Recently, Kakinada Special Economic Zone (KSEZ) was in the news when GMR Infrastructure, India's largest and amongst the world's top 5 private airport developers who own and operate Delhi and Hyderabad International Airports sold its entire stake of 51% in KSEZ to Aurobindo Realty and Infrastructure for INR 2,719 crore. But what exactly a Special Economic Zone is? How is it different from the rest of the economic areas? By whom is it developed and how? Let's answer all these questions in this article.

What is a Special Economic Zone?
Special Economic Zones (SEZs) can be defined as a special jurisdiction within a country made to facilitate foreign trade. As per Section 53(1) of the Special Economic Zones Act, 2005 (SEZ Act), SEZs are deemed as foreign jurisdictions for the purpose of trade operations and taxes. Within SEZs, businesses are provided heavy tax exemptions, advanced infrastructure, minimal regulations and lucrative fiscal packages to boost the country's economy through foreign trade. Many countries including Russia, the Philippines, Jordan, Poland, North Korea, China have SEZs.

The concept of SEZs in India was officially introduced on 1st April 2000 as a part of the Export-Import Policy and was cemented by the commencement of the Special Economic Zones Act, 2005. Before this Act, the SEZ policy was implemented via amendments in various statutes and executive orders, which was causing an alarming hindrance in the path of Foreign Direct Investment (FDI) to India. Presently, SEZs are governed by the SEZ Authority under the Department of Commerce, Ministry of Trade and Commerce.

Why are SEZs developed?
The core objectives of the Special Economic Zones Act, 2005 (primary statute concerning the formation and governance of SEZs) are as follow:

• Driving more economic activities;
• To further the export of commodities;
• To draw investments from foreign and domestic investors;
• To generate employment in the country;

For infrastructural development.
SEZs provide a conducive environment to local enterprises for business growth and expansion in order to make them compete on an international scale. Further, SEZs can be set up even by the private sector and foreign investors, making them drivers of public-private partnership to bolster infrastructure in the country.

SEZs can do wonders for an economy. For example: According to the World Bank, in recent years in China, SEZs have made a total 22% contribution to the GDP, 45% of total national FDI and 60% of exports. These Chinese SEZs have generated approximately 30M+ jobs, catapulted participating farmers' income by 30% and bolstered industrialization, urbanization, modernization and even agriculture in China.

Who all can develop SEZs?
According to Section 3 of the SEZ Act private entities/individuals, State Governments and Central Government can establish SEZs either jointly or separately for manufacturing, providing services or for establishing Free Trade and Warehousing Zone (FTWZs) that are defined in Section 2(n) of the SEZ Act.

What are the incentives and facilities offered in SEZs?
Businesses are provided multiple incentives and facilities under SEZs to attract domestic as well as foreign investments there.

These incentives/facilities are as follow:
Benefits to SEZs' Developers

• Under Section 80-IAB of the Income Tax Act, 1961(ITA), there is a complete exemption from Income Tax on the income generated via the business by the developers of the SEZs (for a span of 10 years out of the first 15 years from the date of notification of that SEZ by the Central Government
• Under Section 115JB of ITA no Minimum Alternate Tax (MAT);
• Imports and domestic procurement of goods for the purpose SEZ businesses are zero-rated under Integrated Good and Services Tax Act, 2017;
• A Single Window Clearance system for all the required permissions from the Central and the State government;
• No custom tax(s) and excise duties for SEZs' development for particular operations to be approved by the Board of Approval (BOA) of Special Economic Zones;
• Under Section 115-O of ITA, SEZ businesses are exempted from the Dividend Distribution Tax.
• Direct coordination with customs officer to ease and expedite the trade processes;

Benefits to businesses situated in SEZ 
Under Section 10AA of the Income Tax Act, 1961 for the first five years there is zero Income Tax on export income for SEZ businesses. Thereafter, merely 50% for the subsequent five years and 50% of the ploughed back export profit for subsequent five years.
Under the aforementioned Section, losses that are related to business and are mentioned under the heading of Profits and Gains from Businesses/Profession and Income from Capital Gains can be carried forward to subsequent years.
Exempted from the Securities Transaction Tax applicable on taxable securities that are entered into by a non-resident via IFSC. 
Under Section 54GA of the ITA Capital gains tax on the transfer of assets is exempted for the shifting of industrial units from an urban area to SEZ on the satisfaction of certain conditions.

Under Section 10(15)(viii) of the ITA, interest income is exempted from tax for non-residents/not ordinarily residents if the deposit is made in an Off-Shore Banking Units(OBUs) situated in SEZs.

Legal Procedure for Setting-up of SEZs in India
Legal Criteria for the Approval of SEZ
The objectives for the establishment of SEZs as aforementioned under the heading of Why SEZs are established? are pretty much the criteria for the approval of a SEZs project. In addition, the SEZ project shall in no manner subvert the sovereignty, integrity and security of India.

Under Section 9(2) of the SEZ Act, BOA has the complete authority to reject, approve or modify the proposal for SEZs' establishment. Further, it also has the power to revoke the approval after the applicant has been heard on the same.

The legal procedure to establish SEZs in India by private entities including individuals, co-operative societies, companies, partnerships, etc is as follow:
Step 1: Submission of proposal
If an organisation has identified the location where it wishes to set up an SEZ, it has to make a proposal either to the State's government or directly to the BOA using From-A prescribed under the Special Economic Zones Rules, 2006 (SEZs Rules).

Step 2: Approval from State and BOA
If the proposal is first made to the State government, then it is forwarded to BOA along with its recommendation within 45 days from the date of proposal. But if the proposal is directly made to the BOA, then the developer needs to get the concurrence of the State Government within six months from BOA's approval date.

Step 3: Obtaining the Letter of Approval
Thereafter, the proposal is forwarded to the Central Government, which after its satisfaction grants the Letter of Approval to the concerned person. This letter has a validity period of three years within which the developer has to implement the proposal and kick off the operations. Though, BOA has the power to grant a two years sanction depending upon the merit of the developer.

Step 4: Submission of land documents 
After obtaining the LOA, the developer is required to submit the documentation of land acquired for the purpose of the establishment of SEZ. SEZs & FTWZs other than those for IT/ITES, Biotech or Health (except hospitals) services, must have a contiguous land area of 50ha or more. But in the case of Meghalaya, Nagaland, Manipur, Assam Tripura, Himachal Pradesh, Arunachal Pradesh, Uttarakhand, Sikkim, Goa, Mizoram or in a UT, the limit is 25ha or more. 

For SEZs in Biotech, Health (except hospitals) and IT/ITES services, there is no minimum land area threshold but the minimum built-up processing-area thresholds are as per the provisions laid down in SEZ (3rd Amendment) Rules, 2019 notified vide 17th December 2019 notification.

After the concerned Development Commissioner has inspected the area and submitted his report on the contiguity and vacancy of land certifying the same, the area is notified as SEZ by the Central Government.

Step 5: Complete Project's Details Submission
Once the green signal is received for the land, the developer has to provide complete details about the project in order to commence the authorized operations, apply for the exemptions, concessions and drawbacks.

Step 6: Demarcation of Land
Afterwards, the SEZ land is divided into processing and non-processing areas. The processing areas are then allotted to individual businesses who wish to conduct business under that SEZ by the developer. The developer is not allowed to sell the non-processing areas but can utilise such areas by allotting them for business or societal causes.

Note: The developer or co-developer needs to have a minimum of 26% of the equity in the entity proposing to create the business, residential or recreational facilities within SEZ. 
Compliances for the establishment of SEZs

The developer has to sign a bond-cum-legal undertaking with respect to the proper utilisation of goods. Further, he also has to sign an undertaking saying that he will be compliant with the Area Planning laws, Pollution Control laws, Industrial & Labour laws and Sewerage Disposal laws.

SEZ Authority is also obligated to undertake the development, operations and management of SEZ including but not limited to infrastructural advancement and promotion of exports and other supervisory work.

Resolution of Dispute in SEZs
As per Section 42 of the SEZ Act, any dispute between developers, entrepreneurs or developer-entrepreneur dispute shall be referred to arbitration.

But such disputes can only be referred for arbitration unless before the date when a court has been designated to resolve them. These courts are designated under Section 23(1) of the SEZ Act and have the power to try civil suits and suits of the notified offences. An appeal under Section 24 of the SEZ Act can be filed against the Order(s) of the designated court(s) before the High Court within 60 days from the date of the verdict.

Conclusion
There are 262 operational SEZs in India. Since 2006 (when SEZs rules were official) 426 SEZs have been formally approved out of which 358 have been notified. A total of 20L jobs have been generated by these SEZs since 2006. In 2015-16, these SEZs made exports worth INR 4,67,337 (USD 71.38B), while in 2016-2017, it increased by 12.05% to 5,23,637
(USD 78.07B).

Boosted by the COVID crisis; the US-China trade war and the highly efficient government startups like Invest India, Indian SEZs are receiving record FDI. But SEZs are not the sole factor for the development of foreign trade. Securities Laws, ease of starting and doing businesses, human resources quality, quality of healthcare and education are some other factors which the government needs to make serious improvements.

Further, it's been observed that a few particular states attract 80% of FDI, a fair distribution of FDI across the country is crucial for the country's equitable development. Similarly, India's manufacturing sector is still underdeveloped while the service sectors like IT are comparatively leaps and bounds ahead, the government needs to channelise its efforts towards holistic development for sustained development of our country. More budget and attention need to be assigned towards vertical growth (innovation and Research & Development) in order to gain a competitive edge over the first-world countries like the USA, UK, Canada, etc. India has the potential to be a world leader once again if a cordial, well-planned robust implementation is made on these points. Written by Anubhav Garg, a law student pursuing his B.B.A. LL.B, 2018-23, from Delhi Metropolitan Education college. In this article, he has attempted to explain, in detail, the concept of Special Economic Zones along with their benefits to the economy, the legal procedure for developing SEZs, incentives and facilities provided and dispute resolution under SEZs.