AS part of its continuing commitment to liberalisation, the government of India has, since the last decade, adopted a multi-pronged approach to promotion of foreign investment in India.

Several initiatives are also being taken to promote export-import of goods in a quick, efficient and hassle-free manner.

Further, the private sector is being encouraged to participate in setting up of mega infrastructure projects of public importance, including the setting up of industrial parks.

For example, this year’s budget proposes to grant special economic zones the status of `infrastructure facilities’, thereby enabling developers and investors to avail of certain tax benefits under Section 10(23G) of the Income Tax Act, 1961, (I-T Act).

It seems that SEZs are now viable for both manufacturers and developers of SEZs.

China: China pioneered the concept of SEZs' in the ‘80s' and has established several SEZs; including in Shenzhen, Shantou, Shuhai, Xiamen and Hainan.

The Chinese SEZs and more specifically the Shenzen SEZ have been extremely successful in attracting foreign investment and promoting indigenous exports.

Foreign investment attracted by the Shenzen SEZ is supposedly more than the total foreign investment attracted by India.

China is able to attract about US$ 45 bn per annum by way of foreign investment, which is almost ten times more than what India is able to attract.

The following are few of the reasons attributable to the success of Chinese SEZs: most Chinese SEZs are supported with world-class infrastructure.

They are strategically located next to sea-ports and/or airports. Adequate recreational, entertainment and educational facilities are provided in SEZs; in fact, one of the SEZs has over 90 theatres.

Significant tax incentives are provided to units in SEZs and there is no tax payable by new units for the first few years of their operation.

After a few years of operation, units pay a low tax of 15 per cent of their profits, which is even lower in the case of companies earning income largely from exports.

Chinese SEZs are in close proximity to Hong Kong which serves as one of the largest end markets for goods produced in the SEZs.

Although, there is no need for India to blindly follow the Chinese model, it is important for the success of our indigenous SEZs that our policy makers understand the reasons behind the success of the Chinese SEZs and take appropriate steps to make our existing SEZ scheme more investor-friendly.

SEZs in India: The government under its Export-Import Policy, ‘97-’02 (the policy) introduced the `SEZ Scheme’ which is contained in Chapter 9A of the policy.

SEZs are defined as `delineated duty free enclaves and are deemed foreign territories for the purpose of trade operations, duties and tariffs’. 100 per cent foreign direct investment is permitted on an automatic basis for most manufacturing activities.

Setting up SEZs: A SEZ may be set up in the public, private or joint sector and/or by a state government, subject to compliance with the policy and guidelines issued by the MoC.

Additionally, existing Export Processing Zones (EPZs) may be converted into SEZs. For instance, the Mumbai, Kandla Cochin and Visakhapatnam EPZs have been converted into SEZs. The minimum size of a SEZ is required to be 1000 hectares.

Setting up units in SEZs: Units may be set up in SEZs, among other things, for manufacturing of goods, rendering services, processing, assembling, trading, repairing, reconditioning, making of gold/silver, platinum jewellery et al.

In order to set up a unit in the SEZ, an application is to be made to the Development Commissioner of the SEZ—the administrative controller of the SEZ.

If units want to manufacture items which require an industrial licence then the application would first have to be cleared by the board of approval and the department of industrial policy and promotion.

Minimum investment of Rs 50 lakh is required to be made in plant and machinery, by a unit in a SEZ. A unit is also required to have a positive net foreign exchange performance in the first five years of its operation.

Trading units are required to ensure a turnover of at least US$ 1 million within five years from commencement of operation.

Certain benefits to units in SEZs: A unit in a SEZ is entitled to import all types of goods (except those prohibited under the policy), without payment of any duty, including capital goods, whether new or second hand, required for its operations.

In comparison to other similar schemes, under the policy, the SEZ scheme has several addition advantages such as:

No requirement of minimum net foreign exchange earning.

No licence required for manufacturing items reserved for the small scale sector.

Sub-contracting of part of production abroad permitted subject to certain conditions and restrictions.

Unlimited sales to the domestic tariff area, subject to certain conditions.

Export proceeds may be brought back within 365 days as compared to 180 days.

Units permitted to retain credit upto 100 per cent of receipts in foreign exchange.

All activities of units to be through self-certification procedures, unless specifically provided otherwise.

Certain benefits to developers: In order to encourage the development of SEZs, the government provides the following privileges to developers of SEZs: To allocate developed plots to approved SEZ units on a purely commercial basis; to provide services such as supply of water, electricity, security, restaurants, recreation et al on commercial lines; to develop townships within a SEZ with residential areas, markets, playgrounds, clubs, recreation centres etc.and to procure specified goods from the domestic tariff area without payment of duty or import specified goods at concessional rates of duty in certain cases.

Need for further legal framework : Certain countries, such as the Kyrghiz Republic, and China, have allowed their SEZs' significant legislative freedom.

For instance, the SEZs' in the Kyrghiz Republic have a distinct legal framework for each SEZ, which creates a special regime for foreign entity registration, immigration, labour, customs, taxes, foreign exchange, land, international trade.

Similarly in China, state governments and even local authorities have been granted significant legislative freedom to enable the operation of SEZs independently with very little intervention from the Chinese government.

For example, foreign investment approvals of upto US$ 30 million in units in SEZs may be granted directly by authorities of the SEZs.

This is in stark comparison to the operation of SEZs in India. The state governments or local authorities do not have such legislative freedom or such powers.

In fact, units in SEZs have to comply with a large number of the local laws and strict labour laws.

The question the government is therefore faced with is, whether to permit each state in India to develop its own legislative framework for SEZ's enabling each state to independently control and manage the operation of SEZs in India.

To ensure that SEZs in India are successful, inter alia, the government may need to consider granting greater latitude to state governments to develop their own legislative framework in respect of SEZs and providing financial aid to each state government, for setting up adequate infrastructure in SEZs.

If appropriate support is provided by the central government, it is likely that SEZs in India will be successful in attracting huge amounts of foreign investment and enabling further growth of exports from India.

The availability of skilled labour at reasonable costs and the availability of a large English speaking populace are also factors which are likely to make SEZs successful in India.

Lets all hope that the government’s vision of creating magnets for foreign investment becomes a reality.