Special Economic Zone (SEZ) A BOON OR BAN

The coverage includes the following:1. The need for SEZ2. The background3. What is Special Economic Zone (SEZ)4. Goal & Objective of establishing SEZ5. Different types of special zones6. Divisions of SEZ7. Variants of SEZ8. Who can establish & control SEZ9. Advantages and disadvantages10.Major issues in SEZ11.Prerequisites of SEZ12.Institutional framework13.Preferences of SEZ units14.Expectations by SEZ developer and unit15.How do SEZs boost country's economy16.Success and failure stories17.Expectations of new Maldivian

government

1. The need for SEZGlobalization, stagnant and declining economic performance, the need to revitalize economies, the desire to be competitive and a quest to improve the standards of living of their people as well as the need to reduce poverty have led many countries around the world to establish Special Economic Zones (SEZs).

2. The background ◦Since antiquity, governments, emperors, kings and queens have been providing traders and investors with special sites offering respite from normal import-export tax regimes and regulations in return for a steady stream of much needed revenue for the public purse.

◦Before modernity, such places were concentrated in the Mediterranean basin, at Delos in Greco- Roman times, and in Venice, Genoa and Marseilles during the Middle Ages.

◦By the 19th century, they had spread to Southeast Asia. But it was not until the latter half of the 20th century that so-called free zones made their mark as deliberate tools of economic development, most notably in China in 1979 when one of the most famous free zones of all was set up at Shenzhen.

The Background (contd.)

◦The first Special Economic Zone was established in Puerto Rico in 1942. (located in Caribbean sea)

◦According to the World Bank (2014) over 3000 Special Economic Zones (SEZs) have been established around the globe with a value of US$400 billion in trade.

◦There are about 135 nations around the world mainly from emerging markets which have established the economic zones thereby creating over 70 million jobs in the zones

3. What is SEZ ?Special Economic Zone (SEZ) is a specially delineated duty free geographical enclaves that has economic legal framework different from country’s economic legal framework

These are ◦major export hubs contribute for the economic growth and development

◦areas where the market driven capitalist policies are implemented to entice foreign business to invest

◦one of the most effective instruments of attracting investment

◦the planning tools lever for boosting economic development.

◦Tool to support innovative companies through which residents compete successfully in the global market

4. Goal and objectives of SEZs

The Goal: It is to increase foreign investments

Main objective: Through foreign investment provide an internationally competitive and hassle free environment for exports

Other objectives are:◦Increase country’s revenue◦Reduce over dependence on conventional source of income

◦Increase the employability of workforce◦Enhance industrialization◦Development of infrastructure facilities

5. Different types of SEZ

Types of SEZ Sector Specific SEZ-units may be set up for◦manufacture of one or more goods in a sector◦rendering of one or more services in a sector

Multi-product SEZ-units may be set up for◦manufacture of two or more goods in a sector or goods falling in two or more sectors

◦trading and warehousing◦rendering of two or more services in a sector or services falling in two or more sectors

Other SEZ’s◦SEZ in a port or airport◦SEZ for Free Trade and Warehousing

6. Division of SEZ SEZs are divided into Processing and Non Processing areaProcessing area:◦(a) the processing area for setting up Units for activities, being the manufacture of goods, or rendering services; or◦(b) the area exclusively for trading or warehousing purposes; or

Non processing:◦the non-processing areas for activities other than those specified under clause (a) or clause (b). purposes such as educational institutions, hospitals, hotels, recreation and entertainment facilities, residential and business complexes

7. Variants of SEZVariants /Forms of SEZ◦Free zones generally fall into one of four categories: ◦Free trade zones - typically located near seaports or airports, mainly offer exemptions from national import and export duties on goods that are re-exported. Local services gain, though there is little, if any, value added to the goods traded

◦Export processing zones go a step further by focusing on exports with a significant value added, rather than only on re-exports

◦Special economic zones apply a multi-sectoral development approach and focus on both domestic and foreign markets. They offer an array of incentives including infrastructure, tax and custom exemptions, and simpler administrative procedures

◦Industrial zones are targeted at specific economic activities, say media or textiles, with infrastructure adapted accordingly.

8. Who can establish & control the SEZ

Who can establish◦Any individual/private/public/joint sector or co-operative society/partnership /state government or its agencies can set up SEZ including a foreign agency can also set up SEZs

Who can control◦Statutory functions are mainly controlled by Government and depend upon the arrangements, government can also control operations and maintenance functions or it can be privatized

9. Advantages and disadvantages

Advantages & disadvantages of SEZ unit, Advantages to SEZ unit

Tax holiday for certain no. of years or low tax ratesNo license required to import goods Duty free importsExemptions from customs and central excise dutyExemption from sales tax or VATExemption from service taxExemption from labor laws

Advantages to CountyEconomic growthIncreased employmentIncrease exportsAttracts foreign direct investment

Disadvantages to Government

Revenue loss because of the various tax exemption and incentivesMany units are interested to acquire land and create a land bank for themselvesSeparate treatment for local and SEZ businesses

Disadvantages to SEZ unit very less

10. Major Issues in SEZ

Commitments for Export, FDI, Manufacturing Impact on agricultural land Compensation & Rehabilitation of Farmers Tax Heavens – Revenue losses various governments Abuse of large scale business/services to Domestic area Level playing field for other industries in Domestic area

Impact on democratic system-monopoly be avoided Small SEZ additional burden on present infrastructure Abuse-Real Estate Business Abuse - Housing, Hotel, Mall, Profit motive Health & Education business-illogical Tax Benefits

Transparent decision making process- Better coordination & screening required

11. Prerequisites of SEZ

◦Infrastructure requirementsIndustrial infrastructureRailway branch

lineGas

ElectricityHeatingWater

SewerageDrainage

Inter site roads

Airport connectionSea port

connection

BusinessInfrastructure

Office premisesConference

hallsMeeting roomsExhibition

hallsCanteen/

restaurantsInsurance companiesOffshore banking companies

Customs infrastruct

ureCustoms officeE-

declarations

Customs clearances

A major prerequisites – single window clearance

Tax servicesBuilding planning approval Environmental approvalLabor and social security approvalLand registration approvalTest centersMigration servicesInsurance servicesBanking services

12. Institutional framework for SEZ

Development Commissioner• Grant all level clearances, etc.• Monitor such approvals, licenses, registrations, etc.• Make town planning regulations

Proper Officer Customs administration

DeveloperPlanned development of SEZ• Prepare development plan• Demarcate and develop sites• Allocate and transfer plots,buildings• Regulate the erection ofbuildings in accordance withthe plan• Develop, operate, maintaininfra• Demarcate Zone boundary

Township Authority• May be appointed by the State Government, with powers and functions as may be prescribed

Board of Approval• Approving proposals to set up SEZs• Approval of authorized” operations in an SEZ• FDI Approvals to Developers, Units• Approvals for infrastructure provision (through co-developers, etc.)

Approval Committee• Approve imports of goods and services into the SEZ• Approve proposals forestablishment of SEZ units• Allow foreign collaborations/ FDI proposals duly cleared by the Board of Approval• Monitor compliance by SEZ Developer, units

SEZ Authority• Monitoring of Infrastructure services & Export performance of the SEZ

SEZ

13. Preferences of SEZ unitAttractive and tax preferences

Developed industrial infrastructure

Decreased bureaucracyStrong governmental supportLow cost land /plotsRelaxed labour controlSingle window clearancesReduced administrative barriers

14. Expectations by SEZ developerExemption from customs/excise duties for development of SEZs for authorized operations

Income Tax exemption on income derived from the business of development of the SEZ

Exemption from minimum tax underExemption from dividend distribution tax

Exemption from Central Sales Tax (CST).

Exemption from Service Tax

Expectations by SEZ units

Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units

100% Income Tax exemption on export income for SEZ units

Exemption from minimum alternate taxExternal commercial borrowing by SEZ units up to certain amount without any maturity restriction through recognized banking channels.

Exemption from Central Sales Tax. Exemption from Service Tax. Single window clearance form all levels of government

Exemption from local taxes and other levies as extended by the respective local Governments.  

15. How do SEZs boost country’s economySEZs play a key role in rapid economic development of a country.

Experiences of China, India, Russia, UAE etc. have proved beyond doubt in attracting the foreign direct investment, increase the exports, creating the infrastructure and productive capacity, and creation of employment opportunities etc.,

China: India: Exports increased from Rs. 22840 crores in 2005 to 4.94 lakh crores in 2013-14

Russia: Attracted US $ 12 billion Morocco: One tenth of industrial exports totaling 12 billion Euros

16. Success stories◦While many countries have set up special economic zones, China has been the most successful in using SEZ to attract foreign capital. In fact, China has even declared an entire province (Hainan) to be an SEZ, which is quite distinct, as most SEZs are cities. Shenzhen became the model for China’s SEZ

◦Russian SEZs have proved themselves successful in the international arena of SEZ (Alabuga). There arte 28 SEZs of 4 different types attracted investment from 24 countries with an investment of US$24 billion

◦India : Kandla Export processing zone contributed for increase of exports. SEZs are major export hubs and contribute one third of country’s exports and provide employment to about 15 lakh persons, investments worth US$ 36.5 billion. Exports growth rate around 50% stood at US $65 billion(11-12)

Success stories (contd.)

◦The success witnessed in China with its Special Economic Zones has led many countries to establish their own. Such countries include: Brazil, Cambodia, India, Iran, Jordan, Kazakhstan, Pakistan, Poland, the Philippines, Russia, South Korea, Ukraine, United Arab Emirates, Puno, Peru and North Korea, Bangladesh, Belarus, Cayman Islands, Congo, Greece, Egypt, Ethiopia, Indonesia, Iran, Jamaica, Malaysia, Nigeria, Pakistan, Panama Philippines, Poland, South Korea, Ukraine, Uzbekistan, Zambia,

◦North Korea announced in 2013 that it is establishing 14 new special economic development zones. It will establish one Special Economic Zone (SEZ) and 13 Economic Development Zones (EDZ) with one in every province of the country with the goal of developing its economy so it can be able to attract foreign direct investment (FDI)

Success stories Contd.Significant job creation in Special Economic Zones was recorded in Egypt, Mauritius and Tunisia.

Egypt: 20.3% of total exports and employed 136000 people

Jordon: The AQUABA the most successful SEZ attracted 400 million US$

17. Expectations of New Maldivian Government

The President Mr. Yameen said that the SEZ bill would become “a landmark law” that would strengthen the country’s foreign investment regime

Economic Development Minister Mohamed Saeed has said that the SEZ bill submitted to parliament is designed to incentivise foreign investment with special privileges and tax exemptions

The key focus is on economic development and job creation

The objective is to diversify by introducing new industries in order to overcome the dependence on the tourism industry which was vulnerable to external shocks and global events.

Contd.Mr. Saeed said that Tourism industry was the main source of foreign currency at the moment, however, other industries were not “alien” or unsuited to the Maldives

To expand the economy and could “bring an end to the dependence on tourism

The SEZ legislation envisions nine economic zones across the country, including an industrial estate zone, export processing zone, free trade zone, enterprise zone, free port zone, single factory export processing zone, offshore banking unit zone, offshore financial services centre zone, and a high technology park zone.

Contd.To “outperform competitors” the govt. proposed to offer incentives so that investors would choose the country over business hubs such as Dubai, Oman, Qatar, Singapore or Hong Kong, ◦Investors would be exempted from paying either import duties for capital goods brought in for the development, supervision, and operation of the zone or business profit and withholding taxes.

◦Investors in the SEZ will be exempted from paying goods and services tax for a 10-year period.

◦Lease land to foreign companies for 66 years while local companies would be able to purchase land.

Contd.Special economic zones would be established in the north, south and other “strategic locations.”

Turnover from new industries set up in the SEZs could be two or three times higher than tourism. because all the large developing economies of the world are near the Maldives. For example, China and India,

To achieve the above government will make every effort to make it easier for foreign companies to invest in the Maldives, and improve investor confidence in the country.