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International Trade Procedures and Documentation

Notes (b) Exemption from minimum alternate tax under Section 115JB of the Income Tax Act.

(c) External commercial borrowing by SEZ units up to US $ 500 million in a year
without any maturity restriction through recognized banking channels.
(d) Exemption from Central Sales Tax.

(e) Exemption from Service Tax.
(f) Single-window clearance for Central and state level approvals.
(g) Exemption from state sales tax and other levies as extended by the respective state
governments.

13.4 Present Debate on SEZ

India, with a robust, booming and shining economy and favourable economic environment for
further economic growth has witnessed a huge rush from private sector companies who are
very keen to set up Special Economic Zones (SEZs) as they wish to make India a base for
manufacturing, trading and services due to its cost advantages. The new SEZ legislation was
approved in February 2006, and the government has already received over 500 applications till
August 2008 out of which 250 have already been notified by the Board of Approval with Andhra
Pradesh leading with 56 Special Economic Zones, Tami Nadu 41, and Maharashtra with 36. There
were 19 notified SEZs, which include 7 EPZs converted into SEZs before the new legislation on
SEZ was adopted in 2006. The new legislation that replaced the previous scattered approach of
reference to different acts and rules making the process and execution cumbersome has opened
a Pandora’s box of debate on the utility and importance of SEZ in India, although new legislation
provides a uniform SEZ policy and comprehensively covers all aspects of establishment,
operation and fiscal oversight. Some of the major area of contention and debate are:
1. Loss of revenue to the State: Policymakers, including the central bank have cautioned on
revenue implications from duty and taxes foregone from the mushrooming of SEZs across
the country. The RBI is very critical of the SEZ policy and has time and again raised
questions on the sustainability of revenue inflow to the state, which may cause severe
mismanagement for public finances. Though, it is expected that SEZs would boost
investment and economic growth in the country, they could also aggravate the uneven
pattern of development by pulling out resources from less developed areas to more
prosperous or coastal areas. Major SEZs are coming up in costal areas only because of
transaction cost advantages.

The Finance Ministry is worried that the development of SEZs and the duty and taxes so
forgone would result in unjustified revenue loss to exchequer (over ` 1,00,000 crores) due
to direct tax drain only. It is expected that it will be around 0.5% to 0.7% of the GDP. The
RBI has also echoed these concerns and has cautioned the government about such heavy
revenue loss. It further emphasizes that such benefits/incentives may be justified if the
SEZ units can ensure forward and backward linkages with the domestic economy, thereby
catalysing greater competitiveness in the entire economy, rather than only in zones.
2. Uneven economic development: The success of SEZs in regional economic development
largely depends how smartly the state can play its role in promotion of commercial
activities from such zones, as the role of the state government is vital in the development
of these zones. It has been seen in India that different state governments differ markedly
in the quality of their vision, their capacity of built infrastructure and the political constraints
under which they operate. For example, two Indian states namely Gujarat and Bengal
have different stories with regard to development of SEZs. While Gujarat has been a
leader in commencing operations from such zones, Bengal suffers consistent turmoil with

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