry were the reasons cited for the time taken on these projects. (Source: The Hindu Business Line, 8 April 009) 35

36 It is to be noted that the government initially denotifies SEZs in principle. The government denotifies the SEZ only after the developer returns the benefits including customs, excise, income tax that have been availed by it. Since IT/ITES contributes significantly in the SEZ development in India (64% of the notified SEZs are IT/ITES SEZs) the reduced pace of growth in this industry caused by the global meltdown, has also reduced the demand for real estate (SEZ space) in the country. Thus causing realty majors like DLF, Ansal Properties and Infrastructure Ltd and Parsvanath Developers to either denotify or go slow with their projects. Land Acquisition Land acquisition for SEZs is another major issue which India has been facing for a long time. Cases like Nandigram in West Bengal and Atchutapuram in Andhra Pradesh brought the land issue to fore. The matter has been revolving around acquisition of agricultural land and rehabilitation of the farmers. The Ministry of Commerce and Industry, Government of India, vide Instruction No. 9, dated August 8, 009: clarified that the State Governments would not undertake any compulsory acquisition of land for setting up of the SEZs. BoA will not approve any SEZs where the State Governments have carried out or propose to carry out compulsory acquisition of land for such SEZs after April 5, 007. However, cases in which all persons interested in the land either have not submitted any objection under Section 5A or have withdrawn the objections submitted and have thus acquiesced in the proposed acquisition of land, can be considered. In other cases, where there are objections under Section 5A, the Collector / Acquiring Authority may not proceed with the acquisition for the purpose of SEZ and such cases, if any, brought before the BoA may not be considered. Details L a n d Av a i l a b l e (in sq. km.) Land Proposed for SEZs Total Land in India 9,73, % Total Agricultural Land in India 6,0,388 0.% Source: Ministry of Commerce & Industry, Dept. of Commerce The total land requirement for the formal approvals granted till date is approximately 73,73 hectares out of which approvals for State Industrial Development Corporations (SIDC) / State Government Ventures account for over 0,853 hectares. In these cases, the land already available with the State Governments or SIDCs or with private companies has been utilized for setting up SEZ. The land for the 335 SEZs which have received notification is approximately over 39,803 hectares only. Out of the total land area of 9,73,90 sq km in India, total agricultural land is of the order of 6,0,388 sq km (54.5%). It is interesting to note that out of this total land area, the land in possession of the 335 notified SEZs amounts to approximately over 396 sq km only. The formal approvals granted also works out to only around 730 sq km. Acquisition of fertile agricultural land should be avoided to facilitate a healthy SEZ development. The government can collate land banks across the country which is not fit for agriculture or on which a farmer is not dependent for his income. Even in such cases an apt compensation package should be devised by the government to ensure smooth rehabilitation of the farmers. 36

37 LATEST DEVELOPMENTS ON SEZs.. The Central Government has drafted a Green Policy, for making industrial and non industrial SEZs more energy efficient. According to the draft guidelines, buildings in the SEZs need to comply with the energy conservation building code by laying down solar power systems to generate a minimum of 50 KW of power per hectare, meeting 50 % of hot water requirements through solar heating and implementing 00 % water harvesting while ensuring zero water discharge. The draft guidelines also include minimising individual automobile use in the SEZ premises, encouraging pedestrian and bicycle use, and landscaping of 75 % of open area. (Source :Business Standard dated September, 009) The Reserve bank may not treat banks advances for buying units in SEZs as exposure to commercial real estate (CRE), a move which is different from its earlier decision in 006 that sparked protests from SEZ players. RBI had included these loans in CRE exposures in 006 in order to prevent speculative dealings in such units. Since there are restrictions on transfer of such (SEZ) units and require Government permission, the speculative activity in sale and resale of units is unlikely to be there. Therefore, such cases should be more like financing of industrial units or the projects and if such is the case, these may not be treated as CRE Exposures, RBI said in its draft guidelines. However, the central bank may continue to treat exposure to land acquisition for developing SEZs as lending to commercial real estates, a move opposed by SEZ developers since it makes these advances costlier. (Source : The Economic Times, dated July 8, 009) 4. gates /over bridges/ underpass /culverts and also fence side of the road facing the processing area. No tax benefits would be available for measures taken to establish contiguity. The entire processing area would be located on one side of the National Highway and the formal approval from authorities concerned like NHAI and others would be submitted to the Department of Commerce and work for establishing contiguity would be started only after obtaining the requisite approvals. The government has tightened the norms for development of apartments, malls and other real estate activity inside SEZ. The Commerce Ministry has released guidelines on development activity in non processing area of SEZs, which limits area that can be used for housing and commercial construction. The new rules also make it mandatory for developers to maintain some amount of open space in large and medium sized zones. A circular by the commerce ministry says the BoA will now approve construction activity in non processing area on a casebycase basis, depending on factors such as area of the SEZ, distribution pattern between processing and non processing area available floor area ratio and projected employee strength. The move is said to be aimed at curbing unreasonable profiteering from real estate development in the zones. (Source : business standard dt. 0th June 009) 3. The Ministry of Commerce and Industry, Government of India, vide instruction No 7, dated August 8, 009; has issued guidelines regarding conditions for relaxation of contiguity criteria in respect of SEZs. As per the guidelines, the developer shall maintain contiguity by dedicated security 37