Special Economic Zones (SEZs): Building MSMEs

In a previous article titled “MUDRA Initiative: Financing MSME Dreams”, we discussed about how the new MUDRA initiative taken by PMO India is helpful in financing MSMEs and entrepreneurs in India. Just like MUDRA aims at financing needs of MSMEs, Special Economic Zones (SEZs) aim at supporting them with infrastructure.

Special Economic Zones (SEZs) are geographical areas reserved by the Government of India (GoI), which can be developed by a private sector or public sector developer or in a public private partnership (PPP) model. SEZs in India were established as a step towards accelerating foreign investment by endorsing exports from India and recognizing the need of a global platform to introduce new Indian manufacturers and suppliers to global markets.

The key objective of SEZs is to provide companies with territory that is influenced by a different set of laws that are more liberal than the country’s domestic economic laws like tax rebates, fiscal incentives and lands at subsidized rates.

The perks for operating from SEZ range from:

  • 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.
  • 10% FDI allowed through the automatic route for all manufacturing activities
  • Exemption from excise / VAT on domestic sourcing of capital goods for project development, etc.


SEZs have not been shy of keeping up with the 21st century’s digitized ways either. In August 2015, a pilot project was commenced in Tamil Nadu as a step towards increasing the ease of doing business by digitizing SEZ schemes for data sharing and accessibility between SEZ and tax authorities. Since its launch, the compliance in usage of the system by the SEZ units, developers and co-developers has increased to 70%; MEPZ SEZ is targeting to achieve 100% compliance by March 2016.

The successful implementation of Indian SEZ Policy is quite evident. Presently, 436 SEZ units are approved by GoI, of which 202 are operational and provide direct employment to over 1.5 million Indian citizens, approx. 40% of which are women.

There, though, exists a dark side of SEZs. While there are many ways in which SEZs demonstrate merits to an organization, the leeway provided by the government has been an opening to a few demerits to the GoI itself.

  • Land acquisition at very low prices.
  • If an SEZ is built on agricultural land, the farmers lose their livelihood and if they are not skilled labourers, it is tougher to find alternative mode of livelihood. Indian farmers are already having a tough time handling water scarcity in states of Maharashtra (MH) & floods in Tamil Nadu (TN).
  • Although GoI do a proper risk assessment and keep margins in their budgets, the companies that operate under SEZs enjoy a lot of tax holidays which might create a burden on the finance ministry as tax collected may be lesser than estimates.
  • Huge downward impact on Tax: GDP ratio & the common man have to pay the price of it.

These drawbacks are associated with SEZ concept in India. There are bigger challenges associated with their adaptation.

On May 4, 2015, CITU national general secretary, Mr. Tapen Sen, questioned the Narendra Modi government as to why they were not developing unutilized land allotted for the creation of SEZ; remember, of 436 approved SEZs, only 202 are operational! “There is no dearth of land in the country to create infrastructure. 50% of land allotted to SEZs is still lying unutilized in the country for the last six to eight years,” Mr. Sen told the reporters.

Furthermore, exports from SEZs in 2014-15 declined to INR 4,630,000 million from INR 4,940,000million in 2013-14. The commerce department of GoI has recently proposed that the tariffs and Minimum Alternate Tax [MAT] levied on SEZ units that sell goods in the domestic market should be brought down to 7.5% instead of the existing 18.5%. MAT reduction in manufacturing SEZs would benefit businesses in the auto components, garment manufacturing, ceramics and computer parts sectors located in Chennai, Noida and Kerala.

Industry stalwarts have expressed concerns regarding the tax benefits provided to all IT firms under the STPI scheme available till March 31, 2011, while the SME sector does not get equitable benefit under the SEZ scheme. (Source)

SEZs in China, in comparison to India,have triumphed as a result of creation of complementary infrastructure, power, roads and ports; these facilities currently lack in Indian SEZs. A Business Standard Report quoted, “Major reason for the SEZs languishing is the absence of external infrastructure support. The SEZs have to be connected with ports and airports with world-class roads and rail. This is not the case in India. Deficiencies in the availability and quality of power are an equally important constraint”.

On 20th Nov 2015, the Finance Ministry announced variations in the standard operating procedures for the development of SEZs that are not operational over the next 16 months -from April 2017 as part of its plan to cut the corporation tax rate from 30% to 25%, bringing it closer to the international levels.

SEZs have both, pros and cons. They have, undoubtedly, proven to be a vital element in setting business for MSMEs & entrepreneurs. It is up to you to evaluate whether the pros are heavier than the cons or the other way around. Happy hunting!

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