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SPECIAL ECONOMIC ZONE:

AN OVERVIEW OF THE SEZ
ACT, 2005
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This article is written by Divya from UILS, Panjab University Chandigarh while

pursuing a diploma course in Entrepreneurship Administration and Business Laws
from NUJS, Kolkata.
Special Economic Zone: Favourite Investment Destinations

A Special Economic Zone (SEZ) is a geographical region that has economic laws more
liberal than a country’s typical economic laws. They are established with an aim to
purport development , promote rapid economic growth by providing tax and business
incentives for attracting  foreign technology along with investment. These are not
merely SEZ’s but may be called as “favorite Investment destinations” for foreign
establishments. Such units would be future sources of employment, hubs of latest
technologies and equipped with the best infrastructure. Today, there are
approximately 3,000 SEZs operating in 120 countries.[1]

In this research paper an attempt is made to trace the origin of the SEZ’s, a brief
overview of the SEZ Act, 2005 and the latter part  mentions  about institutions that
made India a Software hub.

Concept and Origin of SEZ’s

The first time when the setting up of SEZ came into limelight was when it was
established in the Caribbean island Puerto Rico with an aim to attract investment
from US. It was in the 1980s China brought SEZs to spotlight by setting up the largest
SEZ in Shenzhen.

It was in 1965 that India experimented with the concept of Export Processing Zones
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(EPZ). Although these EPZ’s somehow failed to achieve the objective they were
created for but in the year 2000, there were winds of change where the Export and
Import policy allowed the setting up of SEZ’s in all sectors. Subsequently all EPZs
were converted into SEZs. And the process for setting up of various SEZ’s was also
put into action.[2]

India’s special Act relating to the SEZ came in 2005 taking country’s foreign
investment policy and converted its EPZs to SEZs. This act further lays down
provisions for setting up of additional SEZ’s which is discussed elaborately further.
Currently there are, nearly  200 SEZs operating and approximately 565 have already
been given the permission to operate, which are sure to open new doors of
investment and opportunities for Indian Markets.

The need for a special Legislation

Before the enactment of the SEZ Act,2005, the necessary provisions in respect of the
SEZ’s were a part of the Foreign Trade Policy which is released every five years. The
policy discussed the latest incentives and benefits that were conferred to them. The
need for this act was well highlighted  in the arguments by one of the counsels in a
 recent case Biomedical Lifescience Pvt vs Union Of India, “In order to give a long
term and stable policy framework with minimum regulatory regime and to provide
expeditious and single window clearance mechanism, a Central Act for Special
Economic Zones has been found to be necessary in line with international practice.
[3]

Overview of the Special Economic Zone Act,2005

Government took the initiative of enacting the SEZ Act keeping in mind various
objectives including generation of additional economic activity, promotion of export
of goods and services, attracting investment from foreign sources as well as domestic
along with creating employment opportunities at all levels..[4]

Following the SEZ Act,2005 came the rules in 2006 that lay down comprehensively
how a zone first may be classified specifically and then establishment of a unit in that
zone, the procedural requirements and other miscellaneous provisions.

Establishing a Special Economic Zone

Application For Filing for SEZ

The Ministry of Commerce & industry issued a  circular in 2008 which provides
various  online services that are:
 An application may be filed for setting up a SEZ (Form A) on the special website
created http://sezindia.nic.in/.
Requests including Application for authorized operations, change in area/
location, and other land details may be also filed online.
A separate e-mail box for each developer/ so as to secure quick communication
with the Department.
Online status of requests.

Taxation and SEZ’s

Any goods or services exported out of, or imported into, or procured from the
Domestic Tariff Area by –

a Unit in a Special Zone

Economic Zone; or
a Developer;

Shall, subject to such terms, conditions and limitations, as may be prescribed, be

exempt from the payment of taxes, duties or cess under all enactments specified in
the First Schedule.

The Second Schedule to the Act makes modifications to the Income-Tax Act, 1961.A
special Section 10 AA discusses about the Tax incentives that shall be made available
to the SEZs.

With an aim make investment in SEZ’s a lucrative option the government introduced
various tax incentives. The income tax act was also amended and provisions related
to SEZ’s were added to the Act, to provide them with amenities so that they may
startup and establish their operations in India. Besides the provisions that have been
laid down in the Income tax act, 1961 provisions have also been made under  Central
Sales Tax Act, 1956, Service Tax Act, 2013; The Central Excise Act, 1944 and the
Customs Act, 1962.[5]

To avail the benefits that have been conferred under the Income tax act,1961  a SEZ
needs to fulfill certain conditions
 As per Section 2(j) an SEZ shall be deemed to be an entrepreneur, who has been
granted the letter of approval by the Development Commissioner under section
15 of the Act.
Along with this, the Finance Bill 2016 seeks to amend section 10AA where the
benefits have been conferred to the SEZ developer are being limited to 31st
March 2020. Any SEZ that shall come into operation after this date will not be
exempted from the tax, which the current law provides under the Income Tax
Act,1961.
It is necessary that assess either exports certain goods or provides some services
out of India from the SEZ.Ultimate aim is to increase exports from the
Also, it is vital that the SEZ carries out by a proper audit of the Books of the
account and needs to submit an audit report as per Form no. 56F.
Only if the conditions are satisfied, it is only then one shall be eligible to apply
for deduction under Section 10AA[6]

Steps that need to taken to ensure the proper Utilization of SEZ’s

Monitored and Regulated Approach: Systematic efforts need to be made to help
zone units forge links with the outside units. To make the best use of the SEZ there is
a dire need for a comprehensive policy framework which needs to be introduced to
ensure that strategies are developed in a timely manner to strengthen the
opportunities that are likely to emerge, protect interests of the Special Economic
Zones workers, and build a link between Special Economic Zones and the domestic
economy. It is only by adoption of a regulated and monitored approach that full
worth may be extracted from these potential laden SEZ’s

Better execution : It is essential that the investors are taken into confidence  and
given rationalized benefits along with an outline for their availability.

Promotion of Strategic Industries: Rationalized Tax incentives to promote

industries of strategic importance. Special schemes may be introduced for
Technology-intensive and industries which have a lower rate of survival and struggle
to survive in the market.
Integration with National Schemes: the much popular Make-in-India initiative
could be well integrated with the SEZ  to create manifold oppourtunities.

Transparency at all levels: This is a must so that the challenges that come up are
tackled effectively, and red-tapism of any kind is reduced and the favourite
investment dstinations actually serve as an engine for economic growth.

SEZs have the potential to be a major growth engine for India. The government
should act fast to revive them otherwise SEZs will become another missed growth
opportunity.[7]

Incentives for Setting Up of SEZ’s in INDIA

The Government of India is keen on making India an export hub and with this aim
established several foreign trade zone schemes to promote production which is
export-oriented. Such schemes are great incentives for a company to grow and
simultaneously they provide an escape through from the country’s restrictive fiscal
and infrastructural obstacles and make Indian goods and services competitive in
international markets.

Other than the SEZ’s schemes include the Export Processing Zone (EPZ) and the
Software Technology Park (STP),which are designated areas for export-oriented
activities there are also certain EOU’s that is Export Oriented Units that have also
been established with an aim to multiply the exports of the country. They are
governed by separate rules and have been conferred various other benefits.[8]

In comparison to China India provides for better options for setting up of  SEZ’s as
the measures which the Government is providing is more conducive for their
functioning. In contrast to China which has only five  major SEZ’s functioning
contrary India has a huge reservoir of SEZ’s that are upcoming and numerous have
already been established. Indian Government is also giving the benefits at all levels
to these SEZ’s for their growth.

Software technology Parks in India

Software Technology Parks of India (STPI), is a Government of India initiative that
set up and established a society by the Ministry of Communications and Information
Technology,Government of India in 1991.

Software Technology Park [STP] Scheme is an absolute scheme for export

orientation.  This scheme was undertaken with an objective for exporting  software
services and developing them using data communication links that may be in form of
physical media.[9] Such parks offer  multifarious services that are required day to day.
The scheme was set up to contribute to the prosperity of the national economy
through promotion of exports from the Software & services Industry by facilitating
all the statutory services of the Govt., strengthening the Communication
Infrastructure

Currently, STPIs that are established across the country are equipped with
outstanding infrastructure and statutory support which further aims at improving
and enhancing the development process of Information Technology in the country.it
is because  of these STPI’s that have given India recognition  all across the world as a
global hub for software services.[10]

The objectives of the Software Technology Parks of India are:

(a) Promotion and development of software and software services including

Information Technology (IT) enabled services/ Bio- IT.

(b) Providing statutory and other promotional services to the exporters by

implementing Software Technology Parks (STP) that shall be formulated and made by
the Government from time to time.

(c) Provision of data communication services including value added services to IT / IT

enabled Services (ITES) related industries.

(d) Encouraging micro,small and medium entrepreneurs by creating better

opportunities  for entrepreneurship in the field of IT/ITES.[11]
[1] World bank website – James Crittle (IFC) –
http://rru.worldbank.org/Discussions/Topics/Topic40.asp taken from
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Special_Economic_Zones.pdf
last accessed on 15th February,2017.

[2] https://www.gtap.agecon.purdue.edu/resources/download/4103.pdf  last accessed

on 15th February,2017.

[3] 3 July, 2013

[4] http://taxguru.in/corporate-law/special-economic-zones-act-2005-an
overview.html#sthash.AYuIa83Z.dpuf

[5] http://taxguru.in/corporate-law/special-economic-zones-act-2005-an-
overview.html#sthash.9jxBgdwK.dpuf

[6] https://blog.ipleaders.in/special-economic-zone-tax-benefits/

[7] http://www.boomlive.in/special-economic-zones-in-india-growth-engines-or-
missed-opportunity/

[8] Research Paper by “SEZs In India: Concept, Objectives And

Strategies”Department Of Economics,Bangalore University

[9] http://swapnilkosare.blogspot.in/2015/06/normal-0-false-false-false-en-in-x-
none.html

[10] http://www.psalegal.com/pdf/e-newsline-january-201001252010113255am.pdf

[11] http://www.letscomply.com/SEZ-and-STPI-Compliances.php

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