Understanding Special Economic Zone:

Abstract:

The government of India in an attempt to compete in the global markets, that

endorses free and smooth Import – Export of Goods and Services across the world,
adopted the LPG Policy in early 1990’s. Government introduced tax reforms, open
markets, offered to incentivise businesses, relaxation in compliances and regulations
to attract foreign companies to set up their offices, factories and units in India to
initiate a relation of mutual profits and benefits.

Another major step in continuance of this idea was the introduction of Special
Economic Zone (SEZ) [●][Add the enactment date /year]. It is considered to be one
of the most significant mechanisms to improve India’s participation in the global
trade of goods and services, as they create favourable environment to attract FDI
such as world class infrastructure, duty free procurements, tax incentives,
availability of markets, technological advancements and other measures designed to
support companies to conduct business in an easier way than other regions in the
same country.

Introduction of GST: Adopted in 2017, the Goods and Service Tax (GST) marked the
beginning of a new era in the history of indirect taxation of India – an era aspiring to
realize the dream of ‘One Nation, One Tax’ for one of the biggest federal
democracies in the world. In line with the fiscal federalism prevalent in India, GST
has not only branched into IGST, CGST and SGST with different tax rates, but also
has a provision for Centre-to-State compensations to make up for the losses incurred
by the States during the transition phase of GST (Compensation Cess). For such an
elaborate taxation arrangement to face bottlenecks, both at the time of roll-out and
its subsequent expansion, is not unusual. A range of tailbacks are observed, ranging
from the difficulties of transitioning from the earlier regimes, difficulties in the
understanding the GST law(s), various technical, procedural and administrative
glitches, and above all the complexity of Centre-State relationships. On the fifth year
of the adoption of GST in India, we look back to analyse the impact of GST on SEZs.
Objectives of this Research:

1. To analyse the current legislations pertaining to SEZ(s) in India, and their

interaction with the GST.
2. To understand the GST implications on SEZ(s).
3. To study the shortcomings, scope of misuse and difficulties in the taxation of
SEZ(s) under GST.
4. To understand the current status of SEZ and mark it against success or failure
terms.

Introduction:

Special Economic Zones (SEZ’s) scheme was conceived in India by the Former
Commerce and Industries Minister Mr. Murosli Maran after his visit to China in
1999. Taking cue from SEZ’s in China, India announced setting up of similar zones
in the country effective from 1.04.20001. The basic idea was to develop specifically
demarcated geographical area inside the country that will be subject to different and
more specific economic regulations and to be treated as a foreign territory for the
purposes of trade operations, taxation, duties and tariffs. These zones shall offer
incentives to resident businesses and such an attempt requires zones from where
export could take place free from all roles and regulations governing imports and
exports and to give them operational flexibility.

Traditionally SEZ’s are created as open markets within an economy

that functions under the control of government, such dominance is visible through
distorted trades and regulatory influence on the market as a whole.

1
The SEZ scheme was introduced in India on 1 April 2000. Its prime objective was to enhance foreign
investment and provide an internationally competitive and hassle-free environment for exports. At that point in
time, the Indian government established several Export Processing Zones (EPZs) in India to promote exports.
However, infrastructural and administrative challenges limited the success of EPZs in India.
How does SEZ benefit the economy of the country:

1. The objective behind an SEZ is to enhance foreign investment, increase

exports, create jobs and promote regional development. To put in the
government’s own words, the main objectives of the SEZs are:

(a) Generation of additional economic activity;

(b) Promotion of exports of goods and services;

(c) Promotion of investment from domestic and foreign sources;

(d) Creation of employment opportunities;

(e) Development of infrastructure facilities.

Overview of the Special Economic Zone Act, 2005:

Special Economic Zone Act, 2005 regulates the operations of SEZ’s in India, for that
matter the preamble of the act states:

An Act to provide for the establishment, development and management of the Special
Economic Zones for the promotion of exports and for matters connected therewith or
incidental thereto.

1. Salient Features of the Act:

a) A designated duty free enclave to be treated as a territory outside the
customs territory of India for the purpose of authorised operations in the
SEZ;
b) No licence required for import;
c) Manufacturing or service activities allowed;
d) The Units are only required to achieve Positive Net Foreign Exchange to
be calculated cumulatively for a period of five years from the
commencement of production;
e) Domestic sales subject to full customs duty and import policy in force;
f) Full freedom for subcontracting;
 g) No routine examination by customs authorities of export/import cargo;
h) SEZ Developers /Co-Developers and Units enjoy Direct Tax and Indirect
Tax benefits as prescribed in the SEZs Act, 2005.

2. Major incentives and facilities available to SEZ / SEZ developers:

a) Exemption from customs/excise duties for development of SEZs for

authorized operations approved by the BOA.
b) Duty free import/domestic procurement of goods for development,
operation and maintenance of SEZ units
c) Exemption from Central Sales Tax, Exemption from Service Tax and
Exemption from State sales tax. These have now subsumed into GST and
supplies to SEZs are zero rated under IGST Act, 2017.
d) Single window clearance for Central and State level approvals.
e) Income Tax exemption on income derived from the business of
development of the SEZ in a block of 10 years in 15 years under Section 80-
IAB of the Income Tax Act.
f) Supplies to SEZ are zero rated under IGST Act, 2017.