Sez(Special Economic Zones)

What’s Special About Special Economic Zones

Introduction to Economic Zones

“Export else perish “ these are the words of first Prime Minister of India Pt.
Jawaharlal Nehru. India being a continent like country having 30 states,
more than 1000 languages and world second largest man power having
diversified natural conditions right from Rain Forests of Kerala, Ice
Mountains of Himalaya, Runn of Kuch to productive land of Bramahaputra
has great potentials of world class export worthy products from various
industries like Agriculture, Engineering, Chemicals, Software’s, Gems and
Jewellry, Pharmaceuticals, Bio technology and many more.

During last fifty years, mostly ours exports have been less than our
imports and the balance of trade been unfavorable. In 1990-1991 India
had faced real pressure on the balance of payment. During this period,
exports had stagnated and there was a crisis in foreign reserves which
lead to an emergency situation in India.

Liberalization policy was announced in June 1991. It is the precious gift of
Dr Manmohan Singh to the people of India at a time when the country was
in the grip of unprecedented economic crisis and political turmoil. One of
the areas in which this policy focused on was on increasing India’s export.
And the trickle down effect of these reforms has lead to the advent of SEZ

In this age of Globalisation, there is a need for every nation in the world
to perform well economically. With the improvements in science and
technology and the raising standards of living worldwide, ensuring
economic development assumes primary importance in the policies of
every nation.

While striving for economic development, every nation takes steps
necessary for the implementation of its ambitious plans. But more often
than not, these plans cannot be affected successfully throughout the
nation. There are always shortcomings in these economic plans. Every

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nation wants to give its industries ample facilities for efficient production
of goods and services and in order to make them globally competitive in
terms of price and quality. Some of these facilities can be used by all
industries throughout the nation. But sometimes, some facilities cannot
be given on account of reasons like the geographical extent and the
possibility of misuse.

For Example: If a country wants to give subsidized power to a specific
industry, it cannot do so throughout the nation as keeping a check on
whether the subsidized power is going to the right people or not is a
Herculean task.

Thus, in order to give the industry certain added advantages, the
governments of various nations come up with special schemes and
subsidies mostly related to customs duties. These schemes provide an
upward thrust to the nation’s products in the global markets on account
of lower prices / better quality. Such schemes, if implemented directly,
are not allowed by the WTO. This has resulted in many nations coming up
with such schemes in an indirect manner. One of the most popular ones
is to set up a special area demarked for the purpose of industrial growth.
Various facilities can be offered in this area without the fear of them
being misused and also, no resistance from WTO (or any other trading
partner / nation) is encountered on account of the scheme not being a
national policy, but only limited to a small area demarked for the purpose.
This is where the concept of ‘Economic Zones’ comes in.

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Types of Economic Zones
Depending on the facilities provided, the level of government control
exercised, the type of industries allowed in the zone, and the type of
activities allowed in the zone, they are classified into many types by
different countries. A few common types are as follows:

Foreign Trade Zone (FTZ) – These are designated sites where
special customs procedures are applicable. These procedures allow
domestic activities involving foreign trade to take place as if it were
outside the nation’s borders, thus relieving them of the Customs of
the land. For Example: Miami Foreign Trade Zone, Florida (USA)

Export Processing Zone (EPZ) – These are the most common types
of zones. And are similar to the FTZs of USA in many respects.
Established for the purpose of promoting exports, these zones
concentrate on providing the exporters with all facilities of
production in one place and also relax the customs procedures for

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the foreign trade activities of the units in the zones. For Example:
Noida Export Processing Zone (NEPZ), Uttar Pradesh (India)

Free Zone (FZ) – These are the zones in countries mainly like the
UAE. Such zones give total exemption from all taxes and duties
levied on profits to the units existing in them, besides other
financial benefits and incentives. For Example: Dubai – Jebel Ali
Free Zone (JAFZ), Dubai (United Arab Emirates)

Special Economic Zone (SEZ) – These are an extension of the EPZ
scheme with added benefits and fewer bureaucratic hassles. But
these zones do not restrict themselves to export promotion only.
They provide all facilities and infrastructure necessary for the
development of the industries in the region. They are normally
huge in size and hence are suitable for mass-production of
commodities, which can be sold domestically, as well as
internationally. For Example: Shenzhen Special Economic Zone
(Shenzhen SEZ), China

The same zones are also referred to as Free Economic Zones (FEZ) in the
Kyrgyz Republic and as Free Trade Zones in many other Asian countries.
Essentially, the core concept of all these zones is the same; i.e. to treat
the designated zone as a foreign territory for the purposes of customs
procedures and to also give them certain added incentives and
infrastructure facilities, which are not available to ordinary units operating
within the country.

1.1 A permanent solution for corruption: Special Governance Zone (SGZ)

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In the 9th International Anti-Corruption Conference in South Africa held from 10-15
December 1999, Shang Jin Wei, Advisor to the World Bank submitted an action plan
for the establishment of a new concept; the concept of SGZs (Special Governance
Zones).

It advocates establishing a special governance zone (SGZ) within a country as an
entry point for an eventual nation-wide anti-corruption program. A SGZ is an
enclave within which comprehensive reforms can take place. It is geographically
limited so that any unpredictable negative consequences can be contained.

According to the plan, reform measures can easily be explored and fine-tuned
within small manageable zones before trying their implementation nationwide. Once
successful, its experience can serve as a model for the rest of the country. The
World Bank (and other international institutions) can play an important role
especially at the initial stage of the program.

The SGZ idea reflects a fundamental belief that the quality of public governance in
many developing and transition economies can be significantly improved and
corruption can be drastically reduced. The proposal is designed to achieve several
objectives: to start the reform program within an area small enough to contain
unpredictable consequences, to experiment and fine-tune various components of
the anti-corruption program in practice, and by the power of example, to build
momentum to implement a nation-wide governance-improving program.

There are a few basic principles for successfully operating a SGZ. First, whenever
possible, a fair market mechanism should be used to allocate resources, to produce
and/or procure public goods, to cut red tape, and to reduce the need for permits
and licenses. This would limit the opportunities for government officials to take
bribes (and to be offered bribes). The reward for civil servants to deliver quality
service and not to take bribes should be raised. At the same time, the penalty for
civil servants for poor performance and for taking bribes should also be raised and
fairly applied.

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Genesis of Chinese Special Economic Zones

Chinese Economic Reforms

Historically, China has adopted an inward-looking strategy to its
economic development. Successive Chinese governments thought that the
economy could grow purely through self-reliance. However, there are
always limitations to what a country can do by itself, for example
limitations in raw materials, natural resources, technology, etc. These can
hold back the growth of an economy and certainly China's economic
growth lagged far behind much of the rest of the world up to the 1970's.

By contrast, countries like the USA were achieving significant economic
growth in this period because they were practising foreign trade policies,
which facilitated free trade. Any shortages in the domestic economy, for
example oil in the USA or Japan, wheat in the Soviet Union or cars in India
could be compensated for by imports. Foreign trade, then, could help to
aid economic growth.

The export trade is also vital. Not only can exports be a means of paying
for imports, but they also help to earn foreign exchange. Since 1979, the
Chinese government has recognised the importance of exports as a
means of fostering economic growth. Economic policies and special
incentive programmes have been introduced to increase exports.

Establishment of SEZs
When it decided to reform the national economic setup in 1978, the
Chinese government embarked on a policy of opening to the outside
world in a planned way and step-by-step. A decision was made in 1978
to permit direct foreign investment in several small "special economic
zones" along the coast. Shenzhen, Zhuhai and Shantou in Guangdong

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Province and Xiamen in Fujian Province, and the entire province of Hainan
were, under this policy, the first five Special Economic Zones to be
established.

The aims of the establishment of the SEZs were to earn foreign exchange,
to enhance employment, to attract foreign investment and to accelerate
the introduction of technology and management expertise. The five SEZs
established were Shenzhen, Zhuhai, Shantou in Guangdong province,
Xiamen in Fujian province and Hainan Island. In order to attract foreign
investors and develop foreign trade, the five SEZs offered similar
packages of favourable incentives to foreign firms. One of the most
attractive points of these packages was that income tax was fixed at the
rate of 15 per cent, lower than that in other parts of China. Other
advantages given were tax exemptions, land use rights, and banking and
finance privileges, which were available to firms operating outside the
SEZs.

Incentives
China lacked the legal infrastructure and knowledge of international
practices to make this prospect attractive for many foreign businesses,
however. In later years steps were taken to expand the number of areas
that could accept foreign investment with a minimum of red tape, and
related efforts were made to develop the legal and other infrastructures
necessary to make this work well.

Many other non-financial advantages were provided inside the SEZs.
Firms were provided relatively free-market environments with minimal
government intervention. This means that private and joint-venture
enterprises were free to hire their own workers. They were also free to set
wages to reflect market conditions. Bonuses could be awarded to workers
for outstanding performance.

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The common threads of these reforms are the search for efficiency and an
assumption that management of the economy by large governmental
bureaucracies is unlikely to produce this result.

Performance
Primarily geared to exporting processed goods, the five special economic
zones are foreign-oriented areas, which integrate science and industry
with trade, and benefit from preferential policies and special managerial
systems. They have summed up their rich experiences in absorbing
foreign investment and developing foreign trade for China to open up to
the international market. In recent years, the special economic zones have
led the country in establishing new systems, upgrading industries and
opening wider to the outside world, serving as national models. In 1999,
Shenzhen’s new-and high-tech industry became one with best prospects,
and the output value of new-and high-teach products reached 81.98
billion Yuan, making up 40.5 percent of the city’s total industrial output
value and coming out in front in the country.

China has so far created 124 export-processing zones. Some 18 million
were employed in firms with foreign investment alone, and many millions
more in Chinese-owned zone enterprises. Shenzhen has become a
window of the country to the outside world and a platform for reform
measures, along with Xiamen, Zhuhai and Shantou.

Open Coastal Cities
In the period between
1984-85, China further
opened 14 coastal cities
and three coastal
regions to foreign
investment. All of these

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2.1 China's '99 Kunming World Horticultural
expo was opened on April 30. This picture shows
a scene built by Shandong Province.


places provide tax treatment and other advantages for the foreign
investor. Laws on contracts, patents, and other matters of concern to
foreign businesses were also passed in an effort to attract international
capital to aid China’s development. The largely bureaucratic nature of
China’s economy, however, poses inherent problems for foreign firms
that want to operate in the Chinese environment, and thus the policies to
attract foreign capital have had to evolve continually in the direction of
presenting more incentives for the foreigner to invest in China.
Since 1992, the State Council has opened a number of border cities, and
in addition, opened all the capital cities of inland provinces and
autonomous regions. In addition, 15 free trade zones, 32 state-level
economic and technological development zones, and 53 new- and
high-tech industrial development zones have been established in large
and medium-sized cities. As a result, a multi-level, multi-channel,
omni-directional and diversified pattern of opening, integrating coastal
areas with riverine, border and inland areas has been formed in China. As
these open areas adopt different preferential policies, they play the dual
roles of ‘Windows’ (in developing the foreign-oriented economy,
generating foreign exchanges through exporting products and importing
advanced technologies) and of ‘Radiators’ (in accelerating inland
economic development).

All these efforts of the Chinese government were fruitful and resulted in
the success of the concept of Special Economic Zones (SEZs). The most
prominent amongst the Chinese SEZs is the Shenzhen SEZ. The growth of
SEZs in China has been explained with the example of Shenzhen SEZ in
the following Chapter.

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‘Window to the World’ – Shenzhen SEZ

2.3 China's Special Economic Zones gear up for WTO, future

In recent years, the Chinese SEZs have been focusing on improving the
overall economic quality and on developing high-tech industries and other
economies with special features. Compared with other parts of China, the SEZs still
hold an edge in utilizing domestic and overseas resources and markets and in
adapting themselves to international common practices to boost economic
development. Experts say that improving overall economic performance is a
necessary choice for the SEZs, as China will face fiercer competition after its entry
into the World Trade Organization. It is the only way for them to realize
modernization.

To hit the goal, analysts say, the SEZs should give national treatment to overseas
investors for more funding while making efforts to open up overseas markets for
their own companies products. By changing the past practice of offering preferential
policies to overseas investors in certain fields, the SEZs have lifted all restrictions for
them. According to officials, the expansion of reform in the SEZs will focus
on systematic innovations, including adjustments in the ownership structure, and
transformation of functions of government departments in accordance with
international common practices.

Shenzhen – The Village
Only twenty years ago, Shenzhen was a small fishing village located in
China's southern province of Guangdong. Today, after two decades of
rapid economic expansion, the city enjoys the highest income per-capita
among the 35 major Chinese cities at US$ 225 per month. At close to US$
3,000 per year the income per capita is approximately four times the
national average. This coastal city, which shares a border with Hong Kong,
has become one of China's most prosperous cities averaging an economic
growth rate of 34 percent between 1980 and 1998. Now that China is

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being accepted into the World Trade Organization, Shenzhen may be the
quintessential model for the central government to follow when taking its
nation, gripped in authoritarian rule, and preparing it to operate in an
increasingly open market environment.

Formation of the SEZ
The city of Shenzhen was founded in 1979 and a year later was
established as China's first special economic zone (SEZ) by Chinese leader
Deng Xiaoping. The special economic zones were implemented by the
Communist government as a virtual laboratory for experimentation with a
free market economy. The SEZs operate under an entirely different
economic premise than that of the mainland, specifically, with an
emphasis on exporting and creating an attractive environment for foreign
direct investment through favorable tax incentives.

Influence of Hong Kong
When the SEZ was first established, the majority of the new businesses
that settled in Shenzhen were Hong Kong-based enterprises drawn to the
zone to take advantage of, among many other things, the abundance of
cheap labor and the customs-free industrial environment. Since this time,
the economic border between Shenzhen and Hong Kong has grown
increasingly vague. Hong Kong dollars flow freely in Shenzhen and many
residents of Hong Kong invest in the Shenzhen stock exchange.

The cultural border has eroded over the years as well. With the proximity
that Shenzhen enjoys to Hong Kong, the population is able to pick-up
Hong Kong based radio and television signals. Those in Shenzhen who
speak Cantonese can receive news and other content that is restricted on
the mainland. Residents of Shenzhen are therefore, able to perceive world
events from a more objective point of view than the one presented by the
communist government's news outlets. Currently, there are a dozen or
more crossing venues between Hong Kong and Shenzhen either by land

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or by sea. According to the Shenzhen Municipal Foreign Investment
Bureau, at the end of 1998 Hong Kong was engaged in 1,078 projects in
Shenzhen accounting for over 78 percent of the total projects undertaken.
Remarkably, Taiwan was the second leading project forum with 119 or
8.5 percent of the total projects.

Troubled Times
Even with its unprecedented track record for growth, things have at times
been less than perfect for Shenzhen. In 1980, Shenzhen's appeal as a SEZ
made it an attractive area for entrepreneurs and fortune hunters, but by
1992, seventeen hundred special economic zones had been established.
Over time Shenzhen was not as unique as it had once been. Fortunately,
in that same year Shenzhen was the first Chinese city to be given
legislative authority in the way of a Municipal People's Congress. To a
small degree this gave the city a level of control over local policy which
was not seen anywhere else.

Additionally, the few years leading up to the return of Hong Kong to
China can be described as a time of over exuberant expectation. The
extraordinarily hot Shenzhen stock market in 1996 goes a long way in
illustrating this point. The people of Shenzhen were under the impression
that when Hong Kong rejoined China in the middle of 1997, Hong Kong
residents would spill into the city buying up property as well as goods
and services from companies listed on the Shenzhen stock exchange.
Investors, including small individual investors who laid out their modest
savings, began pouring money into the stock exchange. When the time
finally came for Hong Kong to reunite with the mainland, the conclusion
was anticlimactic. Many of the anticipated benefits simply did not occur,
and while some experienced asset appreciation others lost their entire
savings.

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Going Hi-Tech
Technologically, Shenzhen did not mature as fast as some had originally
anticipated. Recently, that trend has changed. The goal of making
Shenzhen one of China's most prevalent high-tech centers is definitely
being realized. The combination of
favorable economic policy, coupled
with a highly educated work force,
explains the progress being made
in Shenzhen's high technology
industries. In 1998 nearly a third of
all Chinese individuals holding a
doctorate degree resided in
Shenzhen. Additionally, 10 percent
2.2 An exhibition being held
of all residents are estimated to be in Shenzhen SEZ to showcase
college graduates while less than new technologies
half of one percent of the national population has obtained a college
degree. In 1998 Shenzhen was responsible for approximately half of
China's information technology output, and the Internet industry is now
beginning to gain international exposure. Overseas investors, such as IDG
and Pacific Venture Capital Co., are starting to channel money into the
Shenzhen Internet industry.

According to a release from the Xinhua News Agency in mid-March of this
year, Shenzhen has 180,000 Internet users in the city and over 40
companies offering Internet related services. Furthermore, an estimated
70 percent of these Internet users are said to be using e-commerce to
buy goods. Additionally, an impressive list of multinational IT
corporations that are increasingly being drawn to Shenzhen including
Microsoft, IBM, Lucent Technologies, Compaq and Intel to name a few.

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Future Growth
To believe that Shenzhen can maintain this level of sustained growth
forever would be irrational. As the cost of labour grows higher and other
areas of China begin to adopt more market-oriented policies, businesses
will ultimately begin migrating to other parts of this vast nation. This
assumption is supported by the shear size of China and the magnitude of
natural, as, well as human resources that have remained untapped for so
many years. The only question remaining is at what speed will the central
government allow this to occur.

The wealth will inevitably begin to spread, but that does not mean
Shenzhen will fade into China's background. The wealth generated in this
city over the last twenty years has given rise to a burgeoning service
sector and is home to one of China's two stock markets. The city has
become a regional financial center. At the end of 1999 there were 100
financial institutions operating in Shenzhen employing an estimated
30,000 professionals. According to the Shenzhen Municipal Foreign
Investment Bureau, at the end of 1999 there were 736 projects involving
foreign direct investment in excess of US$ 10 million per project, 109
projects involving amounts in excess of US$ 30 million per project and 18
projects currently underway involving over US$ 100 million per project.

Transportation Issues
A major dilemma that China, as well as its trading partners face, is how to
effectively access and deliver goods and services to a large percentage of
the population that is geographically isolated from the major economic
hubs in China. Shenzhen is very important in this respect. Over the years,
the city has developed an advanced infrastructure that is now well poised
to assist in alleviating the burden that this problem presents. The city
possesses 8 harbors and 12 cargo docks and is home to the Huangtian
International Airport, which is the fourth largest airport in China.
Additionally, both the Beijing-Canton Railway and the Beijing Kowloon

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Railway converge in Shenzhen. Take the fact that Shenzhen already has
the infrastructure in place to be considered a regional distribution center,
and its continuous advancement in both the financial and technology
sectors, one can see that as China enters the WTO and the global
economy, it will look to Shenzhen as a road map for the future.

Achievements
Already, 48 of the world's 500 top enterprises have taken root in
Shenzhen. Coupled with the rapid development of its export-oriented
economy, the city achieved an export volume worth US$26.4 billion in
1998, amounting to one-seventh of China's total, topping the list of
China's big and medium -sized cities for six consecutive years. Output
value of the city's high and new technology products was worth 65.52
billion Yuan (US$7.89 billion) in 1998, making up 35.4 per cent of the
city's total industrial output.

The International Architecture Association awarded Shenzhen this year,
marking the first urban planning award in China and Asia. Shenzhen's
educational, scientific and cultural undertakings have also achieved one
success after another.

Computer hardware, software and phone-related products made up 70
per cent of the city's total high-tech exports. Asian markets receive 60
per cent of these goods. North America gets 26 per cent and Europe gets
about 10 per cent. And 31 per cent of Shenzhen's high-tech exports were
from State-owned enterprises. Wholly foreign-funded enterprises shipped
out 30 per cent, and joint ventures made 28 per cent of the exports.

Shenzhen has become one of the world's most important manufacturing
bases for high and new technology, namely electronics. City's
encouragement of local enterprises to update technology and protect

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their intellectual property rights has sharpened Shenzhen's competitive
edge.

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Future of Shenzhen – Next 5 Years

The guideline and goal for the next 5 years is to follow Deng Xiaoping's
theory on building socialism society of Chinese characteristics; take "hold
on to the opportunity, deepen the economic reform, open up further,
promote development, and keep stability of the society" as the guideline.
Focus on establishing market economy and mechanism, optimize
economic structure, made the city functional better, build new and high
technology industrial development zone, regional information center,
trading center, distribution center, and turn Shenzhen into a modern,
international city.

In more detail, Shenzhen is going to:

1. Expedite the major projects of infrastructure construction.
Infrastructure construction is what a city based upon to exist and
develop. In the coming five years, in order to improve Shenzhen's
investment environment, five networks are to be built: public transit
network, water supply network, flood preventive network, power
supply network, telecommunication network.

2. Widen the range of structural adjustment of industry; enhance the
quality of economic growth and economic efficiency. Increase the
input and establish production base to support leading industries.
Encourage the merge of production and capital. Adjust
organizational structure; strengthen equity management, quality
assurance, and financial management. Put emphasis on making use
of up to date technology. Introduce new agricultural technology,
increase value add and economic efficiency on agricultural products.

3. Develop the service industry vigorously, perfecting the functionality
as an international city. Developed service industry symbolizes a

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modern international city. We are to speed up the development of
the service industry, and turn Shenzhen into a financial center,
information center, trading center and distribution center.

Construction of the Regional Financial Centre
Invite more global banks and financial institutions to open office in
Shenzhen; Develop offshore business of domestic banks; broaden the
coverage and internationalization of our security industry, increase the
radiation power of Shenzhen's financial institutions.

Construction of Regional Information Centre
As a hub of domestic and international market, Shenzhen boasts the
unique advantage in developing information industry. We are going to
strengthen the corporation with world's leading information service
organizations, exploit information sources in conjunction with these
organizations to form a wide connecting, highly efficient information
network.

2.3 China's Special Economic Zones gear up for WTO, future

In recent years, the Chinese SEZs have been focusing on improving the
overall economic quality and on developing high-tech industries and other
economies with special features. Compared with other parts of China, the SEZs still
hold an edge in utilizing domestic and overseas resources and markets and in
adapting themselves to international common practices to boost economic
development. Experts say that improving overall economic performance is a
necessary choice for the SEZs, as China will face fiercer competition after its entry
modernization.

To hit the goal, analysts say, the SEZs should give national treatment to overseas
investors for more funding while making efforts to open up overseas markets for
their own companies products. By changing the past practice of offering preferential
policies to overseas investors in certain fields, the SEZs have lifted all restrictions for
them. According to officials, the expansion of reform in the SEZs will focus
on systematic innovations, including adjustments in the ownership structure, and
transformation of functions of government departments in accordance with
international common practices.

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Impact of SEZs on Chinese Economy

The favourable impact of the SEZs on the economy of China is fivefold:

They attract foreign investment
They help the growth of the export industry
They earn foreign exchange
They provide employment opportunities
They help the indigenous economy improve its level of technology

These points are discussed below in detail:

1. Foreign Investment – The preferential treaties of the SEZ's have
attracted foreign investors to invest a huge amount of money in China.
For instance, Hainan and Xiamen have attracted investments mostly from
Taiwan. By June 1987, a total foreign investment of $2.12 billion had
been made in the five zones, amounting to one quarter of the total
foreign investment in China during this period. The most marked success
was registered in Shenzhen. By the end of 1986, it accounted for $1.4
billion through more than 4000 economic cooperation agreements. One
significant factor is that the investment has not been confined to the
export industry, but has permeated other sectors such as infrastructure
construction, commerce, tourism and real estate.

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2. Growth of Exports – As all five SEZs are coastal cities, they are
convenient for ocean transport routes and help to promote the export
industry. Preferential policies have encouraged foreigners to set up
export- oriented factories in the territories. From 1985 to 1987, an
annual average real growth rate of 83% was recorded for exports from the
five zones. Shenzhen's exports, for example, grew at an average rate of
70% during this period. At the same time the proportion of the SEZs'
industrial products that went to export had risen to 53% by 1987.

3. Foreign Exchange – The establishment of the SEZs has opened a
way for China to increase its trade with foreign countries. They not only
enhance trading activities such as foreign investment and tourism but
also help China to earn foreign exchange through these activities.

4. Employment Opportunities – Since the beginning of the
open-door policy, small-scale private businesses have been allowed to
coexist with state enterprises. This has increased employment
opportunities for local people and raised the level of economic activity.
Also, many state workers sense that going into business on their own
may provide greater income potential. They generally adopt an attitude
commonly known in China as "I Bu Zho Er Bu Shu", which, loosely
translated, means ‘refusing to work and refusing to relax’. Many prefer to
work for joint-venture firms for higher wages. So the average income in
SEZs now ranks as the highest in China.

5. Improvement in Technology – In theory advanced technology and
know-how will also flow into the country as a result of foreign investment.
In turn, with increasing exports the force of international competition
may bring greater pressure on Chinese firms to adopt more efficient work
practices. It is perhaps questionable how much benefit the wider Chinese
economy has reaped from these investments. The technology, patents
and know-how remain firmly the property of, and are controlled by the
parent companies. It may however be the case that in the long run the

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work culture and practices adopted by foreign companies could have
some wash-back effect over wider economic practices in the country.

In conclusion, the establishment of the SEZs has helped to increase the
export trade, which in turn has helped to improve the Chinese economy.
Preferential treaties have been offered in the five SEZs to attract foreign
investment. A large amount of foreign investment has occurred not only
in the export trade, but also in infrastructure construction, commerce and
tourism. Foreign companies have been encouraged to set up factories in
the territories and the export industry has grown. Jobs opportunities have
been provided for locals as factories need labour and the average income
of the people has increased. In addition, advanced foreign technology has
been brought in with the inflow of foreign investment. All these factors
have contributed to the growth of the Chinese economy. It remains to be
seen if these quantitative advances, in which the SEZs have played an
important role, are matched by commensurate advances in the quality of
life for the majority of Chinese people.

3.1 Not all roses - Unwanted byproducts of SEZ developments

About 27 million people, 90 per cent of whom are women, work in export
processing zones worldwide, often earning low wages in poor working conditions,
the International Labour Organisation (ILO) said. The United Nations agency also
said that the industrial zones, which import and process materials before exporting
them again, were huge employment generators but often lacked meaningful links
with the domestic economies around them

Vietnamese example

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The rapid socio-economic development in southern Vietnam’s Dong Nai Province
recently has been attributed to its successful Industrial Zones (IZs), which have
resulted in impressive job generation and export figures. More than 80,000 jobs
have been generated by the IZs over the past five years and more than US$2.7
billion in export revenues has been earned by enterprises operating within them.
Total revenues for the IZs during that period topped $4.7 billion, contributing $176
million to the State budget, nearly $1 billion in export receipts Throughout the
country most of the projects in the IZs focus on sectors that is expected to provide
quick returns on capital such as motorbike and electronics assembly and other
industrial consumer goods. Little attention has been paid by investors, to key
industrial sectors such as engineering, electronics and chemical production and
food processing. Furthermore, nearly 80 percent of foreign-invested projects
use obsolete machinery and equipment, resulting in products of
low competitiveness aimed at domestic consumers, Another problem was that the
occupancy rate of the IZs remains low with only some 41 percent of the total land
area let to investors at present.

22


Current Scenario

WHILE celebrating the 20th anniversary of China's four earliest Special
Economic Zones (SEZs) on August 26, the cities of Shenzhen, Xiamen,
Zhuhai and Shantou, and Hainan Province mapped out development
blueprints for the new century. Analysts believe that by setting the goals
for modernization, the SEZs are still leading other parts of the country in
development as they were 20 years ago.

Two decades ago, local authorities in Shenzhen, encouraged and
supported by senior Chinese leaders including Deng Xiaoping, were
determined to blaze a trail for China's reform and opening-up drive.
Shenzhen has then become a window of the country to the outside world
and a platform for reform measures, along with Xiamen, Zhuhai and
Shantou.

To ensure successful reform and opening up in the SEZs, China
introduced a wide range of special preferential policies. As the
opening-up drive swept other parts of the country, the preferential
policies were applied to more regions. The saying that special economic
zones are no longer special prevails in the country. However, the SEZs
have not lost their vitality. And observers say that the SEZs still shoulder a
historical mission today.

In recent years, the SEZs have been focusing on improving the overall
economic quality and on developing high-tech industries and other
economies with special features. Compared with other parts of China, the
SEZs still hold an edge in utilizing domestic and overseas resources and
markets and in adapting themselves to international practices to boost
economic development.

While fully expanding economic co-operation with multinationals,

23


Shenzhen is tightening ties with Hong Kong, and Xiamen and Hainan with
Taiwan. In Shantou, efforts have been made to attract overseas Chinese,
one of the major channels of overseas investment to the Chinese
mainland.

Experts say that improving overall economic performance is a necessary
choice for the SEZs, as China will face fiercer competition after its entry
modernization. To hit the goal, analysts say, the SEZs should give national
treatment to overseas investors for more funding while making efforts to
open up overseas markets for their own companies' products.

By changing the past practice of offering preferential policies to overseas
investors in certain fields, the SEZs have lifted all restrictions for them.
According to officials, the expansion of reform in the SEZs will focus on
systematic innovations, including adjustments in the ownership structure,
and transformation of functions of government departments in
accordance with international practices.

The government should also simplify procedures to make it easier to get
businesses up and running and give a bigger role to the market, while
improving services, experts say. At the same time, efforts must be made
to improve the social security system and the financing system, and have
intermediary organs operating according to standards.

The forthcoming 50 years will be an important historical period in China's
drive to realize modernization and make the Chinese nation's
long-cherished dream of building a powerful China come true. Experts
are confident that Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan will
set the pace in China's drive toward modernization.

24


25


Beginning of Economic Zones in India

The policies of Liberalisation, privatization and globalisation (LPG) that
were introduced in 1991 removed the highly complex system of controls
prevailing in post-independent India. Now, in the new market scenario, it
became very important to become competitive in terms of price, but also
quality, time, service, etc. India has always paid more attention to its
exports, because they earn revenue. To increase them, the idea of Export
Promotion Zones (EPZ) was conceived. These were areas where import
substitution was not followed and all inputs for any manufacturing
process were allowed to be imported freely. Such zones were established
to promote trade and to develop a specific industry by providing it with
the entire infrastructure it needs.

Evolving Concept
This initial concept was called EPZ (Export Processing Zone) and was
introduced first in Kandla, Gujarat. The Indian manufacturer was nowhere
in terms of international standards of either quality or price. So, to make
him globally competitive, the government had to provide some incentives
to him. Most of these incentives could be used by almost every producer
everywhere. But, there were special incentives which, when given, could
result in a very low cost of production for the manufacturer and there was
a risk then that the goods could then end up being sold in the domestic
market instead of being exported. So, the government established special
zones where people could come in, establish their factories, procure (buy
domestically or import) whatever they would require for production,
produce locally and then export these goods. For such a situation, there
needed to be precise control over every importer and all his actions,
which could lead to any harm to national interest. To prevent all this, EPZs
were established, which were land-locked areas, under constant
surveillance by the customs authorities and security personnel of the

26


zone. These zones would regulate all the material coming into and going
out of the zone and thus, keep a check on the manufacturers’ actions.

EPZs worldwide
Thus, EPZs were set up with the aim of boosting export-oriented
investment and for eliminating the constraints imposed by India’s trade
and industrial policies. As a concept, EPZ dates back to 1962. Some of the
first EPZs were founded in Puerto Rico in 1962, Mexico (1964), Kandla
(1965), Taiwan (1966), South Korea (1971), Philippines and Malaysia
(1972). The EPZ set up in Mauritius is not based on geographical and
locational advantages but is more a functional concept.

Most of these countries have had a good and fulfilling experience by
setting up EPZs. EPZs have helped promote an export-oriented
industrialization strategy with increasing value-additions in domestic
production. Studies have shown that countries where EPZs function have
had excellent performances on the trade front.

Of the 850 EPZs worldwide, a large number of them operate in developing
countries. The world over, it has been observed that processing exports
have outperformed others. In fact, most Asian and Latin American
countries have excelled in trade only due to the processing trade.

The Government of India had established seven EPZs over a period of time.
These were:

1. Kandla Free Trade Zone (KAFTZ), Kandla, Gujarat – 1965;
2. Santa Cruz Electronic Export Processing Zone (SEEPZ), S. Cruz,
Maharashtra – 1974;
3. Cochin Export Processing Zone (CEPZ), Cochin, Kerala;
4. Falta Export Processing Zone (FEPZ), Falta, West Bengal – 1984;
5. Madras Export Processing Zone (MEPZ), Madras, Tamil Nadu;

27


6. Noida Export Processing Zone (NEPZ), Noida, Uttar Pradesh – 1985;
7. Visakhapatnam Export Processing Zone (VEPZ), Visakhapatnam,
Andhra Pradesh.

Kandla was the only Free Trade Zone in India and was the first zone to be
established in India.

While the Santa Cruz Electronics Export Processing Zone (SEEPZ) was
meant exclusively for the exports of electronics and gems and jewellery,
all other zones were multi-product zones. 100% foreign equity was
welcome in EOUs and EPZs.

28


Shortcomings & Problems of EPZs

According to an Audit Report conducted on EPZs and FTZs in 1999, SEEPZ
earned only US$ 1.25 bn. net foreign exchange in the past 8 years.

The reasons for this were attributed to the following causes:
Failure to elicit full commitment from people as they stay far away
from their place of work.
Insufficient comprehensive and well-knitted internal and backup
infrastructure.
High dependence on outside infrastructure created and maintained
by different agencies lacking co-ordination. The result: under
achievement of actual potential.
Limited possibility of improving connecting infrastructure to
enhance the performance of existing EPZ/FTZ.

29


For example:
On 12th March 1994, a memorandum was submitted to Shri Zafar Saifullah,
Cabinet Secretary, Government of India regarding the problems of EPZs
and EOUs. The Development Commissioner, SEEPZ, Santacruz Electronics
Export Manufacturers’ Association (SEEMA), and the SEEPZ Gems &
Jewellery Manufacturers’ Association, SEEPZ submitted this memorandum
in association with the Federation of Indian Export Processing Zones

5.1 The above graph shows that the EPZs never really contributed a
substantial amount in the national exports. Also, the share of EPZ unit
exports in total exports was more or less at the same ratio over the 3
years from 96-97 to 98-99.

Industries Association.

The main problems highlighted in this report were:
Inconsistencies in government regulations – The Import Trade
Control and Exchange Control Regulations have changed over
time to benefit EPZ units, but the customs regulations were still
governed by the notification issued at the time of formation of
the zones. This resulted in a situation wherein certain activities
permitted by the EXIM policy could not be undertaken, as the
same were not permitted by the customs regulations.
Customs working & procedures – The units in the zone were
allowed to work 7 days a week to maximize exports, but the
Customs department worked only 5 days a week, resulting in the
units having to wait for 2 days to get clearance for their
activities. Also, there was still a lot of red-tapism left while
dealing with issues like returning of export goods, return of

30


rejected components, de-bonding of capital equipment, waste
disposal
Modes of transportation – Courier was not recognised as an
approved mode of transportation and hence any goods received
by courier had to be notified and duty had to be paid on them.

Also, there were problems with the formation of Trade Unions,
multiplicity of bonds, fax copies not accepted by customs, hassles in
sub-contracting, DTA sales regulations, etc. These, and many other such
trivial matters were barriers in the proper working of the units in the
zones. Over a period of time, some of these hassles were done away with.
But there was never a situation when the units in the zones were really
satisfied with the procedures.

The experience of Export Processing Zones (EPZs), which were duty-free
enclaves, has not been up to expectations. Even with flexibility to sell 50
per cent of exports in DTA at concessional rates of duties, most EPZ units
have failed. The eight EPZs together contributed barely 3.7 per cent of the
country’s total exports.

In fact, other than Santacruz Electronic EPZ, the other seven EPZs together
contributed to only about 1.41 per cent of the country’s exports. There is
a very strong view in the revenue department that the dismal performance
of the EPZ units does not justify the revenue sacrifice or revenue leakage
inherent in the schemes. In their eyes, the EPZs have failed.

These shortcomings were responsible for the recent makeover of these
EPZs into SEZs. The transition process is covered in the next Chapter.

5.2 Customs probe Bharat Shah's export units for diamond smuggling

31


In January 2001, SEEPZ customs conducted a stock taking of two units from Jan 31,
2000. B V Star and B V Jewels (both owned by Bharat Shah) were probed for
suspected diamond smuggling. The following was found:

Diamonds worth 26.29 cr (73730 cts) of B V Jewels were found short,
allegedly were smuggled out of SEEPZ. Customs duty demanded, therefore, is Rs
12.54 cr
B V Jewels had also suppressed the facts of disposal of capital goods worth
Rs 58.34 lakh to one SB &T International Ltd, SEEPZ, without permission of
customs. The customs duty foregone was Rs 39.31 lakh. That is how the total duty
demanded is Rs 12.94 cr
Suresh Mehta, a partner in both companies, had shown possession of 23
diamonds of 27.42 cts, valued at Rs 39.63 lakh, for which he could not show legal
import documents.
B V Jewels exported diamonds worth Rs 27 cr studded in jewellery, between
1998 and Feb 2000, but could not show how they had procured these.
Further, another unaccounted lot of diamonds of B V Jewels weighing
10631.39 cts and valued at Rs 4.03 cr, were found without corresponding
documents to show legal possession.
In the case of B V Star, which had no production since 1997, customs duty of
Rs 2.57 cr is demanded because of shortage of 8604.5 gms of gold and 844.16 cts
of diamonds revealed in the stock taking.

32


Change to SEZs

EXIM Policy changes

Realising the failures and shortcomings of the EPZ Scheme in India, the
Commerce Ministry decided to improve the existing situation. The
changes and fine-tuning done in the existing EPZs was to no avail and
was not yielding the required results. An Indian delegation headed by the
then Director-General of Foreign Trade, Mr. N.L. Lakhanpal visited UAE
and saw the Jebel Ali Free Zone (JAFZ), Dubai and Fujairah Free Zone (FFZ)
there. This was the birth of the idea of having similar zones in India.

Toying with the idea of Free Trade Zones / Free Zones
After the delegation came back, it submitted a report on the findings of
the visit. The report recommended that the Development Commissioners
of each zone (in India) should be vested with all the authority regarding
their respective zones, thus making them the ultimate local authority on
all issues, as is the case in UAE. Also, like their UAE counterparts, the
Indian DCs should be required to prepare a Business Guide. The report
also stated that the Free Zones in UAE accounted for all duty-free raw
material, ensuring it was used for export. Even in the case of DTA, they
would ensure that it was after payment of full customs duty on the value
of the finished goods. The commerce ministry then decided to convert all
existing EPZs into FTZs with SEEPZ, Noida and Kandla being converted
that year, and the rest to follow.

Reducing role of Customs
According to the proposed policy, the role of customs was to reduce and
the new zones would be exempt from all customs department rules and
regulations from July 1, 1999. After the proposed conversion of the units
to FTZs, the role of the customs department officials was to be confined

33


to working outside the units, giving them total operational flexibility, as
proposed in the revised export and import policy (1997-2002). The FTZs
would have been outside the customs ambit with checks only at the entry
and exit points by customs officers.

Under the new scheme, FTZs would be permitted to sell 50 per cent of
their production in the DTA, subject to payment full customs duties. This
means the remaining half alone needed to be exported. But, according to
ministry officials, for their own survival, the units would have to find
markets for their entire production, as DTA sale will prove rather
prohibitive.

The Indian labour laws ere to apply to FTZs though the commerce
ministry's ultimate objective is to make these inapplicable. The practice
the world over is to exempt FTZs from the purview of labour laws.

Arrival of SEZs
The plans for the FTZs got shelved eventually. Mr. Murasoli Maran, the
Minister for Commerce & Industry, suggested the setting up of Special
Economic Zones in India, similar to the ones in China. This decision to set
up SEZs was the highlight of the EXIM Policy.

The decision was commendable, but it did not take into account several
things. The initial proposed SEZ Scheme was not a major improvement
over the existing EPZ Scheme at that time. Basically, almost all the
features of the original SEZ Scheme already existed in the form of
incentives available to EPZ units. The major advantage for SEZ units was
that they had to now achieve only positive net foreign exchange
earning as a percentage of exports (NFEP), where as EOU/EPZ units
with investment of less than Rs 5 crore in plant and machinery had to
achieve minimum stipulated NFEP.

34


Inadequate extra facilities over EPZs
The relaxation for SEZ units was significant but not sufficient enough to
sway the decision of the entrepreneurs in favour of setting up units in SEZ.
The major advantage for EOU/EPZ units was that they could sell upto 50
per cent of their exports in the DTA at half the rates of customs duties,
whereas SEZ manufactures could sell in DTA only on payment of full
duties. DTA sale was a very important option for EOU/EPZ/SEZ units, as
the international markets are not always booming or lucrative.

Trading units in SEZ/EPZ were not allowed to sell in DTA. Ideally, so long
as the trading unit paid full import duties on DTA sales, there should have
been no restrictions.

Unmet expectations
The commerce minister had announced that the EPZ at SEEPZ, Kandla,
Cochin and Viskhapatnam would be converted to SEZ. The transitional
arrangements for existing EPZ units who did not want to opt for SEZ
scheme was that they had to convert into EOU or de-bond. In either case,
they had to move out of EPZ, which was difficult for existing units.

The industry felt that the government needed to make SEZs an attractive
destination for entrepreneurs. The most oft-repeated request was that
the government should treat SEZ as foreign territory for all purposes.
There was also a feeling that the supplies from DTA to SEZ must be
treated as physical exports and that all the customs notifications should
apply to sales from SEZ to DTA as they apply to physical imports.

Amendments
The existing EPZs were converted to SEZs and activated on 1st November
2000. Also, proposals for the establishment of new SEZs were cleared.
This was followed by some notifications being issued which made the
necessary changes in the SEZ Scheme. The most prominent among them

35


was the declaration of SEZs as foreign territory. The Finance Ministry
declared the area under the SEZs as `foreign territory' for the purpose of
duties and taxes. This means that goods supplied to the SEZ from the
Domestic Tariff Area (DTA) will be treated as `deemed' exports and goods
brought from the SEZ to the DTA will be treated as `imported' goods.
Thus, was evolved, the present concept of SEZs in India.

Present SEZ Concept

The facilities available to SEZ units are as follows:

Customs related:

No license required for import.
Exemption from custom duty on import of capital goods, raw
materials, consumables etc.
Exemption from Central Excise Duty on procurement of capital
goods, raw materials etc. from the domestic market.
Exemption from Custom/Excise duty on import/domestic
procurement of goods for setting up of units in the Zone
Supplies from DTA to SEZ will be treated as deemed exports.
Reimbursement of Central Sale Tax (CST) on inter-State purchases.
Reimbursement of duty paid on Furnace oil as per Drawback rate
notified by DGFT.

36


SEZ units have to be a net foreign exchange earner. No
pre-determined foreign exchange earning or minimum
performance requirement.
Access to domestic market.
Simplified Custom procedure.
Trading activity for exports permitted.
Fast track clearance of imports and exports.
Job working/sub-contracting facilities for exports, including for
jewellery units.
Facility to subcontract part of production abroad
In-house Custom clearance.
Ready infrastructure.
Duty free goods to be utilized within the approval period of 5 years.
Performance of units to be monitored by a committee consisting of
Development Commissioner and Customs.
No separate documentation required under Customs and EXIM
Policy.
Export defective goods etc. without GR waiver

Investment related:

100% FDI permissible for units in SEZs in manufacturing sector
barring few sectors.
No Cap on foreign investment for SSI reserved items.
Exemption from industrial licensing requirement for items reserved
for SSI sector.

Foreign exchange related:

Profits allowed to be repatriated freely without any
dividend-balancing requirement.

37


100% of foreign exchange earnings can be retained in EEFC account.
External commercial borrowing shall be subject to usual procedure.
Facility to realize and repatriate Export proceeds within 12 months.

Tax related:

Attractive tax holiday upto 2010 as per Section 10A of the Income
Tax Act.

Labour Laws:

The labour laws of the land will apply to all units inside the Zone.
However, the respective State Governments may declare units within the
SEZ as public utilities and may delegate the powers of the Labour
Commissioner to the Development Commissioner of the SEZ.

Role of State Governments
State Governments will have a very important role to play in the
establishment of SEZ. Representative of the State Government, who is a
member of the Inter-Ministerial Committee on private SEZ, is consulted
while considering the proposal. Before recommending any proposals to
the Ministry of Commerce & Industry (Department of Commerce), the
States must satisfy themselves that they are in a position to supply basic
inputs like water, electricity, etc.

Terms and Conditions for establishment

Only units approved under SEZ scheme would be permitted to be
located in SEZ.
The SEZ units shall abide by local laws, rules, regulations or
bye-laws in regard to area planning, sewerage disposal, pollution
control and the like. They shall also comply with industrial and
labour laws as may be locally applicable.

38


The SEZ should have an area preferably of 1000 hectares.
Such SEZ shall make security arrangement to fulfill all the
requirements of the laws, rules and procedure applicable to such
SEZ.
Wherever the SEZs are landlocked, an Inland Container Depot (ICD)
will be an integral part of SEZs.

The main differences between the EPZ and SEZ Schemes are:

No minimum Export Performance (EP) or Net Foreign Exchange
earnings as Percentage of exports (NFEP) is needed in an SEZ, as for
EPZ units.
Monitoring of performance of SEZ units by a Committee headed by
Development Commissioner and consisting of Customs.
Duty to be recovered in case of failure to achieve positive NFEP
under Custom Act in proportion to shortfall unlike in EPZ.
Unlimited DTA sales on full duty. For EPZ, only 50% of exports
No linkage with positive NFEP for domestic sale for SEZ units. In EPZ
sales are subject to achievement of NFEP.
Duty free material to be utilized over five years unlike in EPZ where
it is one year.
Subcontracting facility available to SEZ jewellery units, which is not
available to EPZ units.
All imports on self-certification, unlike in EPZ, where attestation of
Development Commissioner is required for import of Capital Goods.
No routine examinations by Customs of export and import cargo in
SEZ.
100% FDI through Automatic Route available to manufacturing SEZ
units. In EPZ, FIPB approval required.
Procedural simplification for operations like record keeping,
inter-unit transfer, subcontracting, disposal of obsolete material,
waste and scrap.

39


Other facilities like tax holiday, retention of 70% of export earnings
in EEFC Account, etc. are common for both EPZ and SEZ.

Salient features and schemes of an SEZ in India

Units set up in SEZs which will operate under a single purpose bond,
can import or procure goods from the DTA duty-free for
manufacture of goods and services, trading, production, processing,
assembling etc and exports thereof.

Goods can be sold in the DTA only if the unit achieves the Net
Foreign exchange Earning as a Percentage of exports (NFEP)
annually and cumulatively as specified in the EXIM Policy. A trading
unit has to achieve a turnover of $1 million in five years. Penal
action can be taken on default.

DTA sales are, however, banned for goods that have been imported
both as scrap as well as for repair. Trading units in the SEZs also
cannot sell goods in the DTA.

SEZ units can import and export through port, airport, land
customs station, ICD, CFS, courier mode and post parcel. Software
development units can import and export through data
communication and telecommunication links.

The norms for procurement of goods from domestic sources by SEZ
units will be the same as those laid down for the EPZ units. In
respect of imported and domestically procured cargo, goods will be
assessed on the basis of documents provided by the units and
there will be no physical examination. However, customs
authorities may examine such cargo when there is specific
information regarding clandestine removal.

40


Exports will be permitted on the basis of self-certification by the
units and there will be no routine examination of the consignment
by the SEZ custom authorities. At the gateway port, the SEZ cargo
will be subject to the examination procedure as per instructions in
force.

SEZ units will have to maintain financial year-wise accounts of all
forex inflow by way of exports and other receipts; all forex outflow
on account of payment of dividend, royalty, fees etc and sale in the
DTA. Units can also undertake job work for the DTA without
payment of duty. Provisions have also been made for temporary
removal of goods into the DTA and to other SEZ, STP, and EOU
zones. Inter-unit transfer of goods amongst SEZs will not be
subject to customs scrutiny. Duty remission will be available on
destruction of goods within the SEZs. Units have also been
permitted to dispose obsolete goods on payment of the applicable
customs duties.

In case of imports, the Bill of Entry with specially stamped
endorsement as "SEZ Cargo" is filed with the Assistant
Commissioner/Deputy Commissioner of Customs in the SEZ for
assessment. For procurement of goods from domestic sources by
SEZ units, CT-3 certificates are issued to the units and against such
CT-3; the goods including capital goods are procured from DTA
without payment of duty. In both cases, i.e. both in respect of
imported and domestically procured cargo, the goods are assessed
on the basis of documents furnished by the units. Goods are not
examined physically and ‘out-of-charge’ is given after verifying the
marks and numbers on the packages only.

41


When the import consignments are required to be transshipped to a
SEZ located at a station away from the place of import, the same is
allowed under normal transit procedure. The unit files the Bill of
Entry with the Assistant Commissioner/ Deputy Commissioner of
Customs in-charge of the SEZ on the basis of the transit document.

In case of exports, the Shipping Bill along with relevant documents
is filed with the Customs authorities in the Zone. As in the case of
imports, the SEZ export cargo is not examined in routine and
export is allowed on the basis of self-certification by the units. The
units, after self-examination of the consignments, are required to
submit the shipping bills to the Assistant Commissioner/Deputy
Commissioner of Customs for "let export" order. After obtaining the
"let export" endorsement on the shipping bill, the consignment is
taken to the gateway port for export. At the gateway port also, the
SEZ export consignment is not examined in routine. However,
whether at the Zone or at gateway port or during transit of such
cargo, the Customs authorities can examine the consignments
when there is a specific information/intelligence. For this purpose,
the orders of the Assistant Commissioner/Deputy Commissioner of
Customs are required to be obtained.

Sub-contracting: The SEZ units are allowed to sub-contract part of
the production process abroad. Approval for sub-contracting
abroad is accorded by the Board of Approval. The goods sent for
job-work abroad are to be returned to the unit for final
processing/manufacturing before exports. The unit is required to
execute a suitable bond for sub-contracting goods abroad and is
required to account for the goods including waste/rejects in the
manner as prescribed by the Commissioner of Customs/ Central
Excise in this behalf.

42


The SEZ units are also allowed to undertake job-work for export on
behalf of DTA units. This is subject to the condition that the
finished goods are exported directly from SEZ units and export
documents are made in the name of the DTA unit. On export of
such goods manufactured by SEZ unit on behalf of the DTA unit,
the DTA unit is entitled to refund of duty paid on the inputs by way
of brand rate of duty drawback.
The SEZ units are allowed to remove the moulds, jigs, tool, fixtures,
tackles, instruments, hangers, patterns and drawings without
payment of duty to the premises of the sub-contractors subject to
the condition that such goods are brought back to the unit on
completion of the job work within the period specified in this behalf.

Gem and Jewellery units in SEZ:
Generally speaking, sub-contracting is not allowed to gem and
jewellery units. However, the gem and jewellery units in SEZ are
allowed to take out gold/silver/platinum for sub-contracting
subject to the condition that goods, finished or semi-finished,
including studded jewellery, containing quantity and purity equal to
the gold/silver/platinum so taken out are brought back to the Zone
within 30 days. It is to be noted that diamonds, precious or
semi-precious stones are not allowed to be taken out for
sub-contracting. The gem and jewellery units are also allowed to
receive plain gold/silver/platinum jewellery from DTA in exchange
of gold/silver/platinum of equal quantity and purity. These units
are, however, not eligible for any wastage or manufacturing loss
against the jewellery received from DTA after processing or against
exchange of gold/silver/platinum. The DTA units undertaking job
work or supplying jewellery against exchange of
gold/silver/platinum are not entitled to deemed export benefits.
The gem and jewellery units are also allowed to sub-contract part

43


of the production or production process through other units in the
same SEZ subject to records being maintained by both the
supplying and the receiving units.

Further, the gem and jewellery units in SEZ are allowed certain
other facilities as mentioned below:

(i) Taking out the items of gem and jewellery into DTA temporarily
without payment of duty for the purpose of display and return
thereafter;

(ii) Personal carriage of gold/silver/platinum jewellery or precious
or semi-precious stones or beads and articles as samples up to US$
1,00,000 for export promotion tours and temporary display or sale
abroad subject to the condition that the exporter would bring back
the jewellery or the goods or its sale proceeds within 45 days from
the date of departure through normal banking channel;

(iii) Export of jewellery including branded jewellery for display and
sale in the permitted shops setup abroad, or in the showroom of
their distributors or agents provided that items not sold abroad
within 180 days, shall be re-imported within next 45 days;

(iv) Removal of parts & tools of machine temporarily without
payment of duty for the purpose of repair and return thereof.

(v) Taking out gem and jewellery manufactured in the SEZ to the
retail outlets or showrooms set up in the departure lounge at
international airports for sale to a tourist, as defined in the Baggage
Rules, 1998, leaving India.

(vi) Sale of gem and jewellery manufactured in the SEZ to a
foreign-bound passenger and transferring the same to the retail
outlets or showrooms set up in the departure lounge or Customs

44


warehouse at international airports for being handed over to the
said passenger for the purpose of export.

(vii) Removal of moulds, tools, patterns, and drawings into the DTA
for job work without payment of duty and to be returned to the unit
thereafter.

For availing of the above mentioned facilities, prior permission of

Assistant Commissioner / Deputy Commissioner is required.

In case of gem & jewellery units, scrap, dust or sweepings

generated in the unit is allowed to be forwarded to the Government

Mint or Private Mint for conversion into standard gold bars and

return thereof to the Zone subject to the observance of procedure

laid down by the Commissioner of Customs. The said dust, scrap or

sweepings are also allowed clearance into DTA on payment of

applicable customs duty on the gold content in the said scrap, dust

or sweepings. Samples of the sweepings/dust are taken at the time

of clearance and sent to mint for assaying. The assessment is

finalized when the reports are received from the mint.

Inter-Unit Transfer:
Inter unit transfer of goods amongst units in a SEZ does not
require any prior permission, but the supplying and receiving units
are required to maintain proper accounts of the transaction

Duty Remission on Destruction of Goods:
A provision has been made in the notifications that duty would not
be levied on capital goods, raw materials, components, waste or
scrap etc. if these goods were destroyed in the presence of the

45


Customs authorities. This provision, however, does not apply to
gold, silver, platinum, diamond, precious stones and semi-precious
stones. The officers supervising destruction are required to ensure
that goods are destroyed fully rendering them unfit for further use
and give certificate to that effect. After destruction of capital goods,
raw materials, components, waste or scrap etc., if the remains have
scrap value, the unit in DTA on payment of duty applicable to scrap
can clear the same

DTA Sale:
The facility of DTA sale is available to the SEZ units. Under the
Scheme, finished goods including by-products and services and
waste/scrap/remnants/rejects etc. can be sold in the DTA on
payment of applicable duty and in accordance with the
Export-Import Policy in force. However, where such finished goods
(including rejects, waste and scrap materials) are not excisable,
duty equal in amount to that leviable on the inputs
imported/indigenously procured under the notifications and used
for the purpose of manufacture of such finished goods, which
would have been paid but for the exemption under the said
notifications, is payable at the time of clearance of such finished
goods. In case of service sector SEZ units, the rendering of services
in DTA is allowed subject to the condition that the unit has
achieved the positive NFE, cumulatively, as specified in the Policy.
This would mean that service units would not be eligible for making
DTA sale if the NFE is not positive cumulatively at any point of time.
Further, if any of such services are taxable under provisions of
Chapter V of Finance Act, 1994, then rendering of such services in
DTA would require payment of service tax as per the provisions of
Finance Act, 1994.

46


Levy of Central Excise Duty on Goods Produced or Manufactured by

SEZ Units and Cleared into Domestic Tariff Area:

In terms of section 3 of the Central Excise Act, 1944, the excise
duty leviable on goods manufactured in an SEZ unit and cleared
into Domestic Tariff Area is an amount equal to the customs duty
leviable under section 12 of the Customs Act, 1962 or under any
other law for the time being in force on like goods produced or
manufactured outside India, if imported into India. Thus, the duty is
worked out exactly in the same manner as applicable to imported
goods.

Maintenance of Accounts:
A SEZ unit is required to maintain proper account in the format

convenient to it and financial year-wise, of all foreign exchange

inflow by way of exports and other receipts, all foreign exchange

out flow on account of imports, payment of dividend, royalty, fees

etc., consumption and utilisation of the materials and sale in the

DTA. The units are required to submit regularly quarterly statement

to the Development Commissioner and the Customs in this regard

in the format prescribed at Appendix 16H of the Hand Book of

Procedures.

Monitoring of activities of SEZ units:
All activities of the SEZ unit, unless otherwise specified, are through
self-certification procedure and are monitored by a Committee
comprising Development Commissioner and Customs. The
Development Commissioner in charge of the Zone heads the
Committee. The Committee is also required to see that wastage /
manufacturing loss on gold/ silver/platinum jewellery and articles

47


are within the overall percentage prescribed in Appendix-41 of the
Handbook (Vol-1). In case of higher wastage/manufacturing loss,
the Committee is required to satisfy itself of the reasonableness of
the same.

Penal action in case of default:
The Customs officials posted in SEZs are not supposed to visit the
units for verification of records or even otherwise in routine.
However, in case of specific information/intelligence which, prima
facie, show that there is fraud, collusion, mis-declaration,
suppression of information etc having a bearing on the export
performance of the unit or where there is specific information
regarding clandestine/unauthorized removal of goods into DTA etc,
the Customs officials can visit the units for verification of records,
goods etc. so as to initiate proceedings under Customs Act, 1962.
The Assistant Commissioner/Deputy Commissioner may keep a
watch on the export performance of the units and in the event of
non-achievement of positive NFE within the stipulated period;
action can be taken against the units for recovery of the duty and
interest. So far as utilization of imported/indigenously procured
goods is concerned, the same may be utilized within the period of
five years. In case of failure to utilize the imported / indigenously
procured goods within the period of five years, the unit is liable to
pay duty on the said unutilized goods along with the interest at the
rate of 24% per annum from the date of importation or
procurement of the said unutilized goods till the date of payment
of such duty.

SEZ is an evolving Scheme and more features would be added as
required.

6.1 Structure & Role of Trade Unions in China

48


A study of Chinese trade unions will be interesting. Comparison with Indian labour
laws almost certainly makes it clear that Indian SEZs will not enjoy same level of
labour cooperation that their Chinese counterparts enjoy.

Chinese trade unions are organized on a broad industrial basis. Membership is open
to those who rely on wages for the whole or a large part of their income – a
qualification that excludes most agricultural workers. In theory, membership is not
compulsory, but in view of the unions' role in the distribution of social benefits; the
economic pressure to join is considerable. The lowest unit is the Enterprise Union
Committee. Individual trade unions also operate at the provincial level, and there are
trade union councils that coordinate all union activities within a particular area and
operate at county, municipal, and provincial levels. At the top of the movement is
the All-China Federation of Trade Unions, which discharges its functions through a
number of regional federations.

In theory, the appropriate trade union organizations are consulted on the level of
wages as well as on wage differentials, but in practice their role in these and similar
matters is insignificant. They do not engage in collective bargaining – not at all
surprising, since their principal duties include assisting the party and promoting
production. In fulfilling these tasks, they have a role in enforcing labour discipline.
From the point of view of the membership, the most important activities concern the
social and welfare services. Thus, it is the unions that look after industrial safety;
organize social and cultural activities; provide services such as clinics, rest and
holiday homes, hostels, libraries, and clubs; and administer old-age pensions,
workers' insurance, disability benefits, and other welfare schemes.

49


SEEPZ SEZ

SEEPZ (Santacruz Electronics Export Processing Zone) was formed in 1974
exclusively for electronics. SEEPZ was established on land leased by the
Government of India (Ministry of Commerce) from MIDC for a period of 99
years. MIDC, in turn had taken this land on lease from the Maharashtra
Government. MIDC and the Government of India together developed the
basic infrastructure needed for such an EPZ to exist. The Government of
India did all the funding and MIDC cleared the land, laid the roads,
provided adequate water supply and arranged for an uninterruptible
power supply source. Thus, SEEPZ was finally established basically for the
electronic industry as government had identified it as a strategic sector
and wanted rapid growth in it. In 1988-89, seeing the potential of the
Gem & Jewellery industry, this industry was also made a part of SEEPZ.

Infrastructure Facilities at SEEPZ

The Philosophy while landscaping SEEPZ was to have Mother Nature live in
harmony with industrial manufacturing and technology. All set in a
sophisticated infrastructure catering to all basic needs of industry.

Inexpensive Factory Space or Land
At SEEPZ, plots are given on lease for a period of 30
years, at rates fixed from time to time. The initial rates
were Rs. 10/- per sq. metre per annum for an SDF
plot. Entrepreneurs can construct their own buildings
on these plots. For this purpose the SEEPZ
administration will obtain all necessary permissions
and clearances. Also, Standard Design Factories (SDFs)
are available on a 5-year renewable lease basis at the rate of Rs. 650 per
sq. metre per annum plus Municipal Taxes (10%). When an entrepreneur

50


begins production in the very first year of obtaining the SDF shed, he is
entitled to a concession of 50% of the lease rent in the first year, 40% in
the second year and 25% in the third year. Again the space allotted to an
entrepreneur inside the SDF shed is based on his export projections. All
internal partitions, air conditioning, electrical wiring, etc. are to be carried
out by the entrepreneur.

Uninterrupted Power
The generating stations of western Maharashtra ensure uninterrupted
supply of power at the rate of Rs. 4.74 per unit. SEEPZ is
exempt from the payment of taxes on the purchase of
power or on its sale. The units are also allowed to generate
and/or sell their own power without any obligation to pay
taxes.

Abundant Water
The Zone has an assured supply of 4.55 million litres
of water a day at the rate of Rs. 21 for every 1000
litres.

Hi-Tech Communication Facilities
The most important facility that lures software enterprises to SEEPZ is the
hi-tech 64KB/128KB/256KB line, that enables these
companies to communicate and videoconference
over the satellite to any of the branches around the
world. A telephone / telex connection is given to
SEEPZ units on priority basis.

Adequate Warehousing and Forwarding Facilities
A large warehouse called an Inland Container
Depot (ICD) is situated within SEEPZ for storing at

51


very nominal rates. This is the central warehouse for all the units inside
SEEPZ. Also Clearing & Forwarding facilities are available here.

In-Zone Custom Clearances
SEEPZ has its own ports of entry with a fully dedicated customs wing
similar to that at the Mumbai Port. Since this customs wing is solely for
the clearances within SEEPZ, the procedures for clearing incoming and
outgoing consignments are simple
and very fast. Also, there is no need
for the same to be carried out either
at the airport or the docks. This
facility at SEEPZ is provided specially
keeping in mind the delay and trouble
that occurs to the exporter while
obtaining clearances. This speedy and
efficient system is available to all the units within SEEPZ at no extra cost.
The number of pending cases with this Customs department is also less,
as they have to cater only to the EPZ units.

Miscellaneous Facilities
3 Industrial Canteens
Exclusive Restaurant
Gymnasium

52


Convention Centre
Communications Centre
Optical fiber telephone exchange with a capacity of 4000 lines
installed within the Zone Complex
Foreign Post Office
Crèche for working women’s children
4 Banks – State Bank of India, Bank of India, Punjab National Bank,
Central Bank of India
Nominated agencies like MMTC and banks authorized by RBI for
supply of precious metals
Clearing Agencies – M/s Air freight Pvt. Ltd., M/s Lee and Muirhead,
M/s Tulsidas Khimji Pvt. Ltd

53


SEEPZ & Development

Ancillaries
The proximity of available spares, components and raw materials affords
Zone units the advantages of lower freight costs and lower inventory
levels. The feedback necessary for effective quality control on supplies
will be quicker, easier and simpler, as the supplier will be almost
next-door.
A Regional Testing Centre of the Department of Electronics (ERTL) located
just outside SEEPZ provides facilities for meeting the evaluation needs of
manufacturers and designers of electronic products.

Transport
Due to the huge workforce in SEEPZ and lack of residential areas nearby,
the employees need to be transported everyday to large distances. The
transport industry has developed to a huge extent in this area because of
this need.

Development of the land
With the establishment of SEEPZ, the surrounding area has increased in
land value. There has been an increase in demand for residential housing
near SEEPZ. There have also been a number of ancillary industries
springing up to serve the needs of the SEEPZ Community.
Many fast food joints, small shops and industries near MIDC,
communication centers, banks, etc. have developed in this previously
underdeveloped area.
A residential colony has been constructed for the SEEPZ authority near
SEEPZ. There is access to many more regions due to the presence of a Bus
Stop exactly at the entrance/exit gate of SEEPZ.

54


General Information on SEEPZ

According to the Annual Report of SEEPZ for the year 1999-2000:

The Government of India has so far invested Rs. 47 crores on the
development of SEEPZ.
Employment in SEEPZ in 1999-2000 stands at 42,000 employees,
up from 24,000 in 1995-96.
Number of operational units increased from 156 to 223 during the
same period.
At present, there are 7 Standard Design Factories (SDFs), 3 Gem &
Jewellery Complex Buildings and 14 self-built factories.
Total built-up area is 2,65,151 sq. mtrs.
During 1999-2000, SEEPZ registered 26.34% growth.

Growth of Electronics Industry (India &
SEEPZ): 1990-94

The electronics industry has always
played a significant role in India’s
exports. In recognition of the catalytic
role electronics plays in global
development, the industry has been
accorded the status of a priority area in
the new industrial policy. A significant
move was made with the establishment
of an Export Processing Zone
exclusively for electronics at SEEPZ
(Santacruz Electronics Export
Processing Zone), Mumbai in 1974.
2001

2001
2001
2001

2001

55


7.1 Comparison of electronics exports
of SEEPZ and India( 2001)

Growth of Gems & Jewellery Industry (India & SEEPZ): 1990-94

Another industry that has
recorded a significant growth in
recent years is the gem and
jewellery industry. In fact India has
established its place on the world
map along with such centres as
Antwerp and Tel Aviv for gem and
jewellery processing and exports.
To catalyze growth of this sector,
the Government along with the
apex trade bodies, has set up a
number of training institutes
specialising in imparting the
requisite skills for gem and
199
2000
2001
2002
2003

jewellery processing and
manufacture. In fact, a special
7.2 Comparison of gems & gem and jewellery complex was
jewellery exports of SEEPZ and
India (1999-2003)
set up in 1987-88 inside SEEPZ,
entirely dedicated to exports.

56


Latest Happenings at SEEPZ

SEEPZ is full in terms of capacity, when taking FSI into account. But,
the Government of Maharashtra has granted double the existing FSI
in respect of space utilized for software activity. Accordingly, an IT
Tower with a built-up area of 3 lakh sq. ft. is being constructed
besides the lake to accommodate IT units.
Maharashtra Government had earlier agreed in principle to transfer
11 hectares of land adjoining SEEPZ for further development of the
Zone. Now, due to the doubling of the FSI, there is no need for the
additional space according to it.
Plans for an expansion through SEEPZ ++ are underway.
Beautification of the Zone was carried out recently in association
with some of the Zone units.
Facility of 24 Hrs. ATM in SEEPZ Service Centre by VYSYA Bank Ltd.
The newly constructed SDF VII has been bought over by a company
for further leasing.
An ambulance is stationed at SEEPZ for 24 Hrs. Service.
There are proposals to improve the physical and telecommunication
infrastructure.
Administrative Improvements:
Strengthening of computerization with additional Hardware &
Software Packages.
Training and familiarization of staff with the use of computers.
Computerizing basic work in various sections.
Rationalisation of work allocation amongst officers.
Promotional Measures:
SEEPZ web site is being renewed
Preparation of SEEPZ brochure
Visit of Foreign Delegations:
Visited Vietnamese Presidents

57


Chinese Delegation

58


Navi Mumbai -
City of the 21st Century

Introduction
Navi Mumbai is a modern township spread over an area of around 350 sq.
km., and been planned, designed and developed by CIDCO. CIDCO has
developed high-quality infrastructure facilities in the Navi Mumbai area
including housing complexes, industrial infrastructure, business districts,
road & railway linkages, educational and recreational facilities, etc.

The township has been developed as a series of nodes with high-quality
housing infrastructure available at most nodes. Further, social
infrastructure for the township has also been developed in terms of
hospitals (2200 beds capacity), gardens (175 nos.), community centres
(20 nos.) and over 80 playgrounds. Other infrastructure like fire stations,
police stations, etc. is also in place.

Navi Mumbai is well connected to Mumbai
both by wide roads and mass rapid rail
systems. Travel time from Mumbai's central
business district at south Mumbai varies from
45 minutes (water transport) to 60 minutes
(road/rail transport). India's busiest domestic
and international airport Chatrapati Shivaji
International Airport - is just 90 minute drive
from Navi Mumbai.

The township is also well connected to other parts of the state through
railway and road networks. In terms of rail infrastructure, Navi Mumbai
has six rail corridors and an independent mainline rail terminal
connecting the city directly to other parts of the country. Several national
and state highways pass through the township. India's first expressway -

59


the Mumbai-Pune Expressway as well as the Konkan Railway, that
connects Central India to North Karnataka and Goa, passes through Navi
Mumbai. These linkages enable ready access to other industrial areas in
Pune, Thane, Vapi, Nagothane, Kalyan, Bhiwandi, Nashik, Dombivili,
Ambernath, Rasayani and others. In terms of sea linkages, Navi Mumbai
has access to one of India's largest seaports - JNPT that lies within the
boundary of Navi Mumbai.

In addition to the existing infrastructure, several new projects are on the
anvil. These include a proposed new international airport, which is to be
located at Navi Mumbai (estimated project cost around USD 2 billion). The
airport has already been approved by the State Government and is in
advanced stages with respect to Central Government approval. Other
proposals include the proposed sea-link between Mumbai and Navi
Mumbai which will land in the SEZ (estimated project cost around USD 1.5
billion).

The development of these planned facilities is likely to be accelerated on
account of demand generated due to the SEZ Project as well as fiscal
incentives offered by the State Government.

The township has adequate power and water facilities. The total installed
power generation capacity in Navi Mumbai is around 960 MVA with a
planned capacity of over 1500 MVA by 2010. There is adequate water
supply for the region as well. CIDCO has developed its own dams in the
area - with an existing capacity of 150 MLD and a planned capacity of
around 465 MLD by 2005.

In terms of living standards, Navi Mumbai scores over Mumbai on account
of the low level pollution, de congested residential areas and high
proportion of open spaces and green belts. In comparison to Mumbai, the
township has significantly lower living costs, owing mainly to the optimal
land and infrastructure costs.

60

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