To earn more from exports and attract investment, many countries create special areas with easy rules and tax benefits. In India, these are called Special Economic Zones (SEZs). They grew out of the older Export Processing Zones (EPZs). Exams ask about the first EPZ, the SEZ policy and Act, the bodies in charge and the benefits. This post explains SEZs in simple words. It ends with 15 previous year questions.
Key Points (Quick Revision)
- India's first Export Processing Zone was set up at Kandla, Gujarat, in 1965. It is often called Asia's first EPZ.
- The SEZ policy was announced in April 2000.
- Parliament passed the SEZ Act in 2005; it came into force with the SEZ Rules in 2006.
- SEZs work under the Department of Commerce, Ministry of Commerce and Industry.
- An SEZ is treated as foreign territory for trade and customs purposes.
1. What is a Special Economic Zone?
An SEZ is a specially marked area within a country where business and trade rules are different from the rest of the country.
- For customs and trade, an SEZ is treated as outside India.
- Goods brought into an SEZ from India count as exports, and goods sold from an SEZ into India count as imports.
- Units inside get tax and duty benefits and simpler procedures.
The aim is to boost exports, bring in investment, including foreign investment, and create jobs.
2. From EPZs to SEZs
- 1965 - India set up its first Export Processing Zone at Kandla in Gujarat.
- Over the next decades, more EPZs came up, such as Santacruz (Mumbai), Falta, Noida, Chennai, Cochin and Visakhapatnam.
- EPZs did not grow as much as hoped, because of limited infrastructure and complex rules.
- April 2000 - the SEZ policy was announced in the EXIM Policy, inspired partly by China's success with SEZs such as Shenzhen.
- Existing EPZs were turned into SEZs.
- 2005 - Parliament passed the Special Economic Zones Act. It came into force in 2006 along with the SEZ Rules, 2006.
3. Who runs SEZs?
| Body | Role |
|---|---|
| Board of Approval | Approves proposals to set up SEZs. It is headed by the Commerce Secretary. |
| Development Commissioner | The administrative head of an SEZ; approves units and monitors them. |
| Unit Approval Committee | Approves individual units inside a zone. |
| Developer | The government, a State body or a private company that builds and runs the zone. |
The State government recommends a proposal, and the Department of Commerce handles SEZ policy at the Centre.
4. Benefits for SEZ units
- Duty-free import and domestic purchase of goods for setting up and running units.
- Income tax benefits on export income for a set number of years, for units that started within the time limit set by law.
- Single-window clearance for approvals.
- Foreign direct investment through the automatic route for most activities.
- Exemption from some indirect taxes on supplies to SEZs.
Some tax benefits have been withdrawn or phased out over the years. For example, the income tax holiday applies only to units that began operations before a cut-off date. Check the current rules before the exam.
5. Criticism of SEZs
- Land acquisition from farmers led to protests in some places.
- Tax benefits cause a loss of revenue to the government.
- Many approved SEZs never became operational.
- Some firms shifted existing work into SEZs only to get tax benefits, without adding new activity.
- Exports from SEZs are concentrated in a few sectors, such as IT and IT-enabled services.
To fix these problems, committees such as the Baba Kalyani Committee (2018) suggested reforms, and a new law to replace the SEZ Act has been under discussion. Check the latest status before the exam.
6. SEZ vs EPZ
| Point | EPZ | SEZ |
|---|---|---|
| Began | 1965 (Kandla) | 2000 policy; Act of 2005 |
| Legal basis | Policy-based | Law - SEZ Act, 2005 |
| Size and scope | Small, mainly manufacturing for export | Larger, with manufacturing, services and infrastructure |
| Status | Converted into SEZs | Current framework |
7. Previous year questions
- Where was India's first Export Processing Zone set up? – Kandla, Gujarat
- In which year was the Kandla EPZ set up? – 1965
- In which year was the SEZ policy announced in India? – 2000
- In which year did Parliament pass the SEZ Act? – 2005
- In which year did the SEZ Act come into force with the SEZ Rules? – 2006
- Under which ministry do SEZs work? – Ministry of Commerce and Industry
- Who heads the Board of Approval for SEZs? – The Commerce Secretary
- Who is the administrative head of an SEZ? – The Development Commissioner
- For customs purposes, how is an SEZ treated? – As foreign territory
- Which Chinese SEZ inspired India's SEZ policy? – Shenzhen
- In which city is the Santacruz SEZ located? – Mumbai
- Which committee reviewed SEZ policy in 2018? – Baba Kalyani Committee
- What is the main aim of SEZs? – Boosting exports and investment
- Goods supplied from India into an SEZ are treated as what? – Exports
- Which sector earns the largest share of SEZ exports? – IT and IT-enabled services
8. How to revise this topic
Start with the timeline: Kandla EPZ 1965, SEZ policy 2000, SEZ Act 2005, SEZ Rules 2006.
Next, fix the bodies: Board of Approval under the Commerce Secretary, Development Commissioner, Unit Approval Committee and the developer.
Then learn the key idea: an SEZ is treated as foreign territory; supplies into it are exports and sales out of it are imports.
Finally, remember the criticism and the Baba Kalyani Committee of 2018.
9. Frequently Asked Questions
What is a Special Economic Zone?
An SEZ is a specially marked area where trade and business rules differ from the rest of the country. It is treated as foreign territory for customs, and units inside get tax and duty benefits to promote exports and investment.
Which was India's first Export Processing Zone?
India's first EPZ was set up at Kandla in Gujarat in 1965. It is often described as Asia's first EPZ.
When was the SEZ Act passed?
Parliament passed the Special Economic Zones Act in 2005, and it came into force in 2006 along with the SEZ Rules. The SEZ policy itself was announced in April 2000.
Who approves SEZs in India?
The Board of Approval, headed by the Commerce Secretary, approves proposals for SEZs. Each SEZ is administered by a Development Commissioner.
What are the main criticisms of SEZs?
SEZs have been criticised for land acquisition from farmers, loss of tax revenue, many zones not becoming operational, and exports being concentrated in a few sectors such as IT services.
For more Economy topics in simple language, see our Balance of Payments and Foreign Trade, FDI vs FPI and World Trade Organization posts, or browse the Economy section. Preparing for a state PSC? Start with the APPSC Group 2 guide or join the 100 Hour GS Course.