Foreign Trade 1

FOREIG
N
TRADE
FOREIGN TRADE
POLICY OF INDIA 2009-
14

Submitted to: Mr.

UTTAM

Submitted by:
GURJEIT SINGH

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Foreign Trade
It is the exchange of goods and services between nations. Goods can be defined as finished products, as intermediate
goods used in producing other goods, or as agricultural products and foodstuffs. International trade enables a nation
to specialize in those goods it can produce most cheaply and efficiently. Trade also enables a country to consume
more than it would be able to produce if it depended only on its own resources. Finally, trade enlarges the potential
market for the goods of a particular economy. Trade has always been the major force behind the economic relations
among nations.

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Import control introduced in 1940 as a wartime measure under the Defence of India Rules with the primary
objective of conserving the foreign exchange resources and restricting physical imports to reduce the pressure on the
limited available shipping space. After the end of the war, the Defence of India Rules lapsed and hence in
September 1946, the Emergency Provisions Ordinance, 1946 promulgated to continue the import trade control. This
was ultimately replaced by the Imports and Exports Act, 1947, which came into force with in the effect from 25th
March 1947. The Imports and Exports Act, 1947 was replaced by the Foreign Trade Development and Regulation
Act, came into force on 19th June 1992.

Objectives of the Foreign Trade Policy of India –

Trade propels economic growth and national development. The primary purpose is not the mere earning of foreign
exchange, but the stimulation of greater economic activity. The Foreign Trade Policy of India is based on two major
objectives, they are -

 To double the percentage share of global merchandise trade within the next five years.
 To act as an effective instrument of economic growth by giving a thrust to employment generation.

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Government Restrictions
Because foreign trade is such an integral part of a nation’s economy, governmental restrictions are sometimes
necessary to protect what are regarded as national interests. Government action may occur in response to the trade
policies of other countries, or it may be resorted to in order to protect specific industries. Since the beginnings of
international trade, nations have striven to achieve and maintain a favorable balance of trade—that is, to export
more than they import. In a money economy, goods are not merely bartered for other goods. Instead, products are
bought and sold in the international market with national currencies. In an effort to improve its balance of
international payments (that is, to increase reserves of its own currency and reduce the amount held by foreigners), a
country may attempt to limit imports. Such a policy aims to control the amount of currency that leaves the country.

 Import Quotas – One method of limiting imports is simply to close the ports of entry into a country. More
commonly, maximum allowable import quantities may be set for specific products. Such quantity
restrictions are known as quotas. These may also be used to limit the amount of foreign or domestic currency
that is permitted to cross national borders. Quotas are imposed as the quickest means to stop or even reverse
a negative trend in a country’s balance of payments. They are also used as the most effective means of
protecting domestic industry from foreign competition.
 Tariffs – Another common way of restricting imports is by imposing tariffs, or taxes on imported goods. A
tariff, paid by the buyer of the imported product, makes the price higher for that item in the country that
imported it. The higher price reduces consumer demand and thus effectively restricts the import. The taxes
collected on the imported goods also increase revenues for the nation’s government. Furthermore, tariffs
serve as a subsidy to domestic producers of the items taxed because the higher price that results from a tariff
encourages the competing domestic industry to expand production.
 Nontariff Barriers to Trade – In recent years the use of nontariff barriers to trade has increased. Although
these barriers are not necessarily administered by a government with the intention of regulating trade, they
nevertheless have that result. Such nontariff barriers include government health and safety regulations,
business codes of conduct, and domestic tax policies. Direct government support of various domestic
industries is also viewed as a nontariff barrier to trade, because such support puts the aided industries at an
unfair advantage among trading nations.

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Strategy of Foreign Trade Policy of India –

○ Removing government controls and creating an atmosphere of trust and transparency to promote
entrepreneurship, industrialization, and trades.
○ Simplification of commercial and legal procedures and bringing down transaction costs.
○ Simplification of levies and duties on inputs used in export products.
○ Facilitating development of India as a global hub for manufacturing, trading, and services.
○ Generating additional employment opportunities, particularly in semi-urban and rural areas, and developing
a series of ‘Initiatives’ for each of these sectors.
○ Facilitating technological and infrastructural up gradation of all the sectors of the Indian economy, especially
through imports and thereby increasing value addition and productivity, while attaining global standards of
quality.
○ Neutralizing inverted duty structures and ensuring that India's domestic sectors are not disadvantaged in the
○ Free Trade Agreements / Regional Trade Agreements / Preferential Trade Agreements that India enters into
in order to enhance exports.
○ Up gradation of infrastructural network, both physical and virtual, related to the entire Foreign Trade chain,
to global standards.
○ Revitalizing the Board of Trade by redefining its role, giving it due recognition and inducting foreign trade
experts while drafting Trade Policy.
○ Involving Indian Embassies as an important member of export strategy and linking all commercial houses at
international locations through an electronic platform for real time trade intelligence, inquiry and
information dissemination.

Foreign Trade Policy of India is a stepping-stone for the development of India’s foreign trade. It contains the basic
principles and points the direction in which it propose to go. A trade policy cannot be fully comprehensive in all its
details it would naturally require modification from time to time with changing dynamics of international trade.

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India’s Foreign Trade Policy 2009-14

The Union Commerce Ministry, Government of India announces the integrated Foreign Trade Policy FTP in every
five year also called EXIM policy. This policy updated every year with some modifications and new schemes. New
schemes come into effect on the first day of financial year i.e. April 1, every year. The Foreign trade Policy, which
was announced on August 28, 2009, is an integrated policy for the period 2009-14.

Aim in General
The policy aims at developing export potential, improving export performance, boosting foreign trade, and earning
valuable foreign exchange. FTP assumes great significance this year as India’s exports have been battered by the
global recession.

A fall in exports has led to the closure of several small- and medium-scale export-oriented units, resulting in large-
scale unemployment.

Objectives of Foreign Trade Policy 2009-14

1) To arrest and reverse declining trend of exports is the main aim of the policy. This aim will be reviewed
after two years.
2) To Double India’s exports of goods and services by 2014.
3) To double India’s share in global merchandise trade by 2020 as a long-term aim of this policy. India’s share
in Global merchandise exports was 1.45% in 2008.
4) Simplification of the application procedure for availing various benefits
5) To set in motion the strategies and policy measures which catalyse the growth of exports
6) To encourage exports through a mix of measures including fiscal incentives, institutional changes,
procedural rationalization, and efforts for enhance market access across the world and diversification of
export markets.

Targets:
Export Target: $ 200 Billion for 2010-11

Export Growth Target: 15 % for next two year and 25 % thereafter.

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Highlights of New Foreign Trade Policy 2009 - 2014

• DEPB Scheme up to December 2010.

• To encourage value addition in our manufactured exports and towards this end, have stipulated a minimum
15%.

• 100% export oriented units for one additional year till 31st March 2011.

• The Government seeks to promote Brand India through six or more ‘Made in India’ shows to be organized
across the world every year.

• Foreign Trade Policy is to help exporters for technological up gradation export sector infrastructure, ‘Towns
of Export Excellence’ and units located therein would be granted additional focused support and incentives.

• To encourage production and export of ‘green products’ through measures such as phased manufacturing
programme for green vehicles, zero duty EPCG scheme and incentives for exports.

• e-Trade project would be implemented in a time bound manner to bring all stake holders on a common
platform. Additional ports/locations would be enabled on the Electronic Data Interchange over the next few
years.

• Incentive available under Focus Market Scheme (FMS) has been raised from 2.5% to 3%.

• Incentive available under Focus Product Scheme(FPS) has been raised from 1.25% to 2%.

• 26 new markets have been added under Focus Market Scheme. These include 16 new markets in Latin
America and 10 in Asia-Oceania.

• 153 ITC(HS) Codes at 4 digit level Product classified for Market Linked Focus Product Scheme (MLFPS)

• Focus Product Scheme benefit extended for export of ‘green products’; and for exports of some products
originating from the North East.

• To accelerate exports and encourage technological up gradation, additional Duty Credit Scrip’s shall be given
to Status Holders @ 1% of the FOB value of past exports.

• Income Tax exemption to 100% EOUs and to STPI units under Section 10B and 10A of Income Tax Act, has
been extended for the financial year 2010-11 in the Budget 2009-10.

• In Tea Sector Minimum value addition under advance authorisation scheme for export of tea has been reduced
from the existing 100% to 50%.

• DTA sale limit of instant tea by EOU units has been increased from the existing 30% to 50%.

• EOUs will now be allowed CENVAT Credit facility for the component of SAD and Education Cess on DTA
sale.
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• Time limit of 60 days for re-import of exported gems and jewellery items, for participation in exhibitions has
been extended to 90 days in case of USA.

• Duty Free Import of samples by exporters, number of samples/pieces has been increased from the existing 15
to 50.

• Exemption for up to two stages from payment of excise duty in lieu of refund, in case of supply to an advance
authorisation holder (against invalidation letter) by the domestic intermediate manufacturer.

• Reduce transaction costs, dispatch of imported goods directly from the Port to the site has been allowed under
Advance Authorisation scheme for deemed supplies.

• Free Sale Certificate has been simplified and the validity of the Certificate has been increased from 1 year to 2
years.

Higher Support for Market and Product Diversification—

• Incentive schemes under Chapter 3 have been expanded by way of addition of new products and markets.

• 26 new markets have been added under Focus Market Scheme. These include 16 new markets in Latin
America and 10 in Asia-Oceania.

• The incentive available under Focus Market Scheme(FMS) has been raised from 2.5% to 3%.

• The incentive available under Focus Product Scheme(FPS) has been raised from 1.25% to 2%.

• A large number of products from various sectors have been included for benefits under FPS. These include,
Engineering products (agricultural machinery, parts of trailers, sewing machines, hand tools, garden tools,
musical instruments, clocks and watches, railway locomotives etc.), Plastic (value added products), Jute and
Sisal products, Technical Textiles, Green Technology products (wind mills, wind turbines, electric operated
vehicles etc.), Project goods, vegetable textiles and certain Electronic items.

• Market Linked Focus Product Scheme (MLFPS) has been greatly expanded by inclusion of products classified
under as many as 153 ITC (HS) Codes at 4 digit level. Some major products include; Pharmaceuticals,
Synthetic textile fabrics, value added rubber products, value added plastic goods, textile made ups, knitted and
crocheted fabrics, glass products, certain iron and steel products and certain articles of aluminium among
others. Benefits to these products will be provided, if exports are made to13-identified markets (Algeria,
Egypt, Kenya, Nigeria, South Africa, Tanzania, Brazil, Mexico, Ukraine, Vietnam, Cambodia, Australia, and
New Zealand).

• MLFPS benefits also extended for export to additional new markets for certain products. These products
include auto components, motor cars, bicycle and its parts, and apparels among others.

• A common simplified application form has been introduced for taking benefits under FPS, FMS, MLFPS and
VKGUY.

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• Higher allocation for Market Development Assistance (MDA) and Market Access Initiative (MAI) schemes is
being provided.

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Technological Up gradation—

• To aid technological up gradation of our export sector, EPCG Scheme at Zero Duty has been introduced. This
Scheme will be available for engineering & electronic products, basic chemicals & pharmaceuticals, apparels
& textiles, plastics, handicrafts, chemicals & allied products and leather & leather products (subject to
exclusions of current beneficiaries under Technological Up gradation Fund Schemes (TUFS), administered by
Ministry of Textiles and beneficiaries of Status Holder Incentive Scheme in that particular year). The scheme
shall be in operation till 31.3.2011.

• Jaipur, Srinagar and Anantnag have been recognised as ‘Towns of Export Excellence’ for handicrafts;
Kanpur, Dewas and Ambur have been recognised as ‘Towns of Export Excellence’ for leather products; and
Malihabad for horticultural products.

EPCG Scheme Relaxations

• To increase the life of existing plant and machinery, export obligation on import of spares, moulds etc. under
EPCG Scheme has been reduced to 50% of the normal specific export obligation.

• Taking into account the decline in exports, the facility of Re-fixation of Annual Average Export Obligation
for a particular financial year in which there is decline in exports from the country, has been extended for the
5 year Policy period2009-14.

Support for Green products and products from North East

• Focus Product Scheme benefit extended for export of ‘green products’; and for exports of some products
originating from the North East.

Status Holders

• To accelerate exports and encourage technological up gradation, additional Duty Credit Scrips shall be given
to Status Holders @ 1% of the FOB value of past exports. The duty credit scrips can be used for procurement
of capital goods with Actual User condition. This facility shall be available for sectors of leather (excluding
finished leather), textiles and jute, handicrafts, engineering(excluding Iron & steel & non-ferrous metals in
primary and intermediate form, automobiles & two wheelers, nuclear reactors & parts, and ships, boats and
floating structures), plastics and basic chemicals (excluding pharmaceutical products) [subject to exclusions of
current beneficiaries under Technological Up gradation Fund Schemes (TUFS)]. This facility shall be
available upto31.3.2011.

• Transferability for the Duty Credit scrips being issued to Status Holders under paragraph 3.8.6 of FTP under
VKGUY Scheme has been permitted. This is subject to the condition that transfer would be only to Status
Holders and Scrips would be utilized for the procurement of Cold Chain equipment(s) only.

Stability/ continuity of the Foreign Trade Policy

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• To impart stability to the Policy regime, Duty Entitlement Passbook (DEPB) Scheme is extended beyond 31-
12-2009 till 31.12.2010.

• Interest subvention of 2% for pre-shipment credit for 7 specified sectors has been extended till 31.3.2010 in
the Budget 2009-10.

• Income Tax exemption to 100% EOUs and to STPI units under Section 10B and 10A of Income Tax Act, has
been extended for the financial year 2010-11 in the Budget2009-10.

• The adjustment assistance scheme initiated in December, 2008 to provide enhanced ECGC cover at 95%, to
the adversely affected sectors, is continued till March, 2010.

Marine sector

• Fisheries have been included in the sectors which are exempted from maintenance of average EO under EPCG
Scheme, subject to the condition that Fishing Trawlers, boats, ships and other similar items shall not be
allowed to be imported under this provision. This would provide a fillip to the marine sector which has been
affected by the present downturn in exports.

• Additional flexibility under Target Plus Scheme (TPS) / Duty Free Certificate of Entitlement (DFCE) Scheme
for Status Holders has been given to Marine sector.

Gems & Jewellery Sector

• To neutralize duty incidence on gold Jewellery exports, it has now been decided to allow Duty Drawback on
such exports.

• In an endeavour to make India a diamond international trading hub, it is planned to establish

“Diamond Bourse(s)”.

• A new facility to allow import on consignment basis of cut & polished diamonds for the purpose of grading/
certification purposes has been introduced.

• To promote export of Gems & Jewellery products, the value limits of personal carriage have been increased
from US$ 2 million to US$ 5 million in case of participation in overseas exhibitions. The limit in case of
personal carriage, as samples, for export promotion tours, has also been increased from US$ 0.1 million to
US$ 1 million.

Agriculture Sector

• To reduce transaction and handling costs, a single window system to facilitate export of perishable
agricultural produce has been introduced. The system will involve creation of multi-functional nodal agencies
to be accredited by APEDA.

Leather Sector

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• Leather sector shall be allowed re-export of unsold imported raw hides and skins and semi finished leather
from public bonded ware houses, subject to payment of50% of the applicable export duty.

• Enhancement of FPS rate to 2%, would also significantly benefit the leather sector.

Tea

• Minimum value addition under advance authorisation scheme for export of tea has been reduced from the
existing 100% to 50%.

• DTA sale limit of instant tea by EOU units has been increased from the existing 30% to 50%.

• Export of tea has been covered under VKGUY Scheme benefits.

Pharmaceutical Sector

• Export Obligation Period for advance authorizations issued with 6-APA as input has been increased from the
existing 6 months to 36 months, as is available for other products.

• Pharma sector extensively covered under MLFPS for countries in Africa and Latin America; some countries
in Oceania and Far East.

Handloom Sector

• To simplify claims under FPS, requirement of ‘Handloom Mark’ for availing benefits under FPS has been
removed.

EOUs

• EOUs have been allowed to sell products manufactured by them in DTA upto a limit of 90% instead of
existing75%, without changing the criteria of ‘similar goods’, within the overall entitlement of 50% for DTA
sale.

• To provide clarity to the customs field formations, DOR shall issue a clarification to enable procurement of
spares beyond 5% by granite sector EOUs.

• EOUs will now be allowed to procure finished goods for consolidation along with their manufactured goods,
subject to certain safeguards.

• During this period of downturn, Board of Approvals(BOA) to consider, extension of block period by one year
for calculation of Net Foreign Exchange earning of EOUs.

• EOUs will now be allowed CENVAT Credit facility for the component of SAD and Education Cess on DTA
sale.

Thrust to Value Added Manufacturing

• To encourage Value Added Manufactured export, a minimum 15% value addition on imported inputs under
Advance Authorization Scheme has now been prescribed.

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• Coverage of Project Exports and a large number of manufactured goods under FPS and MLFPS.

DEPB

• DEPB rate shall also include factoring of custom duty component on fuel where fuel is allowed as a
consumable in Standard Input-Output Norms.

Flexibility provided to exporters

• Payment of customs duty for Export Obligation (EO) shortfall under Advance Authorisation / DFIA / EPCG
Authorisation has been allowed by way of debit of Duty Credit scrip’s. Earlier the payment was allowed in
cash only.

• Import of restricted items, as replenishment, shall now be allowed against transferred DFIAs, in line with the
erstwhile DFRC scheme.

• Time limit of 60 days for re-import of exported gems and jewellery items, for participation in exhibitions has
been extended to 90 days in case of USA.

• Transit loss claims received from private approved insurance companies in India will now be allowed for the
purpose of EO fulfillment under Export Promotion schemes. At present, the facility has been limited to public
sector general insurance companies only.

Waiver of Incentives Recovery, On RBI Specific Write off

• In cases, where RBI specifically writes off the export proceeds realization, the incentives under the FTP shall
now not be recovered from the exporters subject to certain conditions.

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Simplification of Procedures

• To facilitate duty free import of samples by exporters, number of samples/pieces has been increased from the
existing 15 to 50. Customs clearance of such samples shall be based on declarations given by the importers
with regard to the limit of value and quantity of samples.

• To allow exemption for up to two stages from payment of excise duty in lieu of refund, in case of supply to an
advance authorisation holder (against invalidation letter) by the domestic intermediate manufacturer. It would
allow exemption for supplies made to a manufacturer, if such manufacturer in turn supplies the products to an
ultimate exporter. At present, exemption is allowed up to one stage only.

• Greater flexibility has been permitted to allow conversion of Shipping Bills from one Export Promotion
scheme to other scheme. Customs shall now permit this conversion within three months, instead of the present
limited period of only one month.

• To reduce transaction costs, dispatch of imported goods directly from the Port to the site has been allowed
under Advance Authorisation scheme for deemed supplies. At present, the duty free imported goods could be
taken only to the manufacturing unit of the authorisation holder or its supporting manufacturer.

• Disposal of manufacturing wastes / scrap will now be allowed after payment of applicable excise duty, even
before fulfillment of export obligation under Advance Authorisation and EPCG Scheme.

• Regional Authorities have now been authorised to issue licences for import of sports weapons by ‘renowned
shooters’, on the basis of NOC from the Ministry of Sports & Youth Affairs. Now there will be no need to
approach DGFT (Hqrs.) in such cases.

• The procedure for issue of Free Sale Certificate has been simplified and the validity of the Certificate has been
increased from 1 year to 2 years. This will solve the problems faced by the medical devices industry.

• Automobile industry, having their own R&D establishment, would be allowed free import of reference fuels
(petrol and diesel), up to a maximum of 5 KL per annum, which are not manufactured in India.

• Acceding to the demand of trade & industry, the application and redemption forms under EPCG scheme have
been simplified.

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Reduction of Transaction Costs

• No fee shall now be charged for grant of incentives under the Schemes in Chapter 3 of FTP. Further, for all
other Authorisations / licence applications, maximum applicable fee is being reduced to Rs. 100,000 from the
existing Rs. 1,50,000 (for manual applications) and Rs. 50,000 from the existing Rs.75,000 (for EDI
applications).

• To further EDI initiatives, Export Promotion Councils/ Commodity Boards have been advised to issue RCMC
through a web based online system. It is expected that issuance of RCMC would become EDI enabled before
the end of 2009.

• Electronic Message Exchange between Customs and DGFT in respect of incentive schemes under Chapter 3
will become operational by 31.12.2009. This will obviate the need for verification of scrips by Customs
facilitating faster clearances.

• For EDI ports, with effect from December ’09, double verification of shipping bills by customs for any of the
DGFT schemes shall be dispensed with.

• In cases, where the earlier authorization has been cancelled and a new authorization has been issued in lieu of
the earlier authorization, application fee paid already for the cancelled authorisation will now be adjusted
against the application fee for the new authorisation subject to payment of minimum fee of Rs. 200.

• An Inter Ministerial Committee will be formed to redress/resolve problems/issues of exporters.

• An updated compilation of Standard Input Output Norms (SION) and ITC (HS) Classification of Export and
Import Items has been published.

Directorate of Trade Remedy Measures

• To enable support to Indian industry and exporters, especially the MSMEs, in availing their rights through
trade remedy instruments, a Directorate of Trade Remedy Measures shall be set up.

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EPZs
An Export Processing Zones bears cluster of specially designed commercial zones for aggressive promotion of
exports of India. The basic concept of Export Processing Zones was conceived in the 1970s and it was implemented
to encourage the growth of export of India. All the Indian Export Processing Zones are facilitated with fiscal
incentives, subsidized taxes, and other exclusive benefits for the growth of Indian export.

Objectives
• encourage and generate the economic development across all industry sectors

• To encourage Foreign Direct Investments (FDI)

• To channel the sources of foreign exchange within the system in a phased manner

• To foster the establishment and development of industrial enterprises within the said zones

• To encourage and generate wider economic activities by encouraging foreign investments for the
development of the zones

• To channel the foreign exchange earnings for the further development of these zones and explore new areas
for the development of Indian exports

• To encourage establishment and development of Indian industries and business enterprises and facilitate
with proper infrastructure

• To generate employment opportunity

• To upgrade labor and management skills

• To acquire advanced technology for increased productivity

• To ensure world class quality of products

Three-tier management system in EPZs

• Tier one is headed by the Ministry of Commerce headed by the Commerce Secretary, which drafts and
implements policies and reviews the performance of each such zones

• Tier two is headed by the Board of Approval (BOA), which is responsible for examination of proposals for
opening up of new enterprises in the zone and which is headed by a person of the level of Additional
Secretary

• The Development Commissioner, who is the chief executive of the Export Processing Zone, heads the three
tiers. The Development Commissioner vested with the power for the day-to-day function of the zone.

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Further, he is the head of functions relating to administration, approval of investment, and he also enforces
various regulatory provisions

EOUs
The Export Oriented Units (EOUs) scheme, introduced in early 1981, is complementary to the SEZ scheme. It
adopts the same production regime but offers a wide option in locations with reference to factors like source of raw
materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and
the need for a larger area of land for the project. As on 31st December 2005, 1924 units are in operation under the
EOU scheme.

Objective
The main objectives of the EOU scheme is to increase exports, earn foreign exchange to the country, transfer of
latest technologies stimulate direct foreign investment and to generate additional employment.

Exports from EOUs during 2004-2005 were of the order of Rs.36806.17 crores as compared to the export of
Rs.28827.58 crores achieved during 2003-2004, registering a growth of 27.68%.

Activities
Initially, EOUs were mainly concentrated in Textiles and Yarn, Food Processing, Electronics, Chemicals, Plastics,
Granites and Minerals/Ores. But now a day, EOU has extended it area of work which includes functions like
manufacturing, servicing, development of software, trading, repair, remaking, reconditioning, re-engineering
including making of gold/silver/platinum jewellery and articles thereof, agriculture including agro-processing,
aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisiculture, viticulture, poultry, sericulture
and granites.

Choosing the Location for EOU

EOUs can be set up anywhere in the country and may be engaged in the manufacture and production of software,
floriculture, horticulture, agriculture, aquaculture, animal husbandry, pisciculture, poultry and sericulture or other
similar activities.

However, it should be noted that in case of large cities where the population is more than one million, such as
Bangalore and Cochin, the proposed location should be at least 25 km away from the Standard Urban Area limits of
that city unless, it is to be located in an area designated as an "industrial area" before the 25th July, 1991. Non-
polluting EOUs such as electronics, computer software and printing are exempt from such restriction while choosing
the area.

Apart from local zonal office and state government, setting up of an EOU is also strictly guided by the environmental
rules and regulations. Therefore, an even if the EOU unit has fulfilled all locational policy but not suitable from

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environmental point of view then the Ministry of Environment, Government of India has right to cancel the proposal.
In such situation industrialist would be required to abide by that decision.

Bonding Period of EOUs

The EOUs are licensed to manufacture goods within the bonded period for the purpose of export. As per the Exim
Policy, the period of bonding is initially for five years, which is extendable to another five years by the
Development Commissioner. However on a request of EOU Unit, time period can also be extended for another five
year by the Commissioner / Chief Commissioner of Customs.

Some incentives given to EOUs

• No import licences are required by the EOU units and import of all industrial inputs exempt from customs duty.

• Supplies from the DTA to EOUs are regarded as deemed exports and are hence exempt from payment of excise
duty which means that high quality inputs are available at lower costs.

• On fulfillment of certain conditions, EOUs are exempted from payment of corporate income tax for a block of 5
years in the first 8 years of operation. Export earnings continue to be exempt from tax even after the tax holiday
is over.

• Industrial plots and standard design factories are available to EOUs at concessional rates.

• Single window clearance for EOU. For example, the State Government of Kerala as well of Karnataka has
constituted single window clearance mechanisms such as District Single Window Clearance Board (in Kerala)
and Karnataka Udyog Mitra (in Karnataka) for the purpose of speedy issue of various licences, clearances.

• Private bonded warehouses in the 7 EPZs can be set up for

○ Import and sale of goods including in the DTA, subject to payment of applicable duties at the time of sale.

○ Trading including re-export after repacking/labeling.

○ Re-export after repair, reconditioning or re-engineering

• EOUs and EPZs are permitted to sub-contract part of their production processes for job work to units in the
DTA on a case by case basis.

• Supplies to the DTA under international competitive bidding against payment in foreign exchange to other
EOUs and EPZ units and against import licenses are considered towards fulfillment at the export obligation.

• The FOB value of exports of EOUs and EPZ units can be clubbed with that of parent companies located in the
DTA for the purpose of obtaining a Trading or Export House status.

• EOUs and EPZ units may export goods through Trading and Export Houses or other EOU and EPZ Units.

SEZs
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A Special Economic Zone in short SEZ is a geographically bound zone where the economic laws in matters related
to export and import are more broadminded and liberal as compared to rest parts of the country. SEZs are projected
as duty free area for the purpose of trade, operations, duty, and tariffs. SEZ units are self-contained and integrated
having their own infrastructure and support services. Within SEZs, a unit may be set-up for the manufacture of
goods and other activities including processing, assembling, trading, repairing, reconditioning, making of
gold/silver, platinum jewellery etc. As per law, SEZ units are deemed to be outside the customs territory of India.
Goods and services coming into SEZs from the domestic tariff area or DTA are treated as exports from India and
goods and services rendered from the SEZ to the DTA are treated as imports into India.

The world first known instance of SEZ have been found in an industrial park set up in Puerto Rico in 1947. In the
1960s, Ireland and Taiwan followed suit, but in the 1980s China made the SEZs gain global currency with its largest
SEZ being the metropolis of Shenzhen. From 1965 onwards, India experimented with the concept of such units in
the form of Export Processing Zones (EPZ). But a revolution came in 2000, when Murlisone Maran, then
Commerce Minister, made a tour to the southern provinces of China. After returning from the visit, he incorporated
the SEZs into the Exim Policy of India. Five year later, SEZ Act (2005) was also introduced and in 2006 SEZ Rules
were formulated.

Role of State Government in Establishment of SEZ Units

State Governments play a very active role to play in the establishment of SEZ unit. Any proposal for setting up of
SEZ unit in the Private / Joint / State Sector is routed through the concerned State government who in turn forwards
the same to the Department of Commerce with its recommendations for consideration. Before recommending any
proposals to the Ministry of Commerce & Industry (Department of Commerce), the States Government properly
checks all the necessary inputs such as water, electricity, etc required for the establishment of SEZ units. The State
Government has to forward the proposal with its recommendation within 45 days from the date of receipt of such
proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of
Approval. Representative of the State Government, who is a member of the Inter-Ministerial Committee on private
SEZ, is also consulted while considering the proposal.

The main factor for the under performance of these Special Economic Zones were poor export policy of India,
which was loaded with huge taxes and duties. The Government of India eased the export policy of India to facilitate
easy growth of SEZ and Export Promotion of Indian goods across international destinations. This created a
congenial environment for the development of a special kind of units within the designated Special Economic
Zones. These specialized export oriented units called Export Oriented Units or EOU and they were created to
increase the overall export potential of these SEZ. The SEZ Act, 2005, supported by SEZ Rules, came into effect on
10th February, 2006. The main objectives of the SEZ Act are:

• Generation of additional economic activity

• Promotion of exports of goods and services

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• Promotion of investment from domestic and foreign sources

• Creation of employment

• Development of infrastructure facilities

• Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for
setting up units and conducting business

• Single window clearance for setting up of a SEZ and an unit in SEZ

• Single window clearance on matters relating to Central as well as State Governments

• Easy and simplified compliance procedures and documentations with stress on self certification

It expected that this will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and
productive capacity, leading to generation of additional economic activity and creation of employment
opportunities.

The main features of Indian Special Economic Zones are as follows -

• Modern harbor - Artificial harbor and handling bulk containers made operational through out the year

• Airport - Houses both domestic and international air terminals to facilitate transit, to and from major
domestic and international destinations

• Financial Institutions - Has host of Public and Private Bank chains to offer financial assistance for business
houses

• A vibrant industrial city with abundant supply of skilled manpower, covering the entire spectrum of
industrial and business expertise

• Other Advantages - Well connected with network of public transport, local railways and cabs

• Pollution free environment with proper drainage and sewage system

• In-house Customs clearance facilities

• Uninterrupted power supply

• Abundant supply of technically skilled manpower

• Abundant supply of semi-skilled labor across all industry vertical

• Easy access to airport and local Railway Station

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The main pros and cons of SEZ policy of India described as follows -
• Generation of additional economic activity

• Promotion of exports of goods and services

• Promotion of investment from domestic and foreign sources

• Creation of employment

• Development of infrastructure facilities

• Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for
setting up units and conducting business

• Single window clearance for setting up of a SEZ and an unit in SEZ

• Single Window clearance on matters relating to Central as well as State Governments

• Easy and simplified compliance procedures and documentations with stress on self certification

Currently, India has more than 1022 units in operations in over 9 functional SEZs, 8 Export Processing Zones
(EPZs) have been converted into SEZs. These are fully functional. All these SEZs are in various parts of the country
in the private/joint sectors or by the State Government. However, this process of planning and development is under
question, as the states in which the SEZs been approved are facing intense protests, from the farming community,
accusing the government of forcibly snatching fertile land from them, at heavily discounted prices as against the
prevailing prices in the commercial real estate industry. In addition, some reputed companies like Bajaj and others
have commented against this policy and have suggested using barren and wasteland for setting up of SEZs.

A SEZ unit which has been set up for carrying on manufacturing, trading, or service activity has both advantages as
well as disadvantages. SEZ advantages are quite far more as compared to its disadvantages, which are almost
negligible.

Advantages
• 15 year corporate tax holiday on export profit – 100% for initial 5 years, 50% for the next 5 years and up to
50% for the balance 5 years equivalent to profits ploughed back for investment.

• Allowed to carry forward losses.

• No licence required for import made under SEZ units.

• Duty free import or domestic procurement of goods for setting up of the SEZ units.

• Goods imported/procured locally are duty free and could be utilized over the approval period of 5 years.

• Exemption from customs duty on import of capital goods, raw materials, consumables, spares, etc.

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• Exemption from Central Excise duty on the procurement of capital goods, raw materials, and consumable
spares, etc. from the domestic market.

• Exemption from payment of Central Sales Tax on the sale or purchase of goods, provided that, the goods are
meant for undertaking authorized operations.

• Exemption from payment of Service Tax.

• The sale of goods or merchandise that is manufactured outside the SEZ (i.e, in DTA) and which is purchased
by the Unit (situated in the SEZ) is eligible for deduction and such sale would be deemed to be exports.

• The SEZ unit is permitted to realize and repatriate to India the full export value of goods or software within
a period of twelve months from the date of export.

• “Write-off” of unrealized export bills is permitted up to an annual limit of 5% of their average annual
realization.

• No routine examination by Customs officials of export and import cargo.

• Setting up Off-shore Banking Units (OBU) allowed in SEZs.

• OBU's allowed 100% income tax exemption on profit earned for three years and 50 % for next two years.

• Exemption from requirement of domicile in India for 12 months prior to appointment as Director.

• Since SEZ units are considered as ‘public utility services’, no strikes would be allowed in such companies
without giving the employer 6 weeks prior notice in addition to the other conditions mentioned in the
Industrial Disputes Act, 1947.

• The Government has exempted SEZ Units from the payment of stamp duty and registration fees on the
lease/license of plots.

• External Commercial Borrowings up to $ 500 million a year allowed without any maturity restrictions.

• Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration.

Disadvantages
• Revenue losses because of the various tax exemptions and incentives.

• Many traders are interested in SEZ, so that they can acquire at cheap rates and create a land bank for
themselves.

• The number of units applying for setting up EOU's is not commensurate to the number of applications for
setting up SEZ's leading to a belief that this project may not match up to expectations.

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SEZ Controversy
Land, especially agricultural land is a very sensitive issue in India. There are millions of people whose livelihood
depends on agricultural land. But the introduction of SEZ in India has resulted in the dispossession of agricultural
land and has affected the livelihood of farmer at large. In against of this, farmers first protested to safeguard their
interests through litigation and court cases challenging the establishment of SEZs. But later on, the resistance
against SEZ in India became massive when political parties also joined the farmers.

 Jamnagar Incidence — In November 2006, farmers from the Jamnagar District in Gujarat moved the High
Court of Gujarat and later to the Supreme Court in order to challenge the setting-up of a 10,000-acre
(approx. 4,000-ha) SEZ by Reliance Infrastructure. They claimed that the acquisition of large tracts of
agricultural land in the villages of the district not only violated the Land Acquisition Act of 1894, but was
also in breach of the public interest. This led the Government to “consider” putting a ceiling on the
maximum land area that can be acquired for multi-product zones and decide to “go slow” in approving
SEZs.
 Nandigram Violence — The Nandigram violence is another famous incidence related to SEZ controversy.
Nandigram is a rural area in Purba Medinipur district of the Indian state of West Bengal. It is located about
70 km south-west of Kolkata, on the south bank of the Haldi River, opposite the industrial city of Haldia. In
2007 the West Bengal government decided to allow Salim Group to set up a chemical hub at Nandigram
under the SEZ policy. Farmers of that village were against it. So, on the order of the Left Front government
on 14 March, 2007, more than 3,000 heavily armed police stormed the Nandigram area. The main objective
was to remove the protestors in order to expropriate 10,000 acres of land for a Special Economic Zone
(SEZ) to be developed by the Indonesian-based Salim Group. During this incidence, police shot dead at least
14 villagers and wounded 70 more including children and women. The above given examples show the
controversies associated with SEZs. No doubts that these commercial hubs started with a lot of premature
praise and have now became a bone of contention which is readily exploited by the political forces to the
detriment of the peasants, who fear losing their means of livelihood.

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SEZ Incentives
Considering the need to enhance foreign investment and promote exports from the country, the Government of India
has introduced various types of special incentives and benefits to SEZ units, which are as follows-

 Customs and Excise—

• SEZ Units are free to import from the domestic sources without paying any duty on capital goods, raw
materials, consumables, spare, packing materials, office equipment, DG sets, etc. for implementation of their
project in the zone without any license or specific approval. Good which are imported duty free could be
utilized over the approval period of 5 years.

• Sales to DTA (Domestic Tariff Area) by SEZ units is always regarded as import and is subject to all normal
import duties, including Countervailing Duty, SAD, etc.

• SEZ Units are free from the periodic examination by Customs of export and import cargo.

• SEZ units may sub-contract a part of their production through units in DTA/SEZ/EOU/EPZ with the
permission of the customs authorities. Sub-contracting may also be permitted for processing abroad with the
permission of the board of approval.

 Income Tax— Part-1 Income Tax incentives for SEZ units

• Tax exemption for SEZ units engaged in manufacture or providing services- A new section 10AA has been
introduced in the IT Act by SEZ Act, 2005 which provides that the units in SEZ which start manufacturing or
producing articles/ things or which start providing services on or after April 1, 2005 will be eligible for a
deduction of 100 percent of export profits for the first five years from the year in which such manufacture/
provision of services commences and 50 percent of the export profits for the next five years. Further, for the
next five years a deduction shall be allowed of upto 50 percent of the profit as is debited to the profit and loss
account and credited to the Special Economic Zone Reinvestment Reserve Account (subject to conditions).

• Tax exemption for Offshore Banking units in SEZ- A deduction in respect of certain incomes would be
allowed under the new section 80LA, to scheduled banks or foreign banks having an Offshore Banking unit in
SEZ or to a unit of IFSC. The deduction shall be for 100 percent of income for five consecutive years
beginning from the year in which permission/ registration has been obtained under the Banking Regulation
Act or the SEBI Act or any other relevant law and 50 percent of income for next five years.

• Interest received by non-residents and not ordinary residents on deposits made with an Offshore Banking Unit
on or after April 1, 2005 shall be exempt from tax.

• Exemption from Minimum Alternate Tax ("MAT")- Income arising or accruing on or after April 1, 2005 from
any business carried on, or services rendered by SEZ unit would be exempt from MAT under section 115JB.

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• Exemption from Capital Gains- Capital gains arising on transfer of assets (machinery, plant, building, land or
any rights in buildings or land) on shifting of the industrial undertaking from an urban area to any SEZ would
be exempt from capital gains tax. The exemption would be allowable if within one year before or three years
after such transfer:

• Machinery or plant is purchased for the purposes of business of industrial undertaking in SEZ by the assessee.

• Assessee has acquired land or building or has constructed building for the purposes of business in SEZ.

• The original assets are shifted and establishment of the industrial undertaking is transferred to SEZ; and other
specified expenses are incurred.

• The amount of exemption for capital gains would be restricted to the costs and expenses incurred in relation to
all or any of the purposes mentioned above.

 Income Tax— Part-2 Income Tax incentives for SEZ Developer

• Tax holiday for SEZ developers- A new section 80-IAB has been introduced in the IT Act vide SEZ Act, 2005
whereby a deduction of 100 percent of profits derived from the business of developing SEZ (notified on or
after April 1, 2005) would be available to developer of SEZ for any 10 consecutive years out of 15 years
beginning from the year in which SEZ has been notified.

• Exemption under section 10(23G) that was available to infrastructure capital fund or a cooperative bank on
interest and long term capital gains investment had been extended to investment made by SEZ developers
qualifying for tax holiday under section 80-IAB of the IT Act. However, this exemption has been withdrawn
with effect from assessment year 2007-08.

• Exemption from Dividend Distribution Tax ("DDT")- No DDT would be payable by a developer of SEZ on
dividend declared, distributed or paid on or after April 1, 2005 out of current income.

• Exemption from MAT- Any income earned on or after April 1, 2005 by a SEZ developer would be exempt
from MAT under section 115JB of the Act from Domestic Tariff Area (DTA) to SEZ.

 Foreign Direct Investments—

• 100% FDI is freely allowed in manufacturing sector in SEZ units under automatic route, except arms and
ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of
alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes.

• No cap of foreign investments for SSI reserved items.

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 Off-Shore Banking Units (OBUs)—

• Setting up of OBUs allowed in SEZs.

• OBUS are entitled for 100% income tax exemption for 3 years and 50% for next 2 years.

 Banking / External Commercial Borrowings (ECBs)

• ECBs by units up to US$ 500 million a year allowed without any maturity restrictions.

• Freedom to bring in export proceeds without any time limit.

• Flexibility to keep 100% of export proceeds in EEFC account and freedom to make overseas payment from
such account.

• Exemption from interest rate surcharge on import finance.

• SEZ units allowed to write-off unrealized export bills.

• Exemption from interest rate surcharge on import finance.

 Service Tax
• Exemption from service tax to SEZ units.

 Sales to DTA
 DTA sales can be undertaken subject to achievement of positive NFE. Net Foreign Exchange (NFE) shall be
calculated cumulatively for a period of 5 years from the commencement of commercial production.

 For the purpose of calculation, the value of imported capital goods shall be amortized as follows -

○ 1st – 2nd year: 5% each year.

○ 3rd – 5th year: 10% each year.

○ 6th – 8th year: 20% each year

 Exemption from capital gains on transfer of an industrial unit from urban area to a SEZ.

 Drawback or such other benefit as may be admissible from time to time on goods and services admitted from
the DTA for setting up, operation and maintenance of units.

 All exports from the DTA to the Zone shall be exempt from state and local body taxes or levies as (In some
states, exports made to educational institutions, hospitals, hotels, residential and / or commercial complexes,
leisure and entertainment facilities or any other facilities as may be notified by the state government are not
exempt).

 Developers of SEZs may import or procure goods from DTA without payment of duty for development,
operation or maintenance of SEZ.
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 Exemption from Central Sales Tax (CST) on supply of goods from the DTA for development, operation and
maintenance of SEZs.

 Income tax exemption for a block of 10 years in the first 15 years of operation.

 Drawback or such other benefits as may be admissible from time to time on supply of goods from DTA for
development, operation and maintenance of SEZs.

 Investment income in the form of dividends, interest or long term capital gains, of an infrastructure capital
company from investments made in an enterprise engaged in the development, operation or maintenance of a
SEZ are exempt from tax.

 Foreign investment permitted.

 Service tax exemption on services provided to a developer or to a unit located in the SEZ region.

 Any activity or transaction in the Zone, which is liable for entertainment duty under the Bombay
Entertainments Duty Act, 1923 and Luxury Tax under the Maharashtra Tax on Luxuries Act, 1987 shall not
be liable to such tax The fiscal benefits shall be applicable for a period of 25 years from the date of
notification of the zone by the Government of India or such extended period as may be decided by the State
Government

 With respect to each Special Economic Zone all such transactions between the Zones or within the Zone or
both, including the transactions of land acquisition for development of the Zone between the developer or co-
developer and land owners and land transactions between the developers or co-developers and the units,
carried out after declaration of the Zone by the Government of India, shall be exempt from the following State
taxes, cess and levies namely:

○ Purchase tax, Sales tax and Turnover tax

○ Specified sales (Lease tax) in respect of lease of goods

○ Stamp duty for the first transaction between the Developer or co-developer and the land-owner and the
first transaction between the Developer or co-developer and the Units

○ Registration fee for the first transaction between the Developer or co-developer and the land-owner and
the first transaction between the Developer or co-developer and the Units

○ Land assessment tax

○ Electricity duty and tax (Only for sales to Units in processing area)

○ Water pollution cess

○ Works Contract tax

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 State government shall—

○ Provide exemption from electricity duty or taxes on sale of self generated or purchased electric power
for use in processing area of an SEZ.

○ Allow generation, transmission, distribution of power within a SEZ subject to the provisions of the
electricity act

 Exemptions in Matters Related to Environment

• SEZs permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants,
hotels and non-polluting service industries in the Coastal Regulation Zone area.

• SEZ units are exempted from public hearing under Environment Impact Assessment Notification.

 Company Act
• Enhanced limit of INR 2.4 crores per annum is allowed for managerial remuneration.

• Agreement to opening of Regional office of Registrar of Companies in SEZ.

• Exemption from requirement of domicile in India for 12 months prior to appointment as Director.

 Drugs and Cosmetics

• Exemption from port restriction under Drugs & Cosmetics Rules.

• Sub-Contracting / Contract Farming.

• SEZ units may sub-contract part of production or production process through units in the Domestic Tariff
Area or through other EOU / SEZ units.

• SEZ units may also sub-contract part of their production process abroad.

 Labour Laws
• Normal Labour Laws are applicable to SEZs, which are enforced by the respective State Governments.
However, State Governments have been requested to simplify the procedures / returns and for introduction of
a single window clearance mechanism by delegating appropriate powers to Development Commissioners of
SEZ.

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