Special Economic Zone (SEZ) - UPSC IAS (2023)

In this article, You will read Special Economic Zone (SEZ) – for UPSC IAS.

  • The concept of SEZ is expected to bring large dividends to the state in terms of economic and industrial development and the generation of new employment opportunities.
  • The SEZs are expected to be engines for economic growth.
  • Special Economic Zone (SEZ) is defined as “a specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs”.
  • SEZ covers a broad range of more specific zones, some of them are:
    • Free Trade Zones (FTZ): A foreign-trade zone (FTZ) is a class of special economic zone. It is a geographic area where goods may be landed, stored, handled, manufactured, or reconfigured and re-exported under specific customs regulation and generally not subject to customs duty. Free trade zones are generally organized around major seaports, international airports, and national frontiers—areas with many geographic advantages for trade.
    • Export Processing Zone (EPZ): An export processing zone, or EPZ, is an area set up to enhance commercial and industrial exports by encouraging economic growth through investment from foreign entities. Incentives such as tax exemptions and a barrier-free environment are the main attractions of an EPZ.
    • Free Zones (FZ): Free economic zones (FEZ), free economic territories (FETs), or free zones (FZ) are a class of special economic zone (SEZ) designated by the trade and commerce administrations of various countries. The term is used to designate areas in which companies are taxed very lightly or not at all to encourage economic activity.
    • Industrial Estates (IE): An industrial estate is a place where necessary infrastructural facilities are made available to entrepreneurs. Industrial parks, industrial zone, industrial areas, Industrial Township are some of the other terms used to denote industrial estates.
    • Free Ports (FP): Freeports or zones are designated by the government as areas with little to no tax in order to encourage economic activity. While located geographically within a country, they essentially exist outside its borders for tax purposes.
    • Urban Enterprise Zones: An urban enterprise zone is an area in which policies to encourage economic growth and development are implemented. Urban enterprise zone policies generally offer tax concessions, infrastructure incentives, and reduced regulations to attract investments and private companies into the zones. They are a type of special economic zone where companies can locate free of certain local, state, and federal taxes and restrictions.

History of Free Trade Zones

  • First Free Trade Zone in the world had started on 1st January 1965 at Kandla port, Kutch, India.
  • By 1978 India had another four free trade zones at Mumbai, Chennai, Noida, and Falta.
  • In 1978 China had gone through a major economic makeover and they had realized the power in the concept of Free Trade Zones.
  • First Chinese Free Trade Zone became operational in 1984 in Shenzhen.
  • In the year 2000 one zone of Shenzhen was Exporting thrice than that of India.
  • As on today, there are about 2000 operation-free zones spread over 150 countries in the world.

Kinds of SEZ

  • SEZs can be categorized on basis of sector, function or location and required to have processing as well as non-processing area.
Special Economic Zone (SEZ) - UPSC IAS (1)
(Video) Special Economic Zones: Simplified

Fundamentals of SEZs

  • SEZs (Special Economic Zones) are fundamentally different from the traditional free zones.
  • They are much larger in size and offer a broader range of activities such as:
    • A single-window management,
    • Streamlined procedures,
    • Duty-free privileges,
    • Access to the domestic market on a duty-paid basis.
  • Cardinal factors that decides whether the enclave is termed an EPZ, FTZ, or SEZ are:
    • Appropriate infrastructure and transport facilities
    • Low factor cost
    • Flexible labour laws
    • Convertibility of currency
    • Stable legal and administrative regime
    • A commitment to the canons of an open economy.

Role of SEZ in Indian economy

  • To provide an internationally competitive environment
  • To encourage FDI and enhance GDP
  • To increase share in global exports
  • SEZ exports accounting for 26% of India’s total export.

Salient features of SEZ

  • Self certification for export and import
    • Import and export movement of goods are based on self-declaration in SEZ
    • No routine examination is made unless specific order from Development Commissioner or authority is made.
  • Sub contracting
    • A SEZ unit may sub-contract a part of its product or production process to different units, even in abroad.
  • Fiscal incentives-Tax
    • There is an exemption from excise and customs duty on procurement of capital assets, consumable stores, and raw-materials from the domestic market.
    • There is an exemption from sales tax, import duty, income tax, minimum alternative tax, and dividend distribution tax.
  • Single Window Clearance
    • There is a facility of the submission of documents at single locations on regular basis.
    • The proceedings are less and time-saving.

SEZ in India

  • Asia’sfirst EPZ(Export Processing Zones) was establishedin 1965 at Kandla, Gujarat.
  • Whilethese EPZs had a similar structure to SEZs,the government began to establishSEZs in 2000under theForeign Trade Policyto redress the infrastructural and bureaucratic challenges that were seen to have limited the success of EPZs.
  • The Special Economic ZonesAct was passed in 2005.The Act came into force along with theSEZ Rules in 2006.
  • However, SEZs wereoperational in India from 2000 to 2006(under the Foreign Trade Policy).
  • India’s SEZswere structured closely with China’ssuccessful model.
  • Presently,379 SEZs are notified,out of which 265 are operational. About 64% of the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra.
  • TheBoard of Approval is the apex bodyand is headed by the Secretary, Department of Commerce(Ministry of Commerce and Industry).
  • TheBaba Kalyani led committeewas constituted by the Ministry of Commerce and Industry to study the existing SEZ policy of India and had submitted its recommendations in November 2018.
    • It was set up with a broad objective to evaluate the SEZ policy towards making itWTO (World Trade Organisation)-compatible and to bring in global best practices to maximise capacity utilisation and to maximise potential output of the SEZs.

Baba Kalyani committee recommendations

  • Framework shift fromexport growthto broad-basedEmployment and Economic Growth (Employment and Economic Enclaves-3Es).
  • Formulation of separaterules and proceduresformanufacturing and service SEZs.
  • Shift fromsupply-driventodemand-driven approachfor 3Es development to improve the efficiency ofinvestment-based on certain industries, the current levels of existing inventory in the region.
  • Enabling framework for Ease of Doing Business (EoDB)in 3Es in sync with State EoDB initiatives. One integrated online portal for new investments, operational requirements, and exits related matters.
  • Enhance competitivenessby enabling ecosystem development by fundinghigh-speed multi-modal connectivity, business services, and utility infrastructure.
  • Promote integrated industrial and urban development– walk to work zones, States and centers to coordinate on the framework development to bring linkages between all initiatives.
  • Procedural relaxationsfor developers and tenants to improve operational and exit issues.
  • Extension ofSunset Clauseandretaining taxorduty benefits.
  • Broad-banding definitionof services/allowing multiple services to come together.
  • Additionalenablersandprocedural relaxations.
  • Unified regulator forIFSC.
  • Utilizing Multi Services SEZ IFSCfor all inbound and outbound investment of the country.
  • Incentives for availing services fromIFSC SEZby domestic institutions.
  • Extension of benefit under servicesExport incentives scheme.
  • Allowing alternate sectors to invest insector-specific SEZs/ 3Es.
  • The flexibilityoflong term leasefordevelopers and tenants.
  • The facility of sub-contracting forcustomers outside 3Es/SEZswithout any restriction or cap at any level.
  • Specified domestic supplies supporting‘Make in India’to be considered in NFE computation.
  • Export dutyshould not be levied on goods supplied to developers and used in the manufacture of goods exported.
  • Flexibility in the usageofNPAby developers and sale space to investors/ units.
  • Infrastructure statusto improve access to finance and enable long term borrowing.
  • Promote MSME participationin 3Es andenable manufacturing enabling service playersto locate in 3E.
  • Dispute resolutionthrougharbitration and commercial courts.

Some of important SEZ in India

  • Karnataka Biotechnology and Information Technology Services – SEZ on biotechnology sector in Bangalore’s Electronics City, over an area of 43 acres.
  • Shree Renuka Sugars Limited – SEZ on sugarcane processing complex covering 100 hectares, comprising a sugar plant, power station, and distillery, at Burlatti in Belgaum district.
  • Wipro Infotech – SEZ on IT/ITES at Electronics City, Sarajpur Bangalore.
  • Hewlett Packard India Software Operation Pvt. Ltd. – SEZ on IT.
  • Food processing and related SEZ services in Hassan spread over an area of 157.91 hectares
  • SEZs on pharmaceuticals, biotechnology, and chemical sector in Hassan, covering of 281.21 hectares.
  • Some other SEZs worth noting are:
    • SEEPZ – Andheri (East), Mumbai
    • Navi Mumbai – Multi-product, Mumbai
    • Salt Lake Electronic City, West Bengal
    • Manikanchan – Jems and jewellery, West Bengal
    • Calcutta Leather Complex, West Bengal
    • Falta Food Processing Unit, West Bengal.
Special Economic Zone (SEZ) - UPSC IAS (3)
(Video) What is Special Economic Zone? Objectives of SEZ Act 2005, Rivers SEZs and Finance SEZs explained
Special Economic Zone (SEZ) - UPSC IAS (4)

Advantages of SEZ

  • Growth and development: SEZs acts as the hub for the growth and development of a country as the motive pertains to the boosting of trade by simplified mechanisms.
  • Attract Foreign Direct Investment: Relaxed trade rule make the foreign investor to invest in SEZ with lucrative deals
  • Exposure to technology and global market: It is done when foreign investor comes with their technology and best business practices in Indian markets.
  • Increasing GDP and Economic Model: SEZs act as the growth engines with the economic model that helps in increasing the economic activities in the area.
  • Employment opportunities are created: With increased economic activities the employment opportunities also increases.
Special Economic Zone (SEZ) - UPSC IAS (6)
(Video) What is Special Economic Zone? Objectives of SEZ Act 2005, Riverse & Finance SEZs in English | UPSC
Special Economic Zone (SEZ) - UPSC IAS (7)

Disadvantages of SEZ

  • Land acquisition at very low prices done which leads to the loss of farming land and revenue of the farmers leading to violent protests.
  • Tax holidays affect GDP: Revenue losses occur 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.

SEZ Act of 2005

  • The basic idea of SEZs emerges from the fact that, while it might be very difficult to dramatically improve infrastructure and business environment of the overall economy ‘overnight’, SEZs can be built in a much shorter time, and they can work as efficient enclaves to solve these problems.
  • The SEZ Act, 2005, provides the legal framework for establishment of SEZs and also for units operating in such zones.
  • The main objectives of the SEZ Act are:
    • Generation of additional economic activity
    • Promotion of exports of goods and services
    • Promotion of investment from domestic and foreign sources
    • Creation of employment opportunities
    • Development of infrastructure facilities
  • Salient Features
    • A SEZ is a designated duty free enclave to be treated as foreign territory for the purpose of trade operations and duties and tariffs.
    • An SEZ does not require a license for imports.
    • Other notable features are as follows:
  • The units must become net foreign exchange-earners within 3 years
  • SEZ are allowed manufacturing, trading and service activities.
  • Full freedom for subcontracting.
  • The domestic sales from the SEZ are subject to full custom duties and import policy is in force, when they sell their produce to domestic markets.
  • There was no routine examination by the customs authorities.
  • The corporation in SEZs will not have to pay any income tax on their profits for the first five years and only 50% of the tax for 2 more years thereafter.
  • If half of the profit is reinvested in the corporation, the concession of 50% tax is extendable for the next 3 years.
  • For SEZ developers, the raw material from cement to steel to electrical parts is subject to zero tax and duty.
  • For the SEZ, the Government acquires vast land tracts and gives to the developers. The basic condition involves that 25% of the area of the SEZ must be used only for export-related activities. Rest 75% area can be used for economical and social infrastructure. However, all SEZ benefits are applicable over the entire SEZ area.
  • There were provisions for sector-specific SEZs and Multiproduct SEZs.
  • The Sector-specific SEZ may have 7500 houses, hotels with 100 rooms, 25 bed hospital, schools, and other institutions, a multiplex in 50000 sq. meters.
  • Multiproduct SEZ are allowed to build 25000 houses. 250 room hotel and 100 bed hospitals along with a multiplex with 2 lakh sq. meters.

Impacts of SEZs

Impacts of SEZs are enumerated in the tables below:

Special Economic Zone (SEZ) - UPSC IAS (9)

Swot (Strength, Weakness, Opportunities, Threats) analysis of Indian SEZ

Strength

  • Based on western model or SEZ in China
  • An established legal redress system
  • Relatively low labour costs
  • Employment opportunities
  • India’s large English speaking and skilled workforce
  • Exposure to technology and global market
  • Worldwide acceptance of capabilities in fields like
    • Pharmaceutical manufacturing & research
    • Clinical trials
    • Manufacturing designing & consultancy, IT & ITES
    • Malls and hotels
    • Hospital
  • Financial & other institutional networks.

Weakness

(Video) Special Economic Zone for UPSC IAS

  • Poor infrastructure and transport facilities
  • The high cost of capital
  • Inadequate institutional support
  • Political changes
  • Inappropriate locations

Opportunities

  • An alternative manufacturing base, particularly compared to Chinese SEZs
  • Investments in core strength areas like IT and software products and services.
  • New Delhi ports & airports are also being developed keeping SEZ concept in mind
  • A large NRI base who have traditionally invested less in Greenfield development in India.

Threats

  • The pattern of buying & selling may not continue. With relocations of industries in other third world countries, new competitors will emerge
  • Opposing interests
  • Prospect of even more restrictive labour laws being introduced.
  • Increasing rejection rate for proposals to establish SEZs.

FAQs

What is special economic zone in India UPSC? ›

The Special Economic Zones Policy was first unveiled in April 2000 with the goal of addressing the issues related to the abundance of controls and clearances, the lack of world-class infrastructure, an unstable fiscal framework, and the desire to draw larger foreign investments into India.

What is meant by special economic zones SEZ? ›

• A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country's national borders. • Their aims include increased trade balance, employment, increased investment, job creation and effective administration.

What were the 4 special economic zones? ›

One of the most renowned reforms under Deng was establishing four "special economic zones" along the Southeastern coast of China, with Shenzhen, Shantou, and Zhuhai located in Guangdong province and Xiamen located in Fujian province.

What is special economic zone explain its characteristics? ›

Broadly, four characteristics define the SEZ concept: (1) it is a geographically delineated area, usually physically secured; (2) it has a single management or administration; (3) it offers benefits for investors physically within the zone; and (4) it has a separate customs area (duty-free benefits) and streamlined ...

How many SEZ zones in India? ›

In addition, 425 proposals for setting up of SEZs in the country have been accorded formal approval under the SEZ Act, 2005. Presently, 378 SEZs are notified, out of which 265 are operational.
...
378 SEZs are presently notified, out of which 265 are operational.
YearsExports (Value in Rs. Crores)
2016-174061
2017-184117
2018-194405
2019-205219
2 more rows
10 Mar 2021

What is SEZ zone in India? ›

Welcome to Special Economic Zone (SEZ).

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965.

What is an example of a special economic zone? ›

Special Economic Zones (SEZs) have been around since the 1950s. Shannon Airport in Ireland, Dubai South in the United Arab Emirates (UAE) and Xiamen in China are just some examples.

WHO declared special economic zone? ›

The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005. The draft SEZ Rules were widely discussed and put on the website of the Department of Commerce offering suggestions/comments. Around 800 suggestions were received on the draft rules.

Which unit is known as Special Economic Zone? ›

A special economic zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's domestic economic laws. India has specific laws for its SEZs.

What is the importance of SEZs? ›

SEZs can help attract investment, create jobs and boost exports – both directly and indirectly, where they succeed in building linkages with the broader economy. Zones can also support global value chain (GVC) participation, industrial upgrading and diversification.

Which country has largest special economic zone? ›

Which country has the largest exclusive economic zone? France has the world's largest Exclusive Economic Zone (EEZ) because it possesses several overseas departments and territories.

How many special economic zones are there in India in 2022? ›

There are 34 SEZs under the jurisdiction of NSEZ.

What are the benefits of special economic zones in India? ›

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.

Which state has highest number of SEZ in India? ›

Special Economic Zones and Warehousing Clusters in Bengaluru

Meanwhile, Tamil Nadu has the highest number of operational SEZs (40), followed by Karnataka (31), and Maharashtra (30).

Where is India's largest SEZ company? ›

APSEZ represents a large network of ports with India's largest SEZ at Mundra. APSEZ Port Business is integral to its Logistics Business and is India's Largest private port operator with presence across 12 locations.

Which is the first SEZ in world? ›

The first SEZs appeared in the late 1950s in industrialized countries. They were designed to attract foreign investment from multinational corporations. The first was in Shannon Airport in Clare, Ireland.

Where are special economic zones located? ›

Where are SEZs located in India? At present there are eight functional SEZs located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal) and Noida (Uttar Pradesh) in India.

Which SEZ City became the first Green SEZ? ›

Kandla Special Economic Zone (KASEZ) is the First Green SEZ of India. KASEZ is also the First Green SEZ to achieve the IGBC Green Cities Platinum Rating for Existing Cities.

Which is the first green SEZ Special Economic Zone of India? ›

Kandla becomes first Green SEZ - Mcommerce.

What is the maximum land limit for special economic zone? ›

The maximum area over which a multi-product Special Economic Zone can be set up is 5000 hectares. However, the Central government may consider on merit, the clubbing of contiguous existing notified Special Economic Zones notwithstanding that the total area of resultant Special Economic Zones exceeds 5000 hectares. Q4.

What are the effects of SEZ? ›

The main aim of the SEZ Act is to accelerate the economic growth of the country through increasing export. To attract foreign invest- ment, SEZs provide an extensive range of incentives and tax exemptions for all those who invest in these Zones.

How many SEZs are there in the world? ›

In general, a sea is defined as a portion of the ocean that is partly surrounded by land. Given that definition, there are about 50 seas around the world. But that number includes water bodies not always thought of as seas, such as the Gulf of Mexico and the Hudson Bay.

Which SEZ is in the Free State? ›

Maluti-A-Phofung SEZ in Harrismith, Free State, lies at the mid-point of the crucial Durban-Johannesburg logistics route. This newly established SEZ offers exporters a logistics base that facilitates access to the Port of Durban, and intermodal logistics solutions for the transfer of freight between road and rail.

What is a special economic zone called? ›

What Is a Special Economic Zone (SEZ)? A special economic zone (SEZ) is an area in a country that is subject to different economic regulations than other regions within the same country. The SEZ economic regulations tend to be conducive to—and attract—foreign direct investment (FDI).

Why are special economic zones established in India? ›

Special economic zones (SEZs) in India are areas that offer incentives to resident businesses. SEZs typically offer competitive infrastructure, duty free exports, tax incentives, and other measures designed to make it easier to conduct business.

What is the importance of special economic zone? ›

Special Economic Zones promote exports of goods and services. SEZs generate employment opportunities for the population. Special Economic Zones can develop infrastructure facilities. SEZs can provide, in a concentrated area, the necessary conditions external investors may require.

What is special economic zone explain its merits and demerits in Indian context? ›

Special Economic Zones (SEZ) is a geographical area within the boundary of a nation where the business and trade laws are different from the rest of the country and will be more liberal in nature. Its main purpose is to increase the trade balance, employment, boost investments, create jobs and attract FDI.

Which country started special economic zone? ›

The goal of an SEZ is to increase foreign investment. One of the earliest and the most famous SEZs was founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s. The most successful SEZ in China is in Shenzhen.

Which land is used for special economic zone? ›

The principal requirement for setting up an SEZ is land for processing and non-processing activities. The sizes specified vary from minimum of 10 ha to the maximum of 5000 ha.

Who introduced SEZ in India? ›

The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005.

Where is India's largest SEZ located? ›

The future of India's largest free-trade zone, the 10,000-hectare Mumbai Special Economic Zone (MSEZ) in Maharashtra's Raigad district, appeared to be in jeopardy on Friday after the Supreme Court refused to give MSEZ — promoted by Mukesh Ambani (52) and expected to cost Rs 40,000 crore — more time to acquire land for ...

Which state has maximum special economic zone? ›

Tamil Nadu has the highest number of operational SEZs (40), followed by Karnataka (31) and Maharashtra (30). In this zone, industries get some tax advantages.

What are the challenges faced by special economic zone? ›

India's special economic zones (SEZs) — a key element of the country's industrial and export promotion policy over the past couple of decades — are faced with numerous challenges, including over 25,000 hectares of land lying unutilised in these preferential treatment industrial enclaves, lack of flexibility to utilise ...

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