Special Economic Zones: Legal Issues Essay

SEZ: Does the Act ensure what the policy intends ? Dr. V. M. Govilkar M. Com. ,LL. B. ,F. C. A. ,Ph. D. [email protected] com. 4,Lokmanya Nagar, Gangapur Road, Nasik. 422002. Exports as real contributor to forex reserve India has recently got the honour of being one among the few countries in the world having foreign exchange reserve of more than 200 billion dollars. However during past six decades India has no trade surplus; all the times the exports have been less than the imports. Hence though there is quantitative increase in forex reserves, qualitative improvements is yet not seen.

The foreign investors have found India a relatively safe & profitable destination to park their funds. That’s all! Long-term improvements in forex reserves is achieved only by positive trade surplus of considerable amount for considerably long period. Obviously all the countries try to increase their exports on one hand and to minimise their imports on the other hand. Limiting imports may not be possible due to many reasons viz. the stage of development of the economy, the development of technology, availability of natural resources etc. Hence to achieve positive trade surplus, the real solution is to maximise the exports.

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Indian Government has also tried to increase exports by announcing & implementing many schemes. To mention few of them– export financing at concessional interest rates, income tax exemption for export income, transport & storage facilities at concessional rates, etc. The latest policy adopted and largely debated for export promotion is that of ‘Special Economic Zones’. The following are some of the factors limiting exports. i. Insufficient and low quality infrastructure. ii. Limited domestic capital formation & restrictions on foreign capital. iii. Administrative hurdles, and complexity. v. Complicated & Labour friendly labour laws. v. Many taxes and high rates of taxes. These hurdles cannot be removed at once throughout the country. But certain geographical islands can be identified for that purpose. They are called as SEZs. The Commerce Ministry in its Press Release on 10/05/2005 said “ The objectives of SEZ are making available goods and services free of taxes and duties supported by integrated infrastructure for export production, quick approval mechanisams and packages of incentives to attract foreign investments for promoting exports. ”

The Government of India adopted SEZ policy in 2000 and passed SEZ Act 2005 & made SEZ Rules 2006 to implement the same. The Act & the Rules have to ensure that the expected results of SEZ policy are achieved and that the negative implications of SEZ policy are overcome. Analysing the Act & Rules from this angle, two issues need some attention. 1. Do the SEZ Act 2005 and SEZ Rules 2006 ensure establishment and development of SEZs? The developer has to apply for approval of SEZ. In-principle approval and the formal/final approval are the two stages involved in the process.

The land required for the SEZ is to be purchased by the Developer and obviously the Developer has to invest considerable amount for same. The argument therefore is if i) The Developer has willing applied for establishment of SEZ and ii) The Developer has invested considerable amount and has put substantial hard efforts and precious time for purchase of land, he will, without doubt, establish and develop the SEZ. A counter argument can also be made that if i. The developer can purchase hundreds of hectars of land with the assistance of the Govt. ithout the application of the provisions barring purchase of agriculture land by a non-agriculturist etc. and ii. There is no compulsion in the SEZ Act to develop the SEZ, There is every possibility that the developer will simply buy the land, hold it in full or in part and transfer the same at profit (with the assistance of Govt. ) After considering the rise in the prices of land in the recent past, it may prove to be a wise proposal to hold the land as it is, not to invest further on its development and wait for the customers to buy the constructed property.

Under such circumstances, the Act/Rules, should ensure that the land so purchased by developer for SEZ, is used for development of SEZ only and that too in a certain time frame. Now the question is whether the SEZ Act 2005 and SEZ Rules 2006 do ensure so ? The relevant sections and Rules are as under- 1. The Proviso to Rule 5(2)(a) says, “Provided also that at least….. % of the area shall be earmarked for developing processing area”. 2. Sec. 6 of SEZ Act reads, “The areas falling within the SE Zones may be demarcated by the Central Government or any authority specified by it as – a) the processing area……….. 3. Rule 11(2) “Processing and non-processing area – The processing area and Free Trade and Warehousing Zone shall be fully secured by boundary wall or wire mesh fencing having a height of at least two meters and forty centimeters above plinth level with top sixty centimeters being barbed wire fencing with mild steel angle with specified entry and exit points”. 4. Rule 11(3) “The Development Commissioner shall ensure compliance of the requirements of sub-rule(2). ” 5.

Form – B (FORMAT FOR LETTER OF APPROVAL FOR SEZ DEVELOPER)(See rule 6) item (ix) “This approval is valid for a period of three years within which time the Developer shall implement the project. The project implementation progress report will be submitted to Government of India every six months”. The verb used in rule 5(2) (a) is to “earmark” and Section 6 is ‘to demarcate ’, and in Rule 11(2)is to “secure”. Will the provisions of the law be complied if the developer does not actually develop the processing area but only earmarks, demarcates the same and provides fencing ?

Is there any other provision in the law to make the developer develop the SEZ in general and the processing area in particular ? Sec. 10 of the Act is regarding Suspension of letter of approval and transfer of SEZ in certain cases. The main provisions of Sec. 10 may be summed up as under – i. The Board may suspend the letter of Approval granted to the Developer [under 4 circumstances specified in Sec. 10(1)] for a period not exceeding one year and appoint an Administrator. ii.

The Administrator to discharge the functions of the Developer and the management of the SEZ shall vest in the Administrator for a period not exceeding one year or up to the date of transfer of the letter of approval whichever is earlier. iii. For transfer of letter of approval, sub-Sec. 9 lays down the following procedure – a. The Board to invite application for transferring LOA & select the person or persons. b. Upon selection of the transferee, the Board may by notice in writing require the Developer to transfer his LOA.

These provisions apparently may be found sufficient to ensure the development of SEZ, either by Original Developer or by the Transferee”. However clause b of Sub Sec. 9 of Sec. 10 clearly states, “………… on such terms and conditions and consideration as may be agreed upon between the Developer and the transferee. ” The meaning and implications of this clause are very clear. Unless the terms, conditions and consideration of the Developer are agreed by the transferee, the LOA cannot be transferred by the Board. The law therefore must be suitably amended to ensure the Development of SEZ.

The Developer may develop (by availing all tax concessions) only the non processing area, lease it, earn substantially because of low cost of construction & development due to tax concessions. The processing area may only be earmarked and demarcated to comply Sec. 6 and Rule 5(2)(a) and the Board does not have the power to compel the Developer to Develop the processing area nor to transfer the LOA unless the Developer agrees to the deal. This possibility gets strength if one considers the following – i. Special Secretary, Ministry of Commerce Mr.

Gopalkrishna Pillai “ Promoters will have to develop SEZs within 3 years from the date of final approval, but we cannot take any action if they don’t. It is their land, so they are free to do whatever they want with it. But in such cases, they will not get tax benefits”. ii. Notification of RBI dt. 21. 9. 2006,” keeping in view current market conditions, it has been decided that the exposure of banks to entities for setting up SEZ or for acquiring units in SEZs, which include real estate, would be treated as real estate sector with immediate effect. iii.

The Governor, RBI, Mr. Y. V. Reddy, “ Like any other land, SEZ is real estate. ” On this background the following points need to be looked after. i. Land purchased for SEZ must be developed and developed in a time frame, for SEZs only (Processing + Non processing area, both) ii. At the time of leasing out area in SEZ by the Developer, there should be a linkage of processing area and non processing area in SEZ. iii. In case the SEZ is not developed, the land should go back to the farmers at appropriate price for which a formula should be developed.

II) SEZ as foreign Territory : The Central Govt. modified the Foreign Trade policy for the period from 2004-2009 incorporating the Exim Policy for the period 2002-2007 on 31. 08. 2004. Chapter 7 of this policy was relating to SEZ. Cause 7. 3. 1 of the policy defined SEZ as, “SEZ is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs. ” There has been a hot discussion about the words ‘Foreign Territory” included in 7. 3. 1 of the Policy.

However many argue that one need not worry about the status of SEZ as Foreign Territory because – i. SEZ Act 2005 and SEZ Rules 2006 now govern the policy relating to SEZ and in the Act or Rules these words ‘ Foreign Territory” are not used any where and ii. Clause 7. 3. 1 of the policy though uses the words Foreign Territory, that is only “for the purposes of trade operations and duties and tariffs”. These arguments, no doubt, hold some strength. But there are some provisions in the Act/Rules granting such special status to SEZs.

They are – i. Sec. 20 Agency to inspect – Notwithstanding anything contained in any other law for the time being in force, the Central Government may, by notification, specify any officer or agency to carry out surveys or inspections for securing of compliance with the provisions of any Central Act by a Developer or an entrepreneur, as the case may be, and such officer or agency shall submit verification and compliance reports, in such manner and within such time as may be specified in the said notification. ii. Sec. 1(1)iii) and (2) – The Central Government may, by general or special order, authorize any officer or agency to be the enforcement officer or agency in respect of any notified offences or committed in a Special Economic Zone. iii. Sec. 22 – Provided that no investigation, search or seizure shall be carried out in a Special Economic Zone by any agency or officer other than those referred to in sub-section(2) or sub-section of section 21 without prior approval of the Development Commissioner concerned. iv. Sec. 23.

Designated Courts to try suits and notified offence. —1) The State Government, in which the Special Economic Zone is situated, may, with the concurrence of the Chief Justice of the High Court of that State, designate one or more courts- a) to try all suits of a civil nature arising in the Special Economic Zone; and b) to try notified offences committed in the Special Economic Zone. 2)No court, other than the court designated under sub-section(1), shall try any suit or conduct the trial of any notified offence referred to in that sub-section: v.

Rule70(1) – Identity Card :- 1) The entry of persons to the processing area of the Special Economic Zone shall be regulated by the Development Commissioner through issue of identity cards. These provisions raise some questions- i. Will the acts or omissions punishable under other Indian Laws be not punishable in SEZ unless notified ? ii. Cannot the officers authorized under other Acts use their powers of enquiry , inspection, survey, investigation and Seizure in SEZs ? iii.

Will the residents of India outside SEZs require a sort of visa to enter into SEZs ? Further the SEZ policies declared by passing resolutions by various State Govts. also include the words ‘Foreign Territory’. Maharashtra has gone one step further and has clarified the status of SEZ in its Resolution No. SEZ 2001/(152)/IND-2 Dt. 12/10/2001 as under- SEZs as Industrial Townships : “12. The State Govt. shall take appropriate steps to declare the SEZs as Industrial Townships to enable SEZs to function as Self governing, autonomous, Municipal Bodies”.

One has to find answer to following questions- i) Will the administration of SEZs be by the representatives elected through elections as in normal local Self-Governments ? or will there be a situation where the developer will have absolute power ? ii) Does this situation contradict Constitution ? iii) Does it violate integrity and sovereignty of the country ? (Refer Sec. 5 guideline No. 6…. ) iv) Does the SEZ Act attack fundamental rights to equality and freedom of movement ? ) How far will the Citizens enjoy rights established through the 73rd Amendment to Constitution in those territories ? Summing up Policy of SEZ has been adopted & implemented with the objective that it will develop sufficient and high quality infrastructure by private sector, will attract considerable foreign investment, will increase employment opportunities, will boost the exports and thereby will expand economic activities in the country. The industrial islands could become engines of growth.

India, to get better share in world trade, must undertake special efforts, when the global export opportunities are increasing. SEZ could be prominent policy for the same. Therefore the experiments of SEZ, which is proven in many countries, may be adopted & implemented, but at the same time the Act & Rules passed to implement the SEZ policy must be with minimum flaws & deficiencies. This article is an attempt to point out two such deficiencies so that the experts and policy makers will consider them for improvements.

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