The Special Economic Zone (SEZ) has recently turned highly controversial in India. One aspect of the controversy relates to land acquisition, which is an important issue in its own right. To get a better view over SEZ we need to analyse the basic concept, benefits and costs associated with SEZ.
Conceptually, SEZ operates like foreign entities within the territory of a country. They are usually separated by physical barriers from each other and from rest of the countries. They have no trade barriers. The countries apply trade barrier strictly within the area excluding SEZs. Which is called the Domestic Tariff Area (DTA). Any good sold by agents within DTA to agents inside SEZ are treated as exports of the country and those purchased by agents in DTA from SEZs are treated as imports subject to custom duty. Any trade between SEZ and outside world is allowed to by pan all customs requirements applicable to DTA.
Any public, private or joint sector enterprise, state and central government can establish SEZ. The minimum stipulated area for a multiproduct SEZ is 1000 hectares with at least 25% of the area earmarked for the development of processing. The minimum area is reduced to 100 hectares if the SEZ is devoted exclusively to services or is located near a port or airport. The limit is 200 hectares if the SEZ located in a state listed in the rules or a union territory. The police provide tax breaks to SEZ developer as well as to units located in SEZ. Among other things the developer is granted a complete tax holiday for any 10 consecutive years in the first 15 years, beginning with the year in which SEZ is notified. Likewise, units in SEZ are given 100% tax exemption from profit tax in the first 5 years and 50% for 2 additional years.
From an economic standpoint, the first question which arises is whether the SEZs would improve efficiency vis-à-vis the status quo. To answer this we need to analyse the cost and benefits regarding SEZ. SEZ may show lower efficiency due to absence of various tax breaks; the least-cost location of a unit may be outside the SEZ. Also, tax break in the SEZ that are not available elsewhere will result in loss of revenue. This loss will have to be recovered from alternative sources leading to further inefficiency.
Against these costs, we must consider the benefits of SEZ. First, international trade in India remains subject to substantial bureaucratic red tape. Domestic indirect taxes that must be reimbursed, when goods are exported are not always fully reimbursed. The SEZ help overcome these inefficiencies. Second, the use of instrumentality of SEZ to relax some of the most burdensome provisions in the labour regime helps see the emergence of firms.
CONCLUSION:
There is no doubt that ideally, India should provide the same business environment and flexible labour market regime it is trying to create in SEZs in the entire country. It should also refrain from the tax breaks it has offered. But the expected benefits of SEZs as implemented still dominate the costs. The ultimate test of their success will be whether or not they help promote large-scale manufacturing of labour-intensive products. If success is achieved, it can even open door to the extension of the policy throughout India.
-ANAND PRAKASH
B.A.(H) ECO. 3RD YEAR
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