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T a x a n d R e g u l a t o r y
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SEZ POLICY – PRESENT STATUS
Sujit Ghosh
Executive Director, BMR & Associates
Conference on
EPC ContractsTax & Legal Imperatives
18 -19 May 2007 | Hotel Imperial | Janpath | New Delhi | India
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CONTENTS
• Global Scenario
• Original Intent
• Ground realities
• SEZ Bandwagon – boon or bane
• Direction of the Policy
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GLOBAL SCENARIO
Over 3000 SEZs have been set up in 120 countries the world over
World’s first SEZ set up in Puerto Rico in 1947
Objective for development of SEZs in each country differed from the
other:
Mauritius – employment generation
South Korea – establishment of the services sector
SEZ concept has been a driver of economic growth and success in
countries like China, Korea, UAE etc
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SEZ
Original Policy
Intent
ORIGINAL INTENT – SEZ POLICY IN INDIA
Virtual SEZ
Manufacturinghub Tax haven
Infrastructureboom
Employment &Exportpromotion
Outsourcinghub
Replicate Chinese
success story
Labour lawrelaxations
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GROUND REALITIES
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SEZ APPROVALS AND NOTIFICATIONS
Approvals vs Notifications
150
100
Formal Approvals Notified SEZs (therefrom till date)
250 proposals granted formal
approval since introduction of SEZAct, 2005 (“SEZ Act”)
Only 100 have been notified till date
There are only 23 functional SEZs in
the country (including both pre-Actand new SEZs)
Notified vs Functional SEZs
100
23
Notified SEZs in India Functional SEZs (therefrom)
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INDIAN SEZ EXPERIENCE - IT SEZs??
Formally Approved SEZs
100
150
Other SEZs IT/ ITES SEZs
In principle Approved SEZs
10 0
70
Other SEZs IT/ ITES SEZs
250 proposals granted formal approval since
introduction of SEZ Act
Approximately 150 are IT /ITES SEZs
170 proposals have been granted in-principle
approvals
Approximately 70 are for IT /ITES sector
Till date 100 SEZs have been notified
approximately 61 are IT /ITES SEZs
Notified SEzs
39
61
Other SEZs IT /ITES SEZs
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Division of Total SEZ Area in sq kms (till now)
133.7188216.2812
1400
Notified area Formal Approved In-principle approved
INDIAN SEZ EXPERIENCE
Other sectors approved as part of 250 formally approval cases include:
BiotechnologyGems and JewelryFootwear
LeatherTextilesPharmaceuticals
100 SEZs including TCS, Biocon,Hexaware, Flextronics, Wipro, Infosys,Nokia and Reliance have already beennotified
Total approved SEZ area in India merelystands at a total of 1750 sq kms
Approximately INR 15000 crores has beeninvested in new SEZs till date
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Total exports Vs P rojections (In Crores)
22839.56
67299.62
0
10000
20000
30000
40000
50000
60000
70000
80000
2005-06 2007-08
2005-06 2007-08
EXPORTS FROM SEZs
Stated objective for development of
SEZs – augmentation of exports
SEZs to act as catalyst to increase
in India’s portion in Global trade
SEZ exports at a faster pace in
comparison to India’s overall exports
Percentage of SEZ exports in India’s
overall exports remains largely
untapped – positioned for higher
growth
In value terms projections for
2007-2008 show that SEZ exports
are likely to triple from current levels
Share of SEZ Exports In India's Exports (%)
4.24.4
3.9
4.75.1 5
0
1
2
3
4
5
6
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Source – Colliers International India Research, 2007
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INVESTMENT AND EMPLOYMENT IN SEZs
0
50000
100000
150000
200000
250000
300000
Investment In SEZs (In Crores) - Actual figures and projections
Notified SEZs Approved SEZs 0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
Notified SEZs Approved SEZs
Employment Figures (actuals and projections)
Upon notification of all formally
approved SEZs it is projected that anInvestment to the tune of INR
300,000 Crores
Currently investment of INR 53,561
crores has been made (figures for 63 notified
SEZs)
All notified SEZs becoming
functional will generate employmentfor 1,575,452 persons
Projections show additional 4 million
will be created if all formally
approved SEZs became functional
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Insert picture from stock hereSEZ BANDWAGON –BOON OR BANE
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SEZ BANDWAGON
SEZ Legislation enacted by the Parliament in June, 2005
SEZ Rules after much delay were notified in February, 2006
Within a year Government of India released Amendment Rules, 2006 and
Amendment Rules 2007
Minimum land requirements for development of different types of SEZs revised Minimum processing area requirements rationalized and revised ( 25-35-50%)
Directions for provision of specified type of infrastructure ( eg 24/7 – power, AC)
Bar on use of previously used plant and machine
Empowering the Board of Approvals (“BoA”) to relax contiguity criteria, allow change
in categorization of SEZs Reduction of validity period of in-principle approval ( 1 yr, extendable by 1yr at a
time)
Procedural changes – introduction of new forms, approval letters etc
SEZ Legislative framework
Despite extensive legislative framework – Policy continues to be nebulous
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Fears of revenue leakage led to Inter-Ministerial tussle between Finance and
Commerce Ministry
Empowered Group of Ministers (“EGoM”) was constituted
Decisions of EGoM superimposed on the SEZ legislation, like:
Moratorium on approvals, Sectoral caps, lifting bans on grant of approval Ceiling on the maximum area for a multi product SEZ
Ban on compulsory land acquisition by State Governments
BoA – nodal agency for granting SEZ approvals though created per the
provisions of the SEZ Act – policy level changes superimposed on legislation,
viz: Net worth criterion ( 250/1000 cr investment of net worth of group 50/250 crore +)
Approval necessary if SEZ Developer changes name and share-holding pattern
Guidelines for creation of social infrastructure etc
SEZ BANDWAGON
Creation of other Regulatory bodies
Legislative framework is it being hijacked by will of these regulatory bodies
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Introduction of SEZ Act – fervour in Industry to file applications to gain SEZ
status
Approximately 300 application are still pending consideration
Constant changes in Policy led to change of plans - Industry Giants to invest in
SEZs - Intel's proposed Chip Fabrication SEZ, HPs SEZ in Karnataka
Politics of SEZs
Economics associated with SEZs led to battle-lines being drawn between
Commerce Ministry – (advancing SEZ concept) and Finance Ministry – (attempting
to roll back exemptions)
Empowered Committee of State Finance Ministers on VAT have unanimously
agreed that no state level benefits will be given to SEZs for development in non-processing
SEZ BANDWAGON
Socio – politico- economic scenario – Effects
Advantage Finance Ministry
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Politics of SEZs
Quantum of investment – Varied States of India all out to woo prospective investors
Maharashtra and Andhra Pradesh – maximum number of SEZs
Large scale transfer of lands (industrial, wasteland and agricultural) to large
corporates to develop the SEZs
Uproar by farming community, widespread discontent and violence – against
acquisition (Raigad- Reliance SEZ, Nandigram – Saelim Group)
Claim for adequate compensation to displaced farmers – changes in Rehabilitation
and Resettlement Policy (“R&R”), 2003
Ban on compulsory land acquisition by States for SEZ development
Comprehensive R&R Bill, 2007 mooted to deal with the compensation packages fordisplaced farmers for SEZs development
Group of Ministers (“GoM”) to discuss changes in SEZ related R&R policy and Bill -
SEZ BANDWAGON
Socio – politico- economic scenario – Effects
Roadblocks for SEZs continue
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Insert picture from stock hereDIRECTION OF SEZPOLICY
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SEZ - DIRECTION
Yet another Amendment in Rules is imminent to capture the decisions of the
EGoM and BoA
EGoM to clarify date from when ban on compulsory land acquisitions will come
into force – Potentially raise legal issues for outstanding agreements entered
into by various State Governments eg Saelim Group’s SEZ in West Bengal,
Reliance – Maha-Mumbai SEZ in Maharashtra etc
Migration of Growth of existing Units into the SEZ regime with the sunset
clause nearing
Formalization of guidelines for development of infrastructure within the
processing and non-processing areas of the SEZ
R&R Policy / Bill, 2007 to be linked to SEZ development
All states should set up rehabilitation councils enjoying statutory backing
Those whose lands are acquired should get either jobs or equity shares
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SEZ - DIRECTION
R&R Policy / Bill, 2007 to be linked to SEZ development (cont)
A free house site, proportional to loss, should be allotted to affected family
Entire compensation should be disbursed before work on the project begins
Councils to conduct environmental and social impact assessment
Redressal cell must be set up under rehab & resettlement commissioner
R&R Bill requires companies to earmark a percentage of profits or turnover for
developing the affected areas Companies should coordinate with the Centre and States in supporting their ongoing
rural development plans – Forced CSR
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Insert picture from stock hereAnnexures
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SEZ POLICY - EVOLUTION
Original Intent Current provisions Dilution of Intent
Labour law relaxations
Deemed foreign territory
Easy hire and fire policy
Not to be governed byexisting stifling Labour
law regime
SEZs will be governed bythe existing Rules andregulations governingTrade Unions, Industrialand Labour disputes,Employer’s Liability,
workmen's compensationetc
Passage of the SEZ Billwas stalled owing topolitical furor againstdilution of existing labourlaw regime
Bill was passed andsubsequent amendmentmade at the behest of theCommunists members ofthe ruling coalitionGovernment
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CHINAs SEZ MODEL
China adopted the SEZ model in the
1980s. Highlights of Chinese SEZ
model are:
Large in size eg Shenzen, Xiamen,
Shantou etc
Single window clearance for both
application and operation phases
Flexible labour laws
Exemption from customs, import duties
and licenses on all products and
services used for processing of export
products
Delegation of powers in favour of
provincial and local governments to
manage the zones
Total SEZ Land in India Hainan Shenzen Xiamen
Land under SEZs in China and India
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SEZs large in size like Shenzen
(326 sq km), Xiamen (132 sq km)
etc
Locational advantage as SEZs liestrategically close to ports and
cities of Hong Kong, Taiwan and
Macau
Vast areas provision for world
class infrastructureFlexible labour laws
SEZs vary in size from 10 to 1000
hectares with the Reliance SEZ
being the largest at 119 sq km
Can be set up anywhere. Portbased SEZs have been approved
but majority SEZs are land locked
Small areas inadequacy of
infrastructure
Stringent labour law regime
COMPARISION BETWEEN CHINESE & INDIANMODEL
China India
Source – Colliers International India Research, 2007
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