INDIAN SPECIAL ECONOMIC ZONE (SEZ) CONCEPT – A STITCH IN TIME
Prof. A.C. Shukla
(e-mail : shuklaac@indiatimes.com)
Introduction:
Indian Economy is one of the fastest growing economies of the world. Export contribution towards growth is the backbone of Indian economy. To strengthen the export, India was one of the first Asian Countries to recognize the effectiveness of Export Processing Zone (EPZ) model. In order to give colours to its dream, Asia’s first EPZ was set up in Kandla (India) in 1965. After few years, China made experiment on Special Economic Zone (SEZ), and, embarked upon their SEZ experiment In 1979-80. It was a great impact in Chinies Economy, and from closed economy model (at that time), it registered 25.97 billion Yuan (about 3.13 billion US dollars) in gross domestic product (GDP) in the first six months of the year 2008-09, from the contributon given by Hainan Province, China’s largest special conomic zone (SEZ).
(source – http://english.peopledaily.com.cn/200107/31/eng20010731_76176.html)
With a view to boost export in open economy, Government of India announced the Special Economic Zones (SEZs) Policy in April 2000. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations. The impact of SEZs was very responsive, and export figures increased tremendously.
At present, 1943 units are in operation in the SEZs. In the SEZs established prior to the Act coming into force, there are 1143 units providing direct employment to over 1.97 lakh persons; about 37% of whom are women. Private investment by entrepreneurs in these SEZs established prior to the SEZ Act is of the order of over Rs. 5626.24 crore.
Present scenario:
SEZs provide good infrastructure and make it cost – effective for manufactures to set up manufacturing units. The environment is conducive the timely production of export goods and manufacturers receive exemptions from the payment of excise and income tax. Moreover, SEZs enable manufacturers to receive faster clearances from various government departments. Manufacturers in SEZs may also be able to use resting and analytical facilities at concessional rates.
At present, 1016 units are in operation in the SEZs, providing direct employment to over 3.49 lakh persons; about 40 per cent of whom are women. Private investment by entrepreneurs in the SEZs established prior to the SEZ Act is of the order of over Rs. 81000 crore. In the 63 notified SEZs which have come up after 10th February 2006, investment of Rs. 13,435 crore has already been made in less than one year.
Visible Gains from SEZs :
Direct Employment in Special Economic Zones
(Source: http://www.sezindia.nic.in/HTMLS/visiblegains-sez.html)
Total employment in SEZs: 3,49,203 Lakh persons
Total incremental employment generated in SEZs since Feb., 2006: 2,14,499 persons
Break up:
( A ) DIRECT Employment created in notified SEZs (as of 30.6.08):
100885 persons (all Incremental Employment generated after February 2006)
(B) DIRECT Employment in Private/State Govt. SEZs which came into force prior to SEZ Act, 2005 (as of 30.6.08):
48988 persons (Incremental employment generated since Feb. 2006: 36,250 persons)
DIRECT Employment in 7 SEZs established by the Central Government (as of 30.6.08)
1,99,330 persons (Incremental employment generated since Feb. 2006: 77,094 persons)
Private Investment in Special Economic Zones
(Source: http://www.sezindia.nic.in/HTMLS/visiblegains-sez.html)
Total investment in Special Economic Zones as of 30.6. 2008: Rs. 81093 crore
Incremental investment since February, 2006: Rs. 77058 crore
Investment in notified SEZs (as of 30.6.08)
Rs. 73348 crore (all Incremental Employment generated after February 2006))
Investment in Private/State Govt. SEZs which came into force prior to SEZ Act, 2005 (as of 30.6.08)
Rs. 3701.91 crore (incremental investment generated since Feb. 2006 is Rs. 1946 crore)
Investment in 7 SEZs established by the Central Government (as of 30.6.08.)
Rs. 4043.28 crore (incremental investment generated since Feb. 2006 is Rs. 1764.08 crore)
Exports in Special Economic Zones
(Source: http://www.sezindia.nic.in/HTMLS/visiblegains-sez.html)
Physical exports in the year 2007-08 accounted for 84% of the total turnover of SEZs
381% increase in exports over four years (2003-04 – 2007-08)
Year
Value Of Physical Exports From SEZs (Rs. Crore)
Growth Rate (over previous year)
2003-2004 13,854 39%
2004-2005 18,314 32%
2005-2006 22,840 24.70%
2006-2007 34,615 52%
2007-2008 66,638 92%
Tax and other incentives being offered to the SEZs:
As per circular Epces circular no. 39 dated 28-2-2007, issued by EXPORT PROMOTION COUNCIL FOR EOUs & SEZ UNITS (Ministry of Commerce & Industry, Government of India)
SEZ units are provided exemption from Income Tax under Section 10AA of the Income Tax Act, as given in the 2nd Schedule of the SEZ Act, 2005. Section 10AA of the Income Tax Act, as given in 2nd Schedule of the SEZ Act, 2005 has been amended by the Finance Bill, 2007. The Finance Bill, 2007,
Accordingly, Tax benefit has been provided only for new units in Special Economic Zones : Sections 10AA of the Income-tax Act, provides that in computing the total income of an entrepreneur, from his unit in the special economic zone, the following deduction shall be allowed:—
(i) hundred per cent. of profits and gains derived from the export made in eligible business for a period of five consecutive assessment years beginning from the year in which such business commences;
(ii) fifty per cent. of such profits and gains for further five assessment years and thereafter;
(iii) an amount not exceeding fifty per cent of the profit debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be created and utilized for the purposes of the business in the specified manner, for the next five consecutive assessment years
Based on the above regulations, Sec. 10AA of Income Tax Act prescribes the following formula for computation of such Income tax benefits:
Profit of the SEZ unit x Export Turnover of the SEZ unit
————————————————————————
Total Turnover of the Business of the Assessee
Case let (one):
Mr. Entrepreneur is having three manufacturing units. Unit one- established in SEZ, unit-two and unit-three are situated in DTA (Domestic Tariff Area). The profit and turnover figures of the three units are as follows:
Year (2008-09) Unit – one (SEZ) Unit – two (DTA) Unit – Three (DTA)
Net Profit Rs. 122.50 Lakhs Rs. 80.70 Lakhs Rs. 92.60 Lakhs
Export Turnover Rs. 630.00 Lakhs Nil Nil
DTA Turnover Nil Rs. 340.00 Lakhs Rs. 365.00 Lakhs
Calculation of Tax Benefits:
Exempted Profit = Profit of the SEZ unit x Export Turnover of the SEZ unit
———————————————————————
Total Turnover of the Business of the Assessee
= 122.50 x 630.00
—————————
(630 + 340 + 365)
= Rs. 57.81 Lakhs (47.19%)
Case let (Two)
Ms. Smart Lady is having only one manufacturing unit in SEZ. The profit and turnover figures of the unit are as follows:
Year (2008-09) Unit – one (SEZ)
Net Profit Rs. 122.50 Lakhs
Export Turnover Rs. 630.00 Lakhs
DTA Turnover Nil
Total Turnover Rs. 630.00 Lakhs
Calculation of Tax Benefits:
Exempted Profit = Profit of the SEZ unit x Export Turnover of the SEZ unit
———————————————————————
Total Turnover of the Business of the Assessee
= 122.50 x 630.00
—————————
630
= Rs. 122.50 Lakhs (100%)
Critical analysis of the two cases:
Section 10AA of the Indian Income Tax Act 1961 allows exemption in respect of export profits of a unit located in a Special Economic Zone (SEZ), as per the provision, export profit required to be calculated for the purpose of exemption, with the reference of the total turnover of the assessee. This has resulted in discriminatory treatment of the assesses having units located both in SEZ and the Domestic Tariff Area (DTA), in compression with the assesses having units located in the SEZ only.
Valuable suggestions:
India is one of the fastest growing economy of the world. Concept of SEZ is becoming a major pillar of the economic structure. So far, SEZs have provided job opportunity, contributed in foreign exchange reserves, developed infrastructure etc. In future, it is advisable to provide more fiscal and non-fiscal incentives to the developers as well as entrepreneurs, Tax incentives and subsidies, should be provided on rational basis. Continuous planning and execution of the plans, periodic review and appraisal of the plans are required to be more strengthened. Overall cooperation and dedicated services are required from merchant exporters and manufacturer exporters, business and industry as partners of Government in the achievement of its stated objectives and goals
In order to obviate the need for litigation and nurture a constructive and conducive atmosphere, a suitable Grievance Redressal Mechanism should be established, which, would, hopefully reduce litigation and further, it will create a healthy atmosphere among developers, entrepreneurs and government
Conclusion:
SEZs can provide a generic framework to develop automatic systems that offer comprehensive approaches and tools to assist developers and entrepreneurs to establish their own standard establishments in less time and with lower costsTo overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, it is necessary to continue study considering the international scenario of this concept, as it is done now, and suggest form time to time and in the light suggestions from individuals and participation entrepreneur and Government should revise and update it policy not only to sustain its share in the development but also to increase it in the interest of the control and development of country as a whole.
