Context: Recently, the union government proposed to replace the existing law governing special economic zones (SEZs) with a new legislation to enable States to become partners in 'Development of Enterprise and Service Hubs'.

About the New SEZ Law

• The existing SEZ Act was enacted in 2006 with an aim to create export hubs and boost manufacturing in the country. However, these zones started losing their sheen after imposition of minimum alternate tax and introduction of sunset clause for removal of tax incentives. 
• These zones are treated as foreign entities in terms of provisions related to customs. Industry has time and again demanded continuation of tax benefits provided under the law. 
• Units in SEZs used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years and 50% of the ploughed back export profit for another five years. 
• The Special Economic Zones Act will be replaced with a new legislation that will enable the states to become partners in Development of Enterprise and Service Hubs. 
• This will cover all large existing and new industrial enclaves to optimally utilise available infrastructure and enhance competitiveness of exports. 
• This would apply to all big current and planned industrial enclaves in order to maximise the use of available infrastructure and boost export competitiveness.
• It will overhaul SEZ customs administration in order to boost ease of doing business. 
• According to Finance Minister "We will also undertake reforms in Customs Administration of SEZs and it shall henceforth be fully IT driven and function on the Customs National Portal with a focus on higher facilitation and with only risk-based checks.

About Special Economic Zone (SEZ)

• It 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, and their aims include increasing trade balance, employment, increased investment, job creation, and effective administration.
• To encourage businesses to set up in the zone, financial policies are introduced.
• These policies typically encompass investing, taxation, trading, quotas, customs, and labor regulations.
• Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

SEZs in India

• The SEZ policy in India first came into inception on April 1, 2000.
• The prime objective was to enhance foreign investment and provide an internationally competitive and hassle-free environment for exports.
• The idea was to promote exports from the country and realizing the need for a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally.
• Subsequently, the SEZ Act 2005, was enacted to provide the umbrella legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.

Who can set up SEZs? 

• Any private/public/joint sector or state government or its agencies can set up an SEZ.

Can foreign companies set up SEZs?

• Yes, a foreign agency can set up SEZs in India.

What is the role of state governments in establishing SEZs?

• State governments will have a very important role to play in the establishment of SEZs.
• A representative of the state government, who is a member of the inter-ministerial committee on private SEZ, is consulted while considering the proposal.
• Before recommending any proposals to the ministry of commerce and industry (department of commerce), the states must satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc.

Are SEZs controlled by the government?

• In all SEZs, the statutory functions are controlled by the government.
• The government also controls the operation and maintenance function in the central government-controlled SEZs. The rest of the operations and maintenance are privatized.

Are SEZs exempt from labor laws?

• Normal labor laws are applicable to SEZs, which are enforced by the respective state governments.
• The state governments have been requested to simplify the procedures/returns and for the introduction of a single-window clearance mechanism by delegating appropriate powers to development commissioners of SEZs.

Who monitors the functioning of the units in SEZ?

• The performance of the SEZ units is monitored by a unit approval committee consisting of a development commissioner, custom, and representative of the state government on an annual basis.

What are the special features for business units that come to the zone?

• Business units that set up establishments in an SEZ would be entitled to a package of incentives and a simplified operating environment.
• Besides, no license is required for imports, including second-hand machinery.

How do SEZs help a country’s economy?

• SEZs play a key role in the rapid economic development of a country.
• In the early 1990s, it helped China and there were hopes that the establishment in India of similar export-processing zones could offer similar benefits – provided, however, that the zones offered attractive enough concessions.
• Traditionally the biggest deterrents to foreign investment in India have been high tariffs and taxes, red-tapism, and strict labor laws.
• To date, these restrictions have ensured that India has been unable to compete with China’s massively successful light-industrial export machine.

By: Shubham Tiwari