INDIAN SPECIAL ECONOMIC ZONE (SEZ), CONCEPT, A STITCH IN TIME

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

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INDIAN SPECIAL ECONOMIC ZONE (SEZ), CONCEPT, A STITCH IN TIME