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Special economic zones (SEZ): Protecting resources and enhancing economic activities at the same time

Every country wants to increase its trading activity to boost their economies as it encourages foreign investment. So, it is the reason for ​​India’s Special Economic Zone (SEZ) program, devised by Minister of Trade and Industry Murosori Malang during his visit to China’s Special Economic Zone in 1999.

SEZ program was announced during the annual review of the EXIM Directive, which came into effect on April 1, 2000. The basic idea behind establishing such a program is to establish a zone as an area where export production can be carried out free from all import/export rules and regulations, giving them operational flexibility.

Special economic zones (SEZs) are regions of a country that are subject to a different economic system than the rest of the country. Specifically, SEZ economic regulations encourage and attract foreign direct investment (FDI).

What are Special Economic Zones?

Special economic zones are defined under clause (za) of section 2 of the Special Economic Zones Act, 2005

SEZs are delimited enclaves that are treated as foreign territory for industrial, service, and commerce operations, with customs tariffs relaxed and a more permissive regime for other levies, foreign investments, and other transactions.

A special economic zone (SEZ) is an area with different business and trade laws than the rest of the country. These zones are located within a country’s boundaries and have the goals of boosting trade balance, increased investment, employment, effective administration, and job creation.

Common exemptions to SEZs

  • Customs duty exemption will be given to item imported for establishment, operation and maintenance of SEZs
  • Excise duty exemption for the goods required for the aforementioned purposes
  • 10 years of income tax exemption for the first 15 years of operation
  • Central sales tax exemption for goods used in the formation and maintenance of SEZs
  • 100% exemption from income taxes for a considerable time
  • Except for a few exceptions, 100% FDI is permitted in the manufacturing sector
  • External maturity borrowings from authorised banks, under strict control
  • No import license requirements
  • Exemption from license restrictions for items classified as SSI
  • No routine customs inspections on import and export cargo
  • Central Sales Tax and Service Tax Exemption
  • Customs and excise duty exemption

Main legal violations arising out of the Special Economic Zones Act 2005

Violation of the Fundamental Rights of the people guaranteed under part III of the Constitution

“The doctrine of equality before the law is the rule of law that pervades the Indian Constitution.”

The basic concept of equality is that “equality is a basic feature of the Indian Constitution, or that treating equals unequally or unequal equally constitutes the violation of the basic structure of the constitution.”

Therefore, laws or statutory provisions that violate the principles may be considered illegal.

“The procedures prescribed to deprive a person of livelihood must address the challenges of Article 14 and must not be arbitrary, fantasy, or oppressive.”

The law mentioned can be considered a breach of the idea of ​​equality. Article 3 (4) of the law stipulates the procedure for applying for the establishment of an SEZ. After the establishment of the SEZ, the SEZ will be given specific benefits and will be relieved of its entire obligations. Due to the special treatment of the SEZ, it divides the national market into two.

Therefore, this distinction is unreasonable and arbitrary, has no rational basis, and violates Article 14. It is an established legal principle that “the right to life includes the right to livelihood” and “the right to a decent life, that is, more than just the existence of an animal”. Therefore, the nation must protect and respect the lives of its citizens.

There are millions of people who depend on farmland for their livelihoods. The introduction of India’s special economic zone led to the expropriation of agricultural land and affected the overall livelihood of farmers.

There is no provision in the SEZ Act to give farmers a livelihood deprived of them in the name of development. Therefore, this expropriation of land from farmers violates their fundamental rights in Article 21 of the Constitution.

Here, the power of the state government is arbitrary and not controlled by law. “Arbitrariness and irrationality deny the rule of law.” Therefore, the law gives the government unlimited power, and the procedure for identifying the area for establishing an SEZ is unfair and unfair.

The SEZ-acquired land is not justified on the grounds of reasonableness

In the welfare state, the main task of the nation is to ensure the well-being of the people. Increasing SEZ problems also lead to increased resistance from the rural people.

Government and the developers claim that resistance is unreasonable. The concept of SEZ needs to get thoroughly reviewed. They take advantage of the relationship with the ruling dispensation and make it clear at the national and state levels.

These lands are already used for agriculture and general public purposes. “It is the government’s mistake to purchase land that is currently in use by the public.”

SEZs are not following sustainable development goals

The right to life includes the right to live in a pollution-free and sustainable environment. We must fulfil our development rights to meet the development and environmental needs.

The environment needs to be protected, thus balancing economic development and the concept of sustainable development. When considering an Indian SEZ, three aspects of sustainable development need to get considered—economy, environment and society.

The Environmental Protection Act of 1986 does not apply to special economic zones, and SEZs are exempted from environmental impact assessment following the provisions of the Environmental Protection Law.

The development manager can publish the release without hearing the Emission Control Bureau’s opinion. Units are allowed to provide compliance reports to comply with specified pollution standards.

Units classified in the green industry do not require a certificate, which can cause life-threatening damage to the balance of the ecosystem.

Units in the SEZ are free to apply methods that comply with environmental standards.

Summing up, the environment cannot get sacrificed on the excuse or the blanket of economic development of the country.

Non-application of several labour laws (Industrial Dispute Act, Contract Labour Act, Factories Act, Minimum Wages Act, Trade Union Act

SEZ Act 2005 avoids the welfare labourers, as the act provided about the inapplicability of the act on labour laws.

The applicability of the labour laws under this act is exempted under Section 49(1), which states that:

“Provided, however, that nothing in this section shall apply to any modifications of any Central Act or any rules or regulations established thereunder, or any notification or order issued, or direction given, or scheme made thereunder, so far as such modification, rule, regulation, notification, order, or direction, or scheme relates to matters connected to trade unions, industrial and labour disputes, the welfare of labour including working conditions, provident funds, employers.”

Special Economic Zones Act, 2005 violates the letter and spirit of the Indian Constitution. The Act has been incorporated into the Constitution’s Ninth Schedule, incorporating that this law is exempted from judicial review.

Incorporating the legislation under the Ninth schedule raises the scope of unconstitutional actions.

Salient Features of the SEZ Bill, 2005

The Act received the President’s assent on 23rd June 2005, and acquired force with the Special Economic Zones rules, 2006 on February 10th, 2006.

Salient features of the Bill include;

  • Matters regarding the establishment of Special Economic Zone and for putting in of units therein, including requirements, obligations and entitlements
  • Concerns regarding requirements for putting in offshore banking units and units in the International Financial Service Center in the Special Economic Zone, including the fiscal regime governing the operation of such units
  • The fiscal regime for developers of Special Economic Zones and units founded therein;
  • At the zone level, there is a single window clearance mechanism
  • The establishment of an authority for every Special Economic Zone established by the Central Government to impart greater administrative autonomy
  • Designation of special courts and single enforcement agency to ensure speedy trial and investigation of notified crimes committed in SEZs
  • A designated duty-free enclave that will be considered as a jurisdiction outside of India’s customs territory for authorised operations in the SEZ.
  • No licence requirement for import
  • Permission of manufacturing or service activities given
  • The Unit must generate Positive Net Foreign Exchange over a five-year period beginning with the start of production.
  • Domestic sales are subject to full customs charge and the current import guidelines.
  • SEZ units will get the freedom to subcontract
  • No routine inspection by customs authorities of export/import cargo
  • SEZ Developers /CoDevelopers and Units enjoy Direct Tax and Indirect Tax benefits as prescribed in the SEZs Act, 2005

Issues with the SEZ

With the introduction of SEZs, there were some issues arising which are pointed out here:-

  • Large-scale and unjustified acquisition of land
  • Inadequate resettlement and rehabilitation policies and plans
  • Inadequate employment opportunities for local people through SEZs lead to loss of livelihood
  • Increasing stress on natural resources and the environment and alienation of local communities from these resources
  • SEZs contributing to the real estate boom and creating real estate zones
  • Potential revenue loss from heavy subsidising in SEZs
  • Concerns over approving and implementing SEZs – where is local government consultation and sanction
  • Threat to water security
  • Bypassing local governments and ignoring local communities
  • Increases regional disparities

Conclusion

Lands will be a scarce resource in our country in the coming decades. The land acquiring policies must be reviewed concerning SEZs to evolve a sustainable land-use strategy.

Economic development, growth and industrialisation are good governance outcomes, not policies based on subsidies and political patronage.

It is pointed out that the more successful the SEZs, the more the government would lose revenue due to the tax concessions.

SEZs must be formulated to ensure the production of goods and services, avoid sectoral imbalances, restrain from over-exploitation of natural resources, maintain biodiversity, achieve distributional equity, etc.

If comprehensive care with proper deliberation is provided, SEZs can generate sustainable value.

FAQs

When was the recent amendment brought to the SEZ Act 2005, and What was the amendment?

The recent amendment to the 2005 Act was brought in 2019 with the introduction of the Special Economic Zones (Amendment) Act, 2019.

Section 2 of the act of 2005 was amended to insert trust and other entities under the definition of “Local authority” to bring it under the act's purview.

Which section of the act of 2005 prescribes establishing the SEZs' authority?

The special economic zone authority is constituted under section 31 of the Special economic zones act, 2005.

What are the functions of SEZs’ authority?

  • The development of infrastructure in the units
  • Promoting exports from the zone
  • Reviewing the functioning and performance of the zone
  • Levy charges or fees for the use of properties belonging to the Authority

Will this SEZ Act prevail over any other law that will be inconsistent with the act's provisions?

This act will have an overriding effect over other laws inconsistent with this act's provisions as per section 51 of the SEZ act 2005.

Are there any exceptions for the establishment of the special economic zones within the boundaries of India?

Yes, a special economic zone can be established within India's boundaries with the central government's discretion to the places covered under section 7 of the customs act, 1962.

About Author

Ayush Ranjan Jha is a 4th-year law student of Vivekananda Institute of Professional Studies (VIPS), IP University, Delhi.

He is inquisitive towards Corporate law, International law & Constitutional law.

He is very keen on research work and got published a number of Research papers and articles related to legal topics during his previous academic years.

Currently, he is preparing for Judicial services examinations.

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