Model Answer

Introduction

Special Economic Zones (SEZs) are designated areas within a country that offer duty-free benefits and distinct business regulations aimed at promoting investment and employment. Despite their potential to enhance foreign investments and boost exports, SEZs in India face significant challenges that hinder their success.

Issues Plaguing SEZs

1. Differences in State Policies

• Challenge: Variability in state policies and their enforcement leads to industrial concentration in a few regions. Approximately 64% of SEZs are located in just five states: Tamil Nadu, Telangana, Karnataka, Andhra Pradesh, and Maharashtra. (Source: Ministry of Commerce)

2. Unutilized Land

• Challenge: Land acquisition remains a contentious issue, with many states struggling to navigate political complexities. Even after acquisition, much of the land remains unutilized due to low demand and disruptions caused by the COVID-19 pandemic.

3. Multiple Economic Models

• Challenge: The existence of various economic models, such as coastal economic zones and the Delhi-Mumbai Industrial Corridor, complicates the integration of SEZs, creating confusion among investors.

4. Sectoral Bias

• Challenge: SEZs primarily focus on IT and IT-enabled services, with limited visibility for manufacturing sectors. This bias restricts employment opportunities, which is a core objective of SEZs, and limits product diversification.

5. Changes in Tax Policy

• Challenge: SEZs have lost their attractiveness following the winding down of tax holidays between 2017 and 2020. The imposition of Minimum Alternate Tax in 2012 and the sunset clause have further reduced tax incentives.

6. Impact of Free Trade Agreements

• Challenge: The proliferation of Free Trade Agreements (2005-2015) has weakened the competitive advantages of SEZs, as importers outside these zones benefit from zero-rated imports without facing Domestic Tariff Area (DTA) restrictions.

Conclusion

SEZs are essential for industrial development and exports, yet their effectiveness is compromised by various challenges. The Baba Kalyani committee has recommended extending tax concessions and developing distinct laws for manufacturing and service SEZs. To realize the full potential of SEZs, a coordinated effort from the union and state governments, along with industry experts, is crucial.