Special Economic Zone Meaning, Objectives

Types of Economic Zones

Special Economic Zone

A Special Economic Zone (SEZ) establishes a specific geographical zone where economic laws related to export and import are more relaxed and accommodating than in the rest of the nation. Authorities project the Special Economic Zone as a designated duty-free area for various trade operations, thereby facilitating ease in duty and tariff regulations.

Within the special economic zone, units may be set up for the manufacture of goods and other activities including trading, repairing, processing, assembling, re-conditioning, making gold, silver or platinum jewellery, etc.

As per legal provisions, special economic zone units are classified as being outside the customs territory of India. Goods and services arriving in the special economic zone from the domestic tariff area (DTA) are classified as exports from India. Conversely, the special economic zone is responsible for categorizing goods and services supplied to the Domestic Tariff Area (DTA) as imports into India.

Experts found the initial instance of SEZ in an industrial park set up in Puerto Rico in 1947. In the 1960s, Taiwan and Ireland also implemented their SEZs. However, it was China in the 1980s that made the Special Economic Zone gain global currency with its largest SEZ being the metropolis of Shenzhen.

Economic Zone Meaning

To give the industry certain advantages, the governments of various countries come up with unique schemes and subsidies mostly related to customs duties. These schemes provide an upward thrust to a country’s products in the global markets owing to their lower prices and superior quality.┬áThe World Trade Organization (WTO) does not authorize the direct implementation of such schemes. This has resulted in many nations coming up with such schemes indirectly.

One of the most popular ways is to set up a particular area for industrial growth. This area can provide various facilities without worrying about their misuse. Additionally, there is no resistance from WTO or any other trading partner or nation. Because the scheme is a national policy, but rather limited to small areas demarked for the purpose. This is where the concept of Economic Zones comes in.

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Throughout the world, countries frequently establish fenced-in and specifically bounded enclaves, creating restricted zones within their sovereign territories. Such enclaves have become known as ‘zones’ in economic and business jargon. These zones are distinguished from the rest of the land regarding their specific administrative authority, benefits enjoyed by industries located in them and availability of better business facilities.

Developers purposefully establish particular zones as foreign territories, working under a unique set of economic laws distinct from those applicable to the remainder of the nation. Being foreign also implies that these zones also function as separate customs areas. Depending upon their specific purposes, benefits offered, economic regulations and administrative frameworks, the zones are called industrial zones (or estates), Free Trade Zone (FTZ), Export Processing Zone (EPZ), Enterprise Zone, Special Economic Zone (SEZs) or Free Economic Zone (FEZ). However, this taxonomy is not completely exhaustive.

Objectives of Economic Zones

The objectives of the economic zone are as follows:

1) The proponents of zones argue that these can generate significant economic gains in terms of job creation and human resource development. However, these can occur only over time. JJustifying particular incentives and policies for the entire economy by highlighting anticipated profits can be a challenging task, especially when the consequences are not immediately apparent. The zones offer policy-makers softer options in this regard.

2) Encouraging exports is one of the main objectives of most zones, with specific incentives frequently employed to foster this encouragement.

3) The latter usually include different kinds of tax exemptions, liberal rules for handling foreign exchange and well-developed logistics and facilities, including warehousing, which are commonly essential for exporters.

4) For many countries, particularly developing economies, it is often more feasible to offer these benefits within a limited geographic region rather than extending them to all corners of the country. This is all the more relevant if benefits include somewhat politically sensitive incentives like, such as flexible labour laws that enable businesses in designated zones to effortlessly staffing and release employees.

5) Other objectives:

i) Development of infrastructure facilities

ii) Promotion of investment from domestic and foreign sources.

iii) Enhance foreign exchange earnings.

iv) Develop export-oriented industries

v) Improve labour standards, pay, and working conditions.

vi) Exports and infrastructural developments.

vii) Industrial upgrading and technology transfer.

Types of Economic Zones

Over time, a range of distinct zone arrangements has emerged, all encompassed by the EZ concept. These economic zones encompass various types, including the following:

  1. Export Processing Zone
  2. Special Economic Zone
  3. Export Oriented Units
  4. Free Zone
  5. Export Houses

1) EPZS (Export Processing Zones)

A unit-bearing cluster of specially designed zones for aggressive economic activity, with the primary aim of boosting exports, characterizes Export Processing Zones (EPZs). The primary idea behind Export Processing Zones originated in the early 1970s to stimulate the growth of India’s struggling export industry. Further, the meaning of Export Processing Zones (EPZs) can be broadly defined as an area enjoying special Government of India support concerning fiscal incentives, tax rebates, and other exclusive benefits aimed at fostering export growth. Export Processing Zones (EPZS) also encompass pre-defined infrastructural facilities and regulations about the establishment of such zones and environmental stipulations. The establishment of these export processing zones in India aims to help the growth of Indian export commodities, especially from the fast-growing sectors.

2) SEZs (Special Economic Zones)

The SEZ Act, of 2005 envisages a key role for the State Governments in promoting exports and establishing the necessary infrastructure. A single-window SEZ approval mechanism has been provided through a dedicated inter-ministerial SEZ Board of Approval (BOA), consisting of 19 esteemed members. The BoA periodically evaluates applications that the respective State Governments/UT Administrations have duly endorsed. The decision making process involves consensus from all parties. The Act is expected to trigger a large flow of both foreign and domestic investment in SEZs, infrastructure and productive capacity. This, in turn, leads to the generation of additional economic activity and the creation of employment opportunities.

3) EOUS(Export Oriented Units)

Introduced in 1981 by the Government of India, the Export Oriented Unit (EOU) Scheme’s primary objective is to enhance and attract sector-specific exports from various regions across India having huge potential near raw material sources. The Scheme has undergone several changes over a period and the present policy parameters are most liberalised and conducive to the entrepreneur for establishing their Export Oriented Units. The Scheme covers manufacturing processing and services.

4) Free Zone

A free trade zone, also known as a special economic zone, is an area within a country such as a seaport, airport, warehouse or any designated area regarded as being outside its customs territory. In these zones, importers may bring goods of foreign origin without paying customs duties and taxes. The free trade zone provides storage for these goods while they await further processing, transhipment, or re-exportation. The community designates free zones as areas located within its customs territory. Goods placed within the areas are free of import duties, VAT and other import charges.

Goods for export can also be put in the zones as this allows for VAT zero rating i.e., no VAT is charged by the supplier in respect of those goods. Furthermore, community goods may be put in free zones to benefit from Community legislation governing export refunds or the re-payment of import duties. In addition, there may be special relief available in free zones from other excises, taxes or local duties. These benefits, however, may vary from one zone to another.  Free zones primarily serve as a valuable service for traders to facilitate trading procedures by allowing fewer customs formalities.

5) Export Houses

Export Houses, Trading Houses, Star Trading Houses and Super Star Trading Houses are entitled to special import licenses for the import of such items included in the negative list of imports, under a scheme notified on this behalf. They are also eligible for opening foreign currency accounts in India and abroad, marketing development assistance and executing legal undertaking instead of bank guarantee to cover the export obligation. Export Houses, Trading Houses and Star Trading Houses are entitled to special import licenses for the import of such items included in the negative list of Imports, under a scheme notified on this behalf. They are also eligible for opening foreign currency accounts in India and abroad, marketing development assistance and executing legal undertaking instead of bank guarantee to cover the export obligation.

Types of Economic Zones

Different Export Houses

The general denomination for export houses, trading houses, star trading houses, and superstar trading houses can be classified on the following basis:

FOB AverageFOB valueNFE AverageNFE value
CategoryAverage FOB value of exports made during the preceding three licensing years in rupees.FOB value of exports made during the preceding licensing years in rupees.Average NFE value of exports made during the preceding three licensing years, in rupees. NFE value of exports made during the preceding licensing years in rupees.
Export Houses15 crore22 crore12 crore18 crore
Trading Houses75 crore62 crore62 crore90 crore
Star Trading Houses375 crore312 crore312 crore450 crore
Superstar Trading Houses1125 crore1680 crore937 crore1350 crore

Description of Export Houses

Specialist companies, known as Export Houses or Export Marketing Companies (EMCs), establish themselves to function as export departments for various companies. They can help small and medium-sized companies to initiate, develop and maintain their international sales.

The government introduced the concept of Trading Houses in India in 1981-82. The main purpose of trading houses was to develop new products and new markets for exports, particularly, for products manufactured by Small-Scale Industries and cottage industries (SSI/cottage industries)

The introduction of the Star Trading House (STH) concept took place in 1990. One of the criteria to obtain an STH certificate is the annual average NFE value of exports of 250 crores during the preceding three licensing years. As compared to export houses and trading houses, star trading houses receive additional benefits such as special additional licenses, more import of capital goods, etc.

The Government of India has introduced a new scheme of Super Star Trading House (SSTH) we. f. 1 April 1994. The concept of SSTH was introduced to encourage the global marketing of several products, both from India and abroad. To obtain an SSTH certificate, one of the criteria is the annual average NFE value of exports during the preceding three years of 750 crore.

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