A Guide to India’s Special Economic Zones

By Samuel Wrest

Posted: 30th October 2014 09:03

India’s special economic zones (SEZs) are certain localities which offer tax and other incentives to their resident businesses. Although India’s SEZs are relatively new, they now form a significant part of its appeal as both a sourcing and manufacturing destination. In this article, we examine how these zones function and highlight some of the key information relevant for companies considering setting up in an Indian SEZ.
 
A Brief History
 
Up until 2000, India did not have SEZs and instead had a number of export processing zones (EPZs), which, although similar in structure to the modern SEZ, failed to attract many firms to India. The government accordingly introduced the SEZ in April 2000. Structured closely on the already successful model of China, they are designed to help stimulate both foreign and domestic investment, boost India’s exports, and create new employment opportunities.
 
India’s SEZ Act 2005 further amended the country’s foreign investment policy and converted its EPZs to SEZs, with notable zones including Nodia, Chennai, Cochin, and Falta. Since the act’s promulgation, the Indian government has also been accepting proposals for additional, far smaller SEZs, which must be proposed by developers to the Indian Board of Approval. As of August this year, almost 200 SEZs are in operation and a massive 565 have already been formally approved for operation.
 
Incentives for Setting Up in an Indian SEZ
 
The advantages of setting up a sourcing or manufacturing platform within a SEZ are numerous and include:
 
 - Duty free domestic procurement of goods for the development and maintenance of your company;
 - 100% income tax exemption on export income for first five years, 50% for five years following;
 - Exemption from Minimum Alternate Tax, Central Sales Tax, Service Tax, State Sales Tax, and a number of other taxes usually levied by local governments;
 - External commercial borrowing allowed up to US $500 million a year without restriction;
 - Permission to manufacture products directly, as long as the goods you are producing fall within a sector which allows 100% FDI
 
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The impact of the new SEZ policy has been substantial and has already served to exponentially increase the amount of foreign firms operating in India. Since 2005, exports from the country have almost continually been increasing, largely due to the rise in sourcing and manufacturing platforms there.
 
Deciding on Which SEZ to Choose.
 
There are many SEZs for your company to choose from – a list of which can be obtained from the Department of Commerce’s website – and so deciding on which is best for you can often be a difficult and stress-inducing process.
 
For companies directly sourcing from or manufacturing in India, your platform should be well placed to acquire the raw materials needed for production, whilst at the same time being in an area suited for export (i.e. on the coast). It used to be that this was a difficult balance to strike, but the new government’s emphasis on infrastructural investment means that procuring your materials from other parts of India is becoming a lot easier.
 
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How to Set Up a SEZ
 
As mentioned previously, developers can apply to the Indian Board of Approval to establish a SEZ where one currently doesn’t exist. Companies, co-operative societies, individuals and partnership firms are all able to file an application, and simply need to fill out the Form-A that is available on the Department of Commerce’s website.
 
The information you have to fill out on the form ranges from basic details, such as the name, address and personal information of the applicant, to more specific details of the proposal, such as the type of land it will be set up on and its means of financing. The amount of land that your proposal requires will determine what type of SEZ it will be. The different types are:
 
 - Multi Sector SEZ (requiring a minimum of 1000 hectares of land);
 - Sector Specific SEZ (requiring a minimum of 100 hectares);
 - Free Trade and Warehousing Zone (FTWZ) (requiring a minimum of 40 hectares);
 - IT/ITES/handicrafts/bio-technology/non-conventional energy/gems and jewellery SEZ (requiring a minimum of 10 hectares).
 
Your proposal will firstly be considered by the State Government’s before it receives formal backing from the Board of Approval.
 
This article was first published on India Briefing
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.

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