BUSINE S S

BRIEFIN G
Special Economic Zones in India
Opportunities and Challenges
Research & Business Analytics Group, India, Cushman & Wakefield

November 2008 | A C&W India Publication

CO N T E N T S ex e cutive su mmary

1 Executive Summary The concept of Special Economic Zones (SEZ) in India can
2 Dawn of Special Economic Zone be traced as far back as the 1960s. India’s leap towards a
3 Thrust of India’s SEZ Initiatives more structured approach towards SEZs is however only
very recent. Taking their hints from various international case
4 Activities within SEZ
studies, the Indian SEZs are a mix of formats with the main
5 Police(ing) The Zone
aim being the creation of an environment for accelerated
6 SEZ Development Stance: An
industrial production. With the SEZ Policy set in place, the
Analysis
process of notification and approvals of SEZs has been swift
7 Zonal Distribution of SEZs
with the key demand driver being IT/ITeS sector followed
8 Sectoral Distribution of SEZs closely by manufacturing and multi- product SEZs. The
9 Export Break-Up extended periods of tax holidays and the corresponding
10 Employment Generation retraction of benefits from IT parks have made the IT/ITeS
11 Investments SEZ especially attractive for occupiers. In spite of a fairly

12 Real Estate Projections long period of existence of the SEZ policy, India is still in
the process of devising new means and ways of streamlining
13 Vantage SEZs & Challengers
procedure of approvals and developments. This paper
14 Where It Stands…
evaluates the SEZ growth story up till now and how the saga
15 Conclusion
would unfold in the future, keenly observing, the trends, the
policies and approaches and the challenges India faces with
SEZ.

DAWN OF SPECIAL ECONOMIC ZONE

Seeds of the present day SEZ model in India can be traced way back to 1965, when Asia’s first
Export Processing Zone was set up at Kandla in Gujarat. The Industries Development and
Regulation Act (IDRA) in 1951 laid the foundations but had kept the licensing requirements
stringent, requiring multi-level clearances by a number of agencies. Early 1960s and 1970s
witnessed planned targets which were not met or failed to be even implemented. The scenario,
instead led to some more restrictive set of regulations and reservations instead of making it less
accessible and thereby defeating the purpose of the regulation.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

By the early 1980s, deregulations and economic reforms were being slowly introduced to liberalise
trade, industrial and financial policies. In July 1991, India launched a major economic reforms
program, opening up the economy to trade, foreign investment and more private sector participation.
While setting the same, there were many limitations and hindrances in the path with factors such as
control regulations, securing multi-level clearances, infrastructural inadequacies or unattractive fiscal
incentives etc. With a view to surmount the shortcomings, the SEZ Policy was announced in April
2000 thus bringing SEZs into existence.

SEZ is a region with minimum possible regulations and control mechanisms, more liberal support
policies with quality infrastructure as well as attractive fiscal packages from both the Centre and the
respective States where they are situated. SEZs cover in its fold a range of more specific zone types,
like Free Trade Zones, Export Processing Zones, Free Zones, Industrial Estates, Free Ports, Urban
Enterprise Zones, etc.

Initially the Foreign Trade Policy Guidelines regulated the SEZs in India which was abandoned
in February 2006. The main intent of the SEZ Policy was to provide an internationally competitive
environment for exports and attract investment from foreign and domestic sources, be it in
infrastructure or productive capacity, generating additional activity in the economy and creating
opportunities for employment. Though the Government of India announced the SEZ scheme in
April 2000, the Special Economic Zones Act, 2005 was brought into effect along with the Special
Economic Zones Rules, 2006 from February 10th, 2006. The Act and the Rules together replaced the
previous applicable legislations and rules governing the operations of SEZ and provided for a single
legislation.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

THRUST OF INDIA’S SEZ INITIATIVES

The world’s fastest growing economies, India and China, have a varied approach towards the
Special Economic Zones (SEZs). China made an early move to set up SEZs in 1980s, two decades
before India announced the SEZ policy. The SEZ framework in China was instituted to promote
manufacturing sector and strategically planned at the coast line, in contrast to the approach that India
followed.

In India, the SEZ Act broadly specified the SEZ types - which either catered to a specific sector/
industry or is broadly categorised to identify the nature of activities intended to be carried out in the
SEZ. Basic categories of SEZs were identified and classified as multi-product, sector specific, port
based and warehousing zones. The Act also laid down the maximum and minimum area limits for
each category of SEZs based on the nature of industry or on geographical parameters.

THRUST OF INDIA’S SEZ INITIATIVES

Type of SEZ Requirements

Multi-product SEZ 1,000 hectares and maximum 5,000 hectares but
reduced to 200 hectares in select states*
SEZ for a specific sector / One or more services / 100 hectares but reduced to 50 hectares in select
Port or Airport states*
IT/Bio-technology/Non-conventional energy including 10 hectares with minimum built up processing area:
solar energy equipments/cells/Gems and Jewellery IT/ITES:100,000 sq.m, Gems & Jewellery:50,000
sqm, Biotech/Non conventional energy:40,000 sqm
Free trade and Warehousing 40 hectares with minimum built up processing area
of 100,000 sq.m,

*Select states include Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal,
Sikkim, Jammu and Kashmir, Goa.

Source: Ministry of Commerce, Govt of India

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

It further provided for activities within an SEZ under broad heads of - manufacturing or trading
and services. Further within these categories, selected types of industries and activities are listed.

ACTIVITIES WITHIN SEZ

ACTIVITIES WITHIN SEZ

Manufacturing / Trading Service

Apparel, Garments & Leather IT enabled services & Biotechnology
Automobile & Auto Components R&D Services
Engineering - Light, Heavy & Application Health Care
Pharmaceuticals Financial Services
Food Processing Knowledge Services
Telecom Equipment Entertainment, Leisure & Recreation
Computer Hardware & Micro- electronics Sports & Related Activities
Consumer Electronics & Appliances Organised Retail
Gems & Jewellery Business Services
Wood, Rubber, Plastic & Leather Products Warehousing & Trade Related Services
Handicrafts

Source: Ministry of Commerce, Govt of India

India leads the count with around 250 notified SEZs with the list continuing to expand; China has
only about six SEZs but on a much larger scale, which are in no way comparable to India. This made
the Chinese SEZs leverage onto the scale and infrastructure more successfully. However, the Indian
government is promoting the SEZs at relatively small scale, with minimum of 10 hectares of area,
permitting private participation and attractive tax incentives, all of it which has made this proposition
attractive for developers to build SEZs across India.

POLICE(ING) THE ZONE

With the sector sizing up attractive investment and attention from various quarters, manning
the system and reducing the operational frictions has become vital. For providing a platform for
removing the structural impediments and easing the complicacies involved, the SEZ Rules were
framed for:
• Simplified procedures for development, operation, and maintenance, and also for setting up units
and conducting business in SEZs;
• Single window clearance for setting up an SEZ or setting up a unit in SEZ;
• Single Window clearance on matters relating to Central as well as State Governments;
• Simplified compliance procedures and documentation with an emphasis on self certification.
• Different minimum land requirement for different class of SEZs.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

• Demarcating the processing and non processing zones wherein the processing area would
comprise of the SEZ units and the non-processing area will host the supporting infrastructure.

While the SEZ Rules smoothened the operational formalities, the SEZ Act further demarcated
the areas for foraying the SEZ domain. The Act provides for setting up of SEZs either jointly or
severally by the Central Government, State Government, or any person (including a private or public
limited company, partnership or proprietorship):
• for manufacture of goods; or
• for rendering services; or
• for both manufacturing of goods and for rendering services; or
• as a Free Trade and Warehousing Zone.

It further envisaged the role of the State Governments in Export Promotion and creation of
related infrastructure with a Single Window SEZ approval mechanism through a 19 member inter-
ministerial SEZ Board of Approval. The Act provides for certain fiscal and non fiscal incentives
both to the SEZ units and developers. Key fiscal incentives for developers/ SEZ units include:
• exemption from customs duty;
• exemption from excise duty;
• drawback or such other benefits (as may be admissible from time to time) on goods brought
from the Domestic Tariff Area (DTA) into a SEZ by the Developer or Unit to carry on the
authorized operations;
• exemption from service tax;
• exemption from the securities transaction tax in case the taxable securities transactions are
entered into by a non-resident through the International Financial Services Centre (IFSC);
• exemption from levy of Central Sales Tax and Local sales tax/ VAT
• exemption from Minimum Alternate Tax
• Tax Holiday
o For SEZ units -100% of export profits for the first five years, 50% of the export profits for
the next five years, upto 50% of the profit as is debited to the profit and loss account and
credited to the Special Economic Zone Reinvestment Reserve Account (subject to
conditions) for the following five years.
o For SEZ Developers- 100% profits derived for 10 years, Exemption from Dividend
Distribution Tax

The policy and fiscal incentives were the prime motivators for the SEZ developments in India.
With the tax holidays for both developers and units, SEZs became an attractive investment
destination. Moreover, the exemptions from duties and lesser governmental interference further
facilitated in attracting investments in the segment.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

SEZ DEVELOPMENT STANCE: AN ANALYSIS

With the policy initiatives and reforms, the SEZs soon took dominance cutting across segments
and sector. Prior to the SEZ Act 2005, 19 SEZs across 9 states were operational in India. Of which
seven were Government EPZ which were later converted to SEZs. After the SEZ Policy came into
effect, formal approvals have been granted to 513 SEZ proposals, out of which, 250 SEZs have been
notified as on August 2008.

OPERATIONAL SEZ (PRIOR TO SEZ ACT 2005)

State SEZ Category

Andhra Pradesh Vishakhapatnam SEZ Multi-Product
Gujarat Kandla SEZ Multi-Product
Surat SEZ Multi-Product
Surat Apparel
Kerala Cochin SEZ Multi-Product
Madhya Pradesh Indore SEZ Multi-Product
Maharashtra SEEPZ – SEZ Electronics, Gems & Jewellery
Rajasthan Jaipur SEZ Gems & Jewellery
Jodhpur Handicrafts

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

OPERATIONAL SEZ (PRIOR TO SEZ ACT 2005)

State SEZ Category

Tamil Nadu Madras SEZ Multi-Product
Mahindra City, Chennai IT, Hardware & Bioinformatics
Mahindra City, Chennai Apparel & Fashion Accessories
Mahindra City, Chennai Auto Ancillaries
Sriperumbudur Telecom Equipment, R&D and Services
Uttar Pradesh NOIDA SEZ Multi – Product
West Bengal Falta SEZ Multi-Product
Manikanchan SEZ Gems & Jewellery
Salt Lake Electronic City, Kolkata Software Development & IT enabled
services

Source: Ministry of Commerce, Govt of India

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

ZONAL DISTRIBUTION OF SEZ S

Formal Approvals In Principle Approvals Notified SEZs

7% 14% 28% 5%
16%
34% 17% 44%
22%

42% 51%
20%

South East South East South East

West North West North West North

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

ZONAL DISTRIBUTION OF SEZ S

Zones: South
State Formal Approvals In-Principle Approvals Notified SEZs
Andhra Pradesh 94 3 56
Karnataka 48 9 23
Kerala 16 1 8
Pondicherry 1
Tamil Nadu 60 14 42
Total 219 27 129

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

ZONAL DISTRIBUTION OF SEZ s

Zones: West
State Formal Approvals In-Principle Approvals Notified SEZs
Dadra & Nagar Haveli 4
Goa 7 3
Gujarat 45 9 22
Madhya Pradesh 13 6 4
Maharashtra 95 36 35
Rajasthan 8 10 5
Total 172 61 69

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

ZONAL DISTRIBUTION OF SEZ s

Zones: North
State Formal Approvals In-Principle Approvals Notified SEZs
Chandigarh 2 2
Delhi 2 1
Haryana 42 17 20
Himachal Pradesh 2
Punjab 8 8 2
Uttar Pradesh 29 4 12
Uttaranchal 3 2
Total 86 31 39

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

ZONAL DISTRIBUTION OF SEZs

Zones: East
State Formal Approvals In-Principle Approvals Notified SEZs
Chattisgarh 1 2
Jharkhand 1 1
Nagaland 2
Orissa 9 4 4
West Bengal 23 13 8
Total 36 19 13

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

A study of the SEZ developments across the four zones of India – East, West, North and South
indicates that South India accounts for highest approvals with 219 formal approvals. However, the
state-wise analysis points out that Maharashtra has received the highest formal approvals at 95. West
India dominates with 61 in-principle approvals with Maharashtra, leading with 36 approvals followed
by Haryana, 17 and Tamil Nandu with 14 approvals. South India accounts for highest number
of notified SEZs standing at 129. Southern States of Andhra Pradesh leads with 56 notifications
followed by Tamil Nadu at 42.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

SECTORAL DISTRIBUTION OF SEZ s

Formal Approvals In Principle Approvals Notified SEZs

21% 9% 18%
41% 9%
2% 3%
5%
4%

4%
5%
4% 4%
4% 1%
62% 38% 66%

IT/ITES Multi Product IT/ITES Multi Product IT/ITES Multi Product

Textiles Bio Tech Textiles Bio Tech Textiles Bio Tech
Pharma Others Pharma Others Pharma Others

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

Sectoral Distribution Analysis mainly points out the SEZ concentration being accounted by mostly
IT/ITES sector. 513 Formal Approvals were granted, with IT/ITES sector accounting for 322
approvals. Moreover, IT/ITES/Electronic Hardware/Semiconductor had the highest number of
approvals (including formal, in-principle and notified) standing at 499 approvals. Multi-product
category is gaining momentum with 52 In-principle approvals. Total In-principle approvals granted
stood at 138. As many as 250 SEZs were granted notifications with a major share of IT/ ITES
accounting for 165 approvals.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 10
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

EXPORT BREAK-UP

EXPORT BREAK-UP

Exports from Special Economic Zones 2006-07 2007-08 2008-09

(INR (INR (Proj.)
Crores) Crores) (INR Crores)
Exports from SEZs established by Central Government 25358.45 39275.11 42898
Exports from Private/State Govt. Special Economic Zones 9134.47 22167.44 30175.32
established/notified prior to SEZ Act
Exports from SEZs notified under the SEZ Act, 2005 121.64 5195.1321 52876.96
Total Exports 34614.56 66637.6821 125950.48
Source: Ministry of Commerce, Govt of India

Sector wise Exports (%) in 2007-08 from SEZs

2% 6%
31%
17%

2%
2%1%
1%2%
36%
Textile & Garments Computer software
Electronic software & hardware Engineering
Gems and Jewellery Chemical and Pharmace uticals
Plastic, rubber, leather, sports goods & ceramics Food & Agro Industry
Other (Biotech, Non Conventional Trading & Services
Energy, Tobacco, Handicrafts & Misc)
Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

EMPLOYMENT GENERATION

As on June 2008, about 199,330 persons were employed in seven SEZs established by the Central
Government. Direct Employment in Private/State Govt. SEZs which came into force prior to SEZ
Act, 2005 stood at 48,988 persons. 100,885 direct employments were created in notified SEZs.

INVESTMENTS

Investment in ST/PVT/ SEZs Investment in Motified SEZs Investment in Government SEZs

25% 8% 19% 14%

75% 92% 67%

Investment made Investment made Investment made Fovt. investment (Developers)

FDI inv. Made FDI inv. Made FDI inv. Made

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India Source: Cushman & Wakefield Research & Ministry of Commerce, Govt. of India

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 11
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

Liberal policy norms and fiscal incentives augmented higher investments in the sector making it
an attractive destination. As on March 2008, investments to the tune of INR 69,538.451 crores
were made in Notified SEZs of which INR.29,618.7 crores is by the developers on infrastructure
development. Total investment made in Govt. SEZs were at INR.4,529.22 crore including FDI of
INR.865.5 crores (Including INR.629.73 crores Govt. investment).Investment made in 12 State/
Private SEZs stood at INR. 3,690.44 crores (of which INR.979.84 crores was FDI).Investment
proposed in notified SEZs stands at INR. 331,140.6 crores.

REAL ESTATE PROJECTIONS

SEZ developments have a significant impact on the real estate scenario in India. The minimum
land requirement of 10 hectares has fuelled the supply with a number of developers in fray to tap
this segment. IT/ITES/Electronic Hardware/Semiconductor had the highest number of approvals
(including formal, in-principle and notified) standing at 499 approvals and also account for a major
share in the SEZs of relatively smaller sizes. Of the 513 Formal Approvals granted, IT/ITES sector
accounts for 322 approvals and about 165 approvals as notified SEZs.

Office Space Supply & Demand in 2007

20
Million Sq.ft.

10

0
Bangalore

Hyderabad
Chennai

Kolkata

NCR

Mumbai

Pune

Demand Supply

Source: Cushman & Wakefield Research

In 2007, of the seven major cities of India, Office Space demand was highest in Bangalore
standing at 13.6 million sq.ft due to the continued demand for Grade A developments while the
supply was 9.02 million sq.ft. The supply was less due to the excess supply in 2006 being carried over
from the previous year in certain peripheral locations as Whitefield and Electronics City. Supply was
higher than the demand in Pune (7.80 million sq.ft), NCR (11.53 milion sq.ft) and Chennai (10.01
million sq.ft).

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 12
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

SEZ Supply 2007-09

10
8
Million Sq.ft 6

4
2
0
Bangalore

Chennai

Hyderabad

Kolkata

NCR

Mumbai

Pune
2007 2008 2009

Source: Cushman & Wakefield Research

Total SEZ Supply in 2008

City Total Supply SEZ Supply SEZ as % of Total
(Million sq. ft.) (Million sq. ft.) Supply
Bangalore 14.48 6.66 46%
Chennai 12.39 3.87 31%
Hyderabad 4.88 2.2 45%
Kolkata 4.10 1.7 41%
NCR 17.80 1.75 10%
Mumbai 11.78 1.44 12%
Pune 10.16 4.14 41%

Source: Cushman & Wakefield Research & Ministry of Commerce, Govt of India

SEZ supply is expected to be highest in Bangalore at 6.66 million sq.ft and Pune at 4.14 million
sq.ft in 2008. About five of the ten notified SEZs in Bangalore are likely to account for 2.5 million
sq.ft by 2008. Moreover, supply demand scenario in Bangalore is expected to be in equilibrium by the
end of 2008. In 2007, SEZ space supply was the highest in Bangalore at 2.92 million sq.ft. followed
by Chennai at 2.42 million sq.ft and Pune, 2.19 million sq.ft. About 72% of the total SEZ supply
in Bangalore was pre committed in 2006. Chennai currently has three IT SEZs and an additional
1 million sq.ft is expected in 2008. Approximately 31% of total supply is accounted by IT SEZs in
Chennai.

In 2007, SEZ supply in NCR was relatively less but with new projects getting both formal
approvals and notifications and by 2009, NCR is expected to have the highest SEZ supply at 8.66
million sq.ft followed by Chennai at 8.3 million sq.ft. Bangalore witnessed highest absorption of

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 13
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

over 3.2 million sq.ft in 2007 with areas -Whitefield and Outer Ring Road attributing maximum
absorption and pre-commitments for 2008 are expected to be over 5.9 million sq.ft.

SEZ Pricing

120

100

80

60

40

20

0
Bangalore

Chennai

Hyderabad

Kolkata

NCR

Mumbai

Pune
INR / Sq.ft. / month
Source: Cushman & Wakefield Research

SEZ commanded the highest price of Rs.110 per sq.ft/ month in Mumbai followed by NCR at
Rs.65 per sq.ft/ month. In Bangalore, prices stood at Rs 48 per sq.ft/ month. Rentals in Bangalore
are likely to strengthen with the limited availability of ready to move in supply during the year.

VANTAGE SEZs & CHALLENGERS

India being primarily an agrarian economy, social issues formed the core concern while framing
stringent and radical economic legislations. The Second Five Year Plan of India with emphasis on
industrial developments paved the door for newer productive sectors in order to maximize long-
run economic growth. Major policy initiatives and landmark legislations to accelerate industrial
developments and promotion of export oriented units soon became prime determining factors. For
over three decades, export processing zones were present in India with stringent legislations policies
governing their operations. India’s SEZ policy was announced in 2000 and the Act implemented after
many deliberations has been an issue of several criticisms since its inception following the special
status and privileges granted to accelerate the growth momentum of the economy. Main advantages
which SEZs stands to reap can be highlighted as follows:

• Flexible Labour norms and issues with lesser interferences from the Government and various
labour unions.
• Infrastructure at par with international levels with class amenities in both industrial and civic
areas.
• Incentives and benefits by way of exemption with respect to customs duty, sales tax, excise duty,
income tax relief, etc.
• Lower operational costs due to the various benefits.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 14
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

• Flexible Government policy with regard to clearances, approvals, etc.

• Helps in integration of various processes as a unit dealing in various business activities can
engage in related business within the sector.
• Easier accessibility to various inputs and reduction of logistics complications.

The segment with vast potential was in need of a breather to support its existence and survival in
the fast changing and competitive scenario. Though SEZs are associated with major activities in the
economy, the sector is faced with a number of challenges in its way ahead. The SEZ policy of India
has faced both criticisms as well as praise since its implementation. On the one hand with the liberal
policies and several incentives both fiscal and non-fiscal, the segment grew in leaps and bounds
generating more employment, attracting foreign investments and creating class infrastructure but
on the other hand is faced with criticisms with regard to exploitation of the weaker sections of the
society and defying the underlying purpose of the Act.

With various business activities brought within the scope of SEZs, number of applications to set
up SEZs has seen a tremendous rise. But granting approvals to a significant number of projects can
entail serious imbalances in government revenues due to the various incentives and relief ’s awarded
to the units in the segment. There is need to implement changes with regard to issues like minimum
area as very small units or zones are not feasible and do not lead to economies of scale.

Besides, there are vital issues like acquisition of land for setting up SEZs are of major concern
today. Proper feasibility study along with necessary rehabilitation programme for the people who
would be displaced from their habitations needs tremendous caution. Issue and cases like the
Nandigram in West Bengal need to be looked into or else it may severely affect the balance of the
region and poise serious problems. Acquisition of agricultural land should be avoided and proper
and fair market value should be awarded to the landholders to reduce frictions and work out models
so that the appreciation and future benefits can be transferred or shared with the land holders fearing
displacement.

Also, withdrawal of approvals as in Goa wherein the State Government decided to scrap the 12
SEZs and further recommended de-notification of 3 notified SEZs comes in the purview. The issue
has brought into perspective the extent to which the respective state governments has powers to
regulate SEZs which are located therein and whether the state has any powers to repeal or award a
ruling beyond the SEZ Act’s provisions.

Emulating and replicating a model similar to international trends is not viable from the Indian
socio- economic and political perspective. The scene in the international spectrum may be much
different from the ground realities in India. Though SEZs operate with liberal policy regimes and as
free trade zones, certain policy guidelines and regulations vital to the region, the SEZ has to abide.
Moreover, the country’s international trade relations and standing are also vital determining factors.
Then there are also factors like the positioning of the SEZ, status imparted and location issues in
comparison to emerging hubs and regions and accessibility to various inputs which are also key
deciding factors and poses as serious challenges to the development of the SEZs in a region.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 15
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

The challenges go beyond the mere recognition of a SEZ. The regulatory control over material
movement to an SEZ location has been a primary bottleneck for most construction schedule.
The lack of permanent SEZ supervisors or other officials also lead to delays of construction and
material movement into and within the sites. Yet another condition which hampers development
is the physical inspection of material while entering or exiting an SEZ site, the lack of automation
in the process makes it more labour intensive and subject to errors. Further more, all SEZs have a
designated time of entry and exit of material which is restrictive in nature causing inadvertent delays
in delivery. The challenges in the construction process can be recounted as below:

VANTAGE SEZs & CHALLENGERS

SEZ PROCESS CHALLENGES FACED

SEZ OFFICER
Less Possibility of establishing a The Govt. appointed SEZ officer for a SEZ site does not remain
Single Point of Contact permanent throughout the project tenure.
Processes get disrupted if the particular SEZ officer changes during
mid – way of the procurement cycle of any goods. This in turn delays
procurement.
Additional time spent on building rapport with the new SEZ officer.
Availability of the SEZ officer Irregular working time of the SEZ officer / SEZ officer not being
available in some days of the week have posed challenges during
situations when goods have arrived at site and have not been able to
be cleared on time.
Rapport with the SEZ officer The time taken for goods clearances is directly influenced by the
rapport shared by the developer and the officer.

SEZ GOODS PROCUREMENT

Procedure for the procurement of The entire procurement procedure should be completed no later than
goods into a SEZ. 45 days from the date of the ARE* form.
In case the procedure exceeds 45 days due to unavoidable
circumstances, the fiscal benefits cannot be availed.
Incoming goods – imported / If goods are imported or procured are found to be defective / found
procured from Domestic Tariff damaged / unfit for use after import or procurement, and the same
Area has to be sent out of the SEZ to the supplier for repair / replacement
by not paying taxes, a long drawn procedure is followed, which causes
time delays.
Excess Goods procured If goods imported or procured are found excessive / remain unutilised
in the project, and the same has to be destroyed without payment of
taxes, a long drawn procedure is followed, which causes time delays.
Semi – finished goods that require If goods imported or procured require further processing by a sub
further processing – contractor, elaborate procedures are involved in seeking approval on
the input – output ratio of the processing involved, which causes time
delays.
Also, goods sent for processing from a SEZ unit shall be returned
within 120 days from the date of removal, failing which the duty
already exempted shall be recovered.
Construction Scrap / Debris Elaborate procedures are involved in removal of the debris / scrap
outside the site.

ARE* - I referred to in notification number 40/2001 - Central Excise (NT) dated the 26th June, 2001

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 16
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

WHERE IT STANDS…

Prior to the SEZs, the STPIs had a dominant position with a number of parks being set up across
the country. STPIs too like the SEZs had a number of incentives but with the nearing of the end of
its tenure of income tax reliefs, the segment is witness to a lesser activity.

STPI & SEZs DIFFERNTIATORS

STPI (Software Technology Park of India) SEZ (Special Economic Zone)

100% Export Oriented Units (EOU) Primary objective is exports of goods and
services
Software development of IT-enabled services forms in Specifically delineated duty free enclaves, deemed
India to be foreign territory for the purpose of trade,
operations and duties, taxes and tariffs
Either a single unit or a group of units in a building or Can be either product specific or generic
development
No minimum area defined Minimum size of SEZs is 10 hectares (25 acres)
Trading not permitted Trading permitted
Income tax completely exempted up to 2010 100% of profit exempted for first 5 years;
50% for the next 5 years;
50% of reinvested profits for next 5 years from
income tax
100% Customs Duty exemption on Capital goods, 100% Customs Duty exemption on goods
hardware and software (imported/ exported) exported and imported into or service provided
in an SEZ
100% Central Excise Tax (CST) reimbursement in goods Complete exemption of Central Excise Tax (CST)
sourced from DTA (Domestic Tariff Area) on sale or purchase of goods
Service Tax is exempted in respect of export of Taxable 100% exemption on services provided to SEZ
services unit or developer
DTA permitted upto 50%of FOB* value of export No limit to DTA sales
subject to condition defined
Amortisation of Capital Goods is allowed over a period Amortisation of Capital Goods is allowed over a
of 8 years period of 10 years
FOB* - Free on Board

More thrust today is to set up and operate SEZs. Though the Indian SEZs are similar in certain
basic respects pertaining to liberal policies, functioning, etc to the global SEZs, but its focus areas
in India is more oriented on services with IT/ITES accounting for a significant share in the SEZ
pie. Manufacturing too is fast catching up. Beside the IT/ITES segment, multi product SEZ which
has accounted for the highest in-principle approvals with their larger scale and size will soon dawn
a newer avenue for SEZ growth. SEZs with world class infrastructure and facilities has spurred
development with removal of infrastructural constraints and easy access to various facilities.

SEZ has augmented the real estate activities in India with a number of real estate projects of
significant size kicking off. The spur is not only in the commercial office space supply but has also
pushed the residential and retail properties to a new high. The commercial office space supply were
the prime beneficiaries with class infrastructure at their disposal. The sector has attracted and is
attracting investments from both the domestic and foreign entities.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 17
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

SEZs in India have a long way to thread as the real pace is yet to pick up. Though SEZ concept
in India is at the initial stages, more experimentations are expected with regard to formats, policy
issues,etc. With more approvals and notifications and more activities being brought within the scope
of the SEZs, more reforms being introduced to the segment to facilitate development of the core
sectors, the demand to set up SEZs are relatively high and it has further propelled India as the most
favoured and attractive business destinations.

CONCLUSION

‘The Old Order Changeth, yielding place to new’ - an excerpt from one of Lord Alfred Tennyson’s poems
aptly describes the current state of India SEZ Policy. In India there have been many successfully
implemented tax incentive regimes such as the EOUs, EPCG, EPZs, STPI, etc., and Special
Economic Zone (SEZ) is geared towards bringing another gamut of inducements for the economy.
However, when compared to previous initiatives, the SEZ policy is characteristically different.
Recognising their inability to provide for physical infrastructure, the Government has turned towards
the private sector for bringing in the infrastructure foundation over which the entire SEZ policy has
been based. Thus SEZs will not only be giving very deep ended tax incentives to the various sectors,
they will also become almost independent conclaves which will nurture and grow investments in the
country. Incentives are also extended to the SEZ developers, operators and occupiers making it an
economically viable proposition for all sections involved in the process.

While on one hand, private participation has been extremely encouraging, on the other hand there
are a few concerns stemming out of the unprecedented enthusiasm for SEZs. In certain instances,
such as in the IT/ ITES sector, an over supply situation is expected in the next 18-24 months due
to the fact that maximum number of approved/ notified IT/ITeS SEZs far outweigh that for other
sectors. The expected supply of IT/ITeS specific SEZs is 47 million sq.ft. by 2009. Multi -sector
SEZs seem to be slower off the blocks - possibly plagued by real estate acquisition challenges.
While the IT/ ITeS sector is clearly the faster moving, space consuming, employment generating
segment of the Indian economy, it does put India on a lop-sided path of over-dependence and one-
dimensional growth.

The other major sector which is likely to benefit from the SEZ policy would be the manufacturing
sector. As per recent estimates approximately 44 SEZs spread across approximately 294, 000 acres is
likely to come up for this sector. This is expected to give the much needed boost to the sector going
forward.

Another trend which we may witness in the coming years would be the de-notification of some
SEZs. It stems from the fact that SEZ developers could evaluate the market conditions to find it
unviable to develop the SEZ, there will be a natural inclination to develop products that have higher
marketability or are more financially viable. The de-notification provision would give the developer
an exit route.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 18
SPECIAL ECONOMIC ZONES IN INDIA

A C & W I N D I A P U B L I CA T I O N

On the developer side, the story is expected to unfold as one of consolidation where we expect
larger real estate developers/ funds to acquire smaller sized SEZ or small SEZ developers, primarily
because of the fact that an SEZ is a perpetual entity and its operations have to be managed, thus
in case of developers who are not keen on managing the operations and would want to exit smaller
SEZs once they are developed.

An auxiliary trend which is likely to happen is that large SEZs are likely to develop into mini
-townships. While such trends are already proposed by some IT /ITeS SEZs, essentially promoting
the concept of walk-to-work, most developers would take the opportunity to develop residential,
retail and also hospitality services in the same SEZ so as to provide corporate occupiers and
employees a holistic solution towards a better work-life balance.

The economic emphasis on SEZs leaves us to answer the vital question of the fate of the IT/
Software Parks under the STPI (Software Technology Parks of India) Scheme. The fact is that most
of the large space occupiers are expanding or setting up new operations in the SEZs, and clearly,
the supply of IT Parks outstrips the IT/ ITeS SEZs. In the event the STPI Scheme is extended, the
IT Parks will be able to sustain for a bit longer, but in the medium to long term they will eventually
face usage obsolescence, leading to high vacancies. The occupiers’ profile of the IT Parks will change
with the SME sector looking towards continuing occupation of these IT Parks, until they have the
wherewithal to set up operations in the SEZs. It is important for local development authorities
to plan ahead to look at alternate permitted usages of these IT Parks, enabling the IT Parks to
rejuvenate themselves.

About Research & Business Analytics Group Cushman & Wakefield is the world’s largest privately held For more information on
Cushman & Wakefield is committed to collation of high commercial real estate services firm. Founded in 1917, it has Cushman & Wakefield, contact :
quality base data and assembling detailed statistics for the 227 offices in 59 countries and more than 15,000 employees.
major India markets on a regular basis. This commitment The firm represents a diverse customer base ranging from Anurag Mathur
to quality research provides a strong foundation for all small businesses to Fortune 500 companies. Managing Director, India
of our services. Customized, analytical reports are also
Tel: +91 80 4046 5555
developed to meet the specific research needs of owners,
It offers a complete range of services within four primary
occupiers, and investors. E-mail: anurag.mathur@ap.cushwake.com
disciplines: Transaction Services, including tenant and
landlord representation in office, industrial and retail real
Through the delivery of timely, accurate, high quality
estate; Capital Markets, including property sales, investment
research reports on the leading trends, markets and
management, valuation services, investment banking, debt
business issues of the day, we aim to assist our clients in
making pertinent and competitive property decisions. and equity financing; Client Solutions, including integrated
real estate strategies for large corporations and property
owners; and Consulting Services, including business and real ©2008 Cushman & Wakefield
In addition to producing regular reports such as global
estate consulting. All Rights Reserved
rankings and local quarterly updates available on a regular
basis, Cushman & Wakefield also provides customized
studies to meet specific information needs of owners, A recognised leader in global real estate research, the firm
occupiers and investors. publishes a broad array of proprietary reports available
on its online Knowledge Center at cushmanwakefield.
For more information: com/knowledge.
Tanuja Rai Pradhan
Associate Director - India
Research & Business Analytics Group
+(91 124) 469 5555
tanuja.pradhan@ap.cushwake.com

Author of the report:

Amrita Datta
Ashim Bhanja Chowdhury

Disclaimer
This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this
material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information
and we do not guarantee that the information is accurate or complete.

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 19
www.cushmanwakefield.com
SPECIAL ECONOMIC ZONES IN INDIA
For industry-leading intelligence to support your real estate
and business decisions, go to Cushman & Wakefield’s
Knowledge Center at www.cushmanwakefield.com/knowledge
A C & W I N D I A P U B L I CA T I O N

2008 Cushman & Wakefield

All Rights Reserved

B U S I N E S S B R I E F I N G | NOV E M B E R 2 0 0 8 20