Special economic zones (SEZs) in India are areas that offer incentives to resident businesses. SEZs typically offer competitive infrastructure, duty free exports, tax incentives, and other measures designed to make it easier to conduct business. Accordingly, SEZs in India are a popular investment destination for many multinationals, particularly exporters.

While India's SEZs are similar to those found in other parts of Asia, business leaders that are considering setting up in a SEZ should seek to understand how SEZs work in India. Each SEZ is unique. Many business leaders conduct market entry studies that compare sites, resources, incentives, and costs before making site visits.

The development of SEZs in India

The Indian government had long used export processing zones (EPZs) to promote exports. In fact, Asia's first EPZ was established in 1965 at Kandla, Gujarat state. While these EPZs had a similar structure to SEZs, the government began to establish SEZs in 2000 under the Foreign Trade Policy.

The government sought to use SEZs to redress the infrastructural and bureaucratic challenges that were seen to have limited the success EPZs. The government's SEZs are structured closely on China's successful model. They are designed to encourage domestic and foreign investment, boost India's exports, and create new employment opportunities.

The Special Economic Zone Act, 2005 further amended the country's SEZ policy. Many EPZs were converted to SEZs, with notable zones in Noida (Uttar Pradesh state), Falta (West Bengal state), Visakhapatnam (Andhra Pradesh state), Chennai (Tamil Nadu state), Cochin (Kerala state), Santa Cruz (Maharashtra state), Indore (Madhya Pradesh), as well as Kandla and Surat (Gujarat),

Since the Act's promulgation, the Indian government has also accepted proposals for additional, far smaller SEZs, which must be proposed by developers to the Indian Board of Approval. The SEZ Rules, 2006 lay down the complete procedure to develop a proposed SEZ or establish a unit in an SEZ.

At least 221 SEZs are in operation, and by January 2018, a massive 423 have received formal approval for operation. While some observers argue that India's SEZs have not become as successful as those in China, India's SEZs remain an important sourcing and manufacturing destination for foreign investors.

Incentives for setting up in an Indian SEZ

Some incentives for setting up a sourcing or manufacturing platform within an Indian SEZ include:

  • Duty free import and domestic procurement of goods for the development, operation, and maintenance of your company;
  • 100 percent income tax exemption on export income for first five years, 50 percent for five years thereafter, and 50 percent of the export profit reinvested in the business for the next five years (these incentives will be withdrawn from April 1, 2020 under the Sunset Clause, but many observers expect it to be extended following recent tax cuts);
  • Exemption from the Goods and Services Tax (GST) and levies imposed by state government (supplies to SEZs are zero rated under the IGST Act, 2017, meaning they are not taxed);
  • Single window clearances for all state and federal government approvals.

After making a shortlist of SEZs for further examination, investors may find that specific SEZs offer other advantages that complement their business plans in India.

Ultimately, however, the benefits of India's SEZ policy have been substantial and have already served to exponentially increase the amount of foreign firms operating in India.

Since 2005, exports from the country have increased substantially, largely due to the rise in sourcing and manufacturing platforms.

Choosing an SEZ location

There are many SEZs for your company to choose from – a list of which can be obtained from the Department of Commerce's website – and so deciding on which is best for you can often be a difficult and stress-inducing process.

For companies directly sourcing from or manufacturing in India, the site should be well placed to acquire the raw materials needed for production, while at the same time being in an area suited for export.

It used to be that this was a difficult balance to strike, but the government's emphasis on infrastructural investment means that procuring materials from other parts of India is becoming a lot easier.

Special Economic Zones and Warehousing Clusters in Delhi NCR

The Delhi National Capital Region (NCR) hosts 14 SEZs, which are primarily located in satellite cities like Gurugram (formerly Gurgaon, Haryana state) and Noida. Read more here.

Special Economic Zones and Warehousing Clusters in Mumbai

The Mumbai area hosts seven SEZs across Mumbai and nearby cities like Navi Mumbai, and Thane. Read more here.

Special Economic Zones and Warehousing Clusters in Bengaluru

The Bengaluru (formerly Bangalore) area hosts 18 SEZ, which are mostly located on the city's outskirts. Read more here.

Developing an SEZ in India

Developers can apply to the Indian Board of Approval to establish an SEZ where one currently doesn't exist.

Companies, co-operative societies, individuals, and partnership firms are all able to file an application, submitting the Form-A that is available on the Department of Commerce's website.

The required information for the form ranges from basic details, such as the name, address, and personal information of the applicant, to more specific details of the proposal, such as the type of land it will be set up on and its means of financing.

The amount of land that the proposal requires will determine what type of SEZ it will be. The different types are:

  • Multi sector SEZ (requiring a minimum of 1000 hectares of land);
  • Sector specific SEZ (requiring a minimum of 100 hectares);
  • Free Trade and Warehousing Zone (FTWZ) (requiring a minimum of 40 hectares); and,
  • IT/ITeS/handicrafts/bio-technology/non-conventional energy/gems and jewelry SEZ (requiring a minimum of 10 hectares).

Any proposal will be first considered by the respective state government where the SEZ is to be located, before it receives formal backing from the Board of Approval.

The article was originally published on October 23, 2014 and was updated on October 31, 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.