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EPS SEZ AND EOU in International Business

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  2. 2. Export Processing Zones  First EPZ- Mayagaez, Puerto Rico-1962  Kandla, India-1965  Post II World War- war torn countries- assistance from USA.  Nations independence- 1950’s- import substitution  Lead- acute balance of payment problems  Increased exports met with tariffs  Compensated by fiscal measures
  3. 3. Export Processing Zone- EPZ  Industrial estates- housing production/ processing/ consultancy units- exports  Widening- net foreign exchange earnings  Situated near seaports or airports  Products- value-added (VA) component  Foreign equity allowed up to-100%  No payment of duty- import-capital goods & raw materials for export production
  4. 4. Objectives 1. Encourage and generate the economic development 2. To channel the sources of foreign exchange within the system in a phased manner- (FDI) 3. Foster the establishment and development of industrial enterprises within the said zones 4. Encourage and generate wider economic activities -zones 5. To explore new areas for the development of Indian exports 6. Encourage establishment and development of Indian industries and business enterprises and facilitate with proper infrastructure 7. Generate employment opportunity 8. Upgrade labor and management skills 9. Acquire advanced technology for increased productivity 10. Ensure world class quality of products
  5. 5. EPZsin India 1. Kandla Free Trade Zone (KAFTZ), Kandla, Gujarat 2. Santa Cruz Electronic Export Processing Zone (SEEPZ), S. Cruz, Maharashtra 3. Cochin Export Processing Zone (CEPZ), Cochin, Kerala 4. Falta Export Processing Zone (FEPZ), Falta,West Bengal 5. Madras Export Processing Zone (MEPZ), Madras, Tamil Nadu 6. Noida Export Processing Zone (NEPZ), Noida, Uttar Pradesh 7. Visakhapatnam Export Processing Zone (VEPZ), Visakhapatnam, Andhra Pradesh
  6. 6. Selection Criteria Board of Approval favour the proposals which:- 1. Show high % of VA per unit of exports 2. Bring in new / sophisticated technology 3. Involve manufacturing processes which attempt to exclude the assembly of “semi- knocked-down” units, bulk- breaking activities and repacking and labeling 4. Provide evidence of technical and marketing arrangement with/ without foreign equity participation 5. Have a large scale of operation 6. Substantial capital investment and the general standing of the promoter.  Entrepreneurial quality, pollution possibilities, suitability of the unit to be located in the zone, assured market possibility of linkages into the DTA are also considered.
  7. 7. Incentive Packages 1. Duty- free import of capital goods and equipments from preferred sources 2. Exemption from customs duties on raw materials, components and tools 3. Exemption from import licenses 4. Export incentives for locally procured supplies from DTA 5. Blanket foreign exchange sanction for business trips abroad 6. Repatriation of capital up to the extent of the original investment
  8. 8. 7. Repatriation of profits and dividends after the payment of tax 8. 100% foreign equity participation 9. EPZ Boards act as nodal agencies for clearance and approval of applications and licenses 10. EPZs have declared public utilities. Trade Union activities- restricted, minimum wage laws- NA 11. Priority release of cement, steel, telephone and telex connections
  9. 9. Fiscal Concessions- 1. Tax holiday for 5 years on all corporate profits 2. Exemption from Central excise duties on manufactured items 3. Exemption from Central Sales tax, State sales tax, Octroi, property taxes, stamp duties on lease of the plots etc. 4. Credit at preferential rates from Central and State financial agencies 5. Subsidized rentals and lease rates for built-up sheds, factory space in standard design factories and industrial plots 6. Exemption from electricity duty
  10. 10. 7. Transport subsidy 8. Capital subsidy 9. Packaging credit facilities for a period of 180 days without production of firm export orders or letters of credit 10. 25 % of produce for sale in India against a valid import license 11. Portions of waste, seconds and scrap can be sold – DTA subject to payment of regular export duties but without license
  11. 11. Mortality of Units Details of units approved, established, cancelled, closed down and working as on 31.03.1988 Name of the Zone Approvals recorded Withdrawn / cancelled after approval Units established Units closed down Units working KFTZ 679 81 173 44 129 SEEPZ 227 128 97 23 74 NEPZ 73 16 15 - 15 MEPZ 124 37 23 - 23 CEPZ 29 2 3 - 3 FEPZ 41 NA 2 - 2 Source:
  12. 12. Reasons for High Mortality 1. Failure of marketing arrangements 2. Withdrawal of foreign collaboration 3. Financial and managerial problems 4. Shortage of export orders 5. Obsolete technology on which production is made 6. Stiff international competition 7. Recession in the International market 8. Changes in international economic relations 9. Changes in the Govt. policies of the trading countries
  13. 13. Foreign Investment Inflow to Indian EPZs Year Total foreign investments Foreign investments in Indian EPZs 1991 351.4 - 1992 675.2 - 1993 1786.0 - 1994 2969.9 - 1995 6393.0 88.72* *Foreign investments made in Indian EPZs are the aggregate amounts from 1985-86 to 1994-95. Source:
  14. 14. Reasons for insignificant Inflow of FIs 1. Vast and developed land area for setting up large industrial units by FIs is not available in the Zones 2. Indian EPZs are not in a position to arrange and supply the required quantity of electric power to Fis 3. Environmental and pollution problems 4. Bulk-breaking, repacking and labelling facilities enjoyed by MNCs in foreign EPZs are not permitted in Indian EPZs owing to low vale addition made to the end product.
  15. 15. 100% Export Oriented Units  Initiated by GOI in December 1980 to encourage and mobilise domestic investment- export production  Industrial unit –offers its entire production for export  Excludes permitted levels of rejects  Designed to create additional export capacity  Was not normally encouraged for products subject to export control ceilings which can be met by the existing industrial units  Hence units- acted as mere substitution for existing units’ production- not allowed
  16. 16. Features 1. Required to manufacture in bond 2. Carry an export obligation- 10 years (ordinary cases) 3. -5 years ( products are open to high degree of technological changes) 4. Enjoy duty free import 5. Exempt from excise duty if- access to indigenous sources
  17. 17. 100% Export Exempted in case of:- 1. Rejects upto 5%- approved by DC- sold in the DTA in payment of appropriate duties 2. 25% production- sold in the DTA, if valid license and payment of duties (except motor vehicles and liquor) 3. Agriculture and allied units- 50% produce can be sold in the DTA 4. Electronics hardware products- sold in the DTA if conditions laid down in the policy fulfilled
  18. 18. Net Effects  99 units in 1987 took advantage of the scheme  Export increased from Rs.104 million (1981- 1982) to Rs.1313 million (1985-1986)  Second Oil Price Shock, which hampered the export activities significantly, led the establishment of a number of Export Processing Zones to boost the export sector
  19. 19. Special Economic Zones  Special Economic Zones (SEZs) Policy was announced in April 2000  SEZ Act, 2005, was passed by Parliament in May, 2005.  Act supported by SEZ Rules came into effect in 10th February, 2006  Drastic simplification of procedures  Single window clearance – matters relating to central as well as state governments
  20. 20. Objectives 1. Generation of additional economic activity 2. Promotion of exports of goods and services 3. Promotion of investments from domestic and foreign sources 4. Creation of employment opportunities 5. Development of infrastructural activities 6. Improvement of business environment on a nation wide bases and providing competitive platform to the Indian entrepreneur 7. To provide scale related advantages by helping to reduce manufacturing costs 8. To become the destination of foreign investment and to serve as a channel for both foreign investment and technology
  21. 21. Operational SEZs in India State Sl.No Units Product Andhra Pradesh 1. Visakhapatnam SEZ* Multi-product Gujarat 2. Kandla SEZ* Multi-product 3. Surat SEZ* Multi-product 4. VillageVanj, Distt. Surat,Gujarat Apparel Kerala 5. Cochin SEZ* Multi-product Madhya Pradesh 6. Indore SEZ Multi-product Maharashtra 7. SantaCruz Electronics EPZ-SEZ Electronics,Gems and Jewellery Rajasthan 8. Jaipur SEZ Gems and Jewellery 9. Jodhpur Handicrafts Tamil Nadu 10. Madras SEZ* Multi-product 11. MahindraCity,Chennai IT, Hardware & Bioinformatics 12. MahindraCity,Chennai Apparel & fashion accessories 13. Sriperumbudur Telecom equipment/ R&D and services 14. MahindraCity,Chennai AutoAncillaries Uttar Pradesh 15. Noida* SEZ Multi-product 16. Moradabad,UP Multi-product West Bengal 17. Falta SEZ* Multi-product 18. Manikanchan SEZ Gems and Jewellery 19. Salt Lake ElectronicCity, Kolkata Software development and IT enabled services
  22. 22. Administrative Set-up BOARD OF APPROVAL (Secretary, Dept of Commerce) ZONE (Development Commissioner – ex-officio chairperson- AC) ZONE (Development Commissioner – ex-officio chairperson- AC) ZONE (Development Commissioner – ex-officio chairperson- AC)
  23. 23. Incentives and Facilities Offered to SEZs 1. Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units 2. 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. 3. Exemption from minimum alternate tax under section 115JB of the Income Tax Act. 4. External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels. 5. Exemption from Central Sales Tax. 6. Exemption from Service Tax. 7. Single window clearance for Central and State level approvals. 8. Exemption from State sales tax and other levies as extended by the respective State Governments.
  24. 24. The major incentives and facilities available to SEZ developers include:- 1. Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. 2. Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. 3. Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act. 4. Exemption from dividend distribution tax under Section 115O of the Income Tax Act. 5. Exemption from Central Sales Tax (CST). 6. Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).
  25. 25. Performanceof SEZ comparedto EPZ Source:- Malini L Tantri, “Effectiveness of SEZs Over EPZs Structure: The Performance at Aggregate Level”
  26. 26. Export Houses and Trading Houses  A company which specialises in the export of goods made by other manufacturers  It can be defined as a registered exporter holding a valid Export House certificate issued by the Director General of Foreign Trade.
  27. 27. OBJECTIVE  To building marketing infrastructure and expertise required for export promotion.  To minimise price fluctuations as a result of seasonal variations in supply and demand  Arrange for storage, transportation, packaging and processing  Assist in marketing of the product  Assist in getting supplies at reasonable prices  Act as important instruments of export growth.
  28. 28. Eligibility  Merchant as well as Manufacturer exporters  Service providers  Export Oriented Units (EOUs)  Units located in Export Processing Zones (EPZs)  Special Economic Zone(SEZ’s)  Electronic Hardware Technology Parks (EHTPs)  Software Technology Parks (STPs)
  29. 29. Criterion for Recognition Category Average FOB value during the preceding three licensing years, in Rupees (crores) FOB value during the preceding licensing year, in Rupees (crores) Average NFE earnings made during the preceding three licensing years , in Rupees (crores) NFE earned during the preceding licensing year, in Rupees (crores) EXPORT HOUSE 15 22 12 18 TRADING HOUSE 75 112 62 90 STAR TRADING HOUSE 375 560 312 450 SUPER STAR TRADING HOUSE 1125 1680 937 1350
  30. 30. Validity Period  Status Certificate shall be valid for a period of three years starting from 1st April of the licensing year during which the application for the grant of such recognition is made  On the expiry of such certificate, application for renewal of status certificate shall be required to be made within a specified period .  During the said period, the status holder shall be eligible to claim the usual facilities and benefits, except the benefit of a SIL (Special Import License).
  31. 31. IN A NUT SHELL 4 stages:  EPZs were set up starting with the Kandla free trade zone Lots of shortcomings Measures taken to check them 1980- new scheme- EOUs  Second Oil Price Shock Hampered export activities More setting up of EOUs and EPZs  Economic Liberalization and restructuring of EPZs  Introduction of SEZs in EXIM policy 1997-2002 Presently most of the EPZs have been transformed into SPZ
  32. 32. REFERENCES  V. M. Manoharan, “ Indian Export Processing Zones and CPEZ”, Vikas pulishing House, New Delhi, Edition-2000  M. L. Varma, “Foreign Trade Management in India”, Vikas Publishing House Pvt. Ltd, new Delhi, 1988  Cherunnilam Francis, “International Trade and Export Management”, Himalaya Publishing House,2000  Sumati Varma, “Internatinal Business- Concepts, Environment, Structure and Strategy”, Ane Books Pvt. Ltd, 2010  Malini L. Tantri, “Effectiveness of SEZs over EPZs Structure: The Performance at Aggregate Level” (article)  Aradhna Aggarwal, “Export Processing Zones In India: Analysis Of The Export Performance”, Indian Council For Research On International Economic Relations, Core-6A, 4th Floor, India Habitat Centre, Lodi Road, New Delhi-110 003, November 2004
  33. 33. THANK YOU