The Special Economic Zones Act 2005 is best read as two statutes occupying a single binding. The first statute is a piece of administrative architecture: it creates a Board of Approval at the Centre, a Development Commissioner for each zone, an Approval Committee at zone level, a letter of approval system for Developers and for Units, a single window for clearances, designated courts for suits and notified offences, and a legal fiction under which a fenced area inside India is treated, for authorised operations, as territory outside the customs territory of India. That first statute survives intact. Its boards meet, its commissioners approve, its letters of approval are issued, and its fiction continues to govern every consignment that crosses a zone boundary. The second statute is a fiscal promise: a schedule of exemptions from customs duty, excise duty, service tax and central sales tax, an exemption from minimum alternate tax and from dividend distribution tax, and a graded income tax deduction for export profits that ran at one hundred per cent for five years, fifty per cent for the next five, and fifty per cent of ploughed back export profit for five years after that. That second statute has been dismantled in stages, almost entirely by amendments to other laws rather than to this Act, and its central promise, the income tax deduction, is closed to any Unit that did not begin production or the provision of services before the sunset date in the income tax statute.

A reader who opens the Act expecting to find the withdrawal will not find it. The text of the Special Economic Zones Act still speaks the language of exemption. Section 7 still exempts goods and services from taxes, duties and cess under the enactments in its First Schedule. Section 26 still lists, clause by clause, the exemptions, drawbacks and concessions available to every Developer and every entrepreneur. Section 51 still gives the Act overriding effect over inconsistent laws. What changed is located elsewhere: in the Finance Act of 2011, which extended minimum alternate tax and dividend distribution tax to the zone regime; in sunset clauses written into sections 10AA and 80-IAB of the Income-tax Act 1961, which closed the deduction first to Developers and then to Units; and in the replacement of the indirect tax system itself, which absorbed several of the taxes the Act exempts into a goods and services tax the Act never mentions. The series to which this article belongs has recorded statutes that were commenced without machinery and machinery that was built without funding. This Act is the inverse case. The machinery is complete, staffed and functioning, and the inducement for which the machinery was built was removed from outside the statute, which is why the position is invisible to anyone who reads only this Act.

That inversion is the One Test of this article. A reader who finishes it should be able to say what a zone is in law, as distinct from what a zone is in a brochure. The reader should be able to name the three tiers of approval and say which tier does what. The reader should be able to explain why goods moving from a factory in Pune into a zone are treated as exports and goods moving out of the zone to a buyer in Pune are treated as imports, and why that treatment is a fiction maintained by a deeming provision rather than a fact about geography. The reader should be able to state, benefit by benefit, what a Unit was offered in 2006, which instrument withdrew or closed each benefit, and on what date. And the reader should be able to explain why the Development of Enterprise and Services Hub Bill, announced in the Budget speech of 1 February 2022 as the replacement for this Act, was never introduced in Parliament, and why the statute it was meant to replace therefore continues to govern.

The lineage: from Kandla to a statute

The zone form arrived in India early and stayed administratively improvised for four decades. The first export processing zone in Asia was established at Kandla in Gujarat in 1965. The model was modest: a bounded area in which units manufacturing for export could import inputs without duty and were supervised as a customs enclave, with the whole arrangement resting on the foreign trade policy and on notifications under the customs and excise laws rather than on any dedicated statute. Further export processing zones followed at Santa Cruz in Mumbai and at a small number of other locations, and for roughly thirty five years the institution existed as a creature of executive policy. Its legal foundations were borrowed. The duty treatment came from exemption notifications, the approval came from the commerce ministry, and the conditions came from the export and import policy of the year. Nothing in that structure gave an investor an entitlement that a change of policy could not revise.

The special economic zone, as distinct from the export processing zone, was announced in the export and import policy that took effect in 2000. The change of name carried a change of scale and of conception. The older zones had been small industrial estates with a customs privilege. The 2000 policy proposed larger areas, a wider range of activities including services and trading, a role for State Governments and for private Developers in establishing them, and conversion of the existing export processing zones into special economic zones. From 2000 to 2006 the scheme operated, as its predecessor had, on the strength of the foreign trade policy. Zones were approved, Developers were authorised and Units were set up under a framework that had no statutory text of its own.

The case for a statute, as the commerce ministry made it, was stability. An investor committing capital to a factory with a fifteen year horizon, inside an area whose entire commercial logic was a set of fiscal concessions, was being asked to rely on policy documents that were revised at intervals and on notifications that could be withdrawn. A statute would convert the scheme into law, define the institutions, state the exemptions in the text of an Act, and give the regime an overriding effect clause so that its provisions would prevail over inconsistent provisions elsewhere. That is the statute Parliament enacted. It was passed in May 2005, received the assent of the President on 23 June 2005 as Act 28 of 2005, and was brought into force in stages, the principal commencement being 10 February 2006, when the Special Economic Zones Rules made under it also took effect.

The staging of commencement is itself instructive and is regularly flattened in summaries that give a single date. Notification S.O. 196(E) of 10 February 2006 brought into force sections 1 to 19, sections 25 to 30 and sections 42 to 58. The Chapter creating the Special Economic Zone Authority, sections 31 to 41, waited until 1 October 2008. Sections 20, 21 and 22, dealing with inspection agencies, single enforcement and investigation, waited until 13 January 2010. The Act therefore acquired its fiscal core and its approval machinery at once, its zone authorities two and a half years later, and part of its enforcement chapter four years after the main commencement. A statute whose inducement was fiscal and whose machinery was administrative was always likely to be commenced in that order, and the order is a clue to the priorities of its first years.

When did the Special Economic Zones Act come into force?

The principal provisions commenced on 10 February 2006 under notification S.O. 196(E), covering sections 1 to 19, 25 to 30 and 42 to 58. The Authority chapter followed on 1 October 2008, and sections 20 to 22 on 13 January 2010, so commencement was staged rather than single.

The map of the Special Economic Zones Act

The Act has fifty eight sections in eight chapters, three schedules, and a structure that rewards being read as a sequence of questions. Chapter I is preliminary: a short title and commencement provision in section 1 and a long definitions section in section 2, which fixes the meanings on which everything else turns, including Developer, Development Commissioner, entrepreneur, authorised operations, Domestic Tariff Area and Unit. Chapter II, sections 3 to 7, governs establishment: how a proposal is made, how a zone is established and a Developer authorised, the guidelines for notification, the division of a zone into processing and non-processing areas, and a general exemption from taxes under the First Schedule enactments. Chapter III, sections 8 to 10, constitutes the Board of Approval and states its duties, powers and functions, with a power to suspend a letter of approval and transfer a zone. Chapter IV, sections 11 and 12, provides for the Development Commissioner and the Commissioner’s functions.

Chapter V, sections 13 to 25, is headed Single Window Clearance and contains much of the working law: the constitution and functions of the Approval Committee, the setting up of a Unit and cancellation of its letter of approval, offshore banking units, an international financial services centre, a single application form and single return, inspection agencies, a single enforcement agency for notified offences, investigation and search, Designated Courts, appeals to the High Court and offences by companies. Chapter VI, sections 26 to 30, carries the special fiscal provisions: the exemptions and concessions in section 26, the application of the Income-tax Act with modifications in section 27, the permitted duration of goods and services in a zone, transfer and removal of goods, and domestic clearance in section 30. Chapter VII, sections 31 to 41, creates the Special Economic Zone Authority for a zone. Chapter VIII, sections 42 to 58, is miscellaneous in the way that matters most in this Act: it contains the power in section 49 to direct that provisions of this Act or of other Central Acts shall not apply to a zone or shall apply with modifications, the state taxes provision in section 50, the overriding effect clause in section 51, the deeming provision in section 53 that makes a zone territory outside the customs territory of India, the power to amend the First Schedule in section 54, the rule making powers, and the closing provisions.

The three schedules do quiet and important work. The First Schedule lists the enactments under which taxes, duties and cess are switched off by section 7. The Second Schedule modifies the Income-tax Act in its application to Developers and entrepreneurs, and is the bridge between this Act and the deduction regime. The Third Schedule amends other enactments consequentially. A reader who reads only the sections will understand the architecture but miss the mechanism, because the Act was drafted to work by switching provisions of other statutes off and on rather than by restating them.

Establishment: sections 3 to 6

A zone begins as a proposal. Section 3 prescribes the procedure for making a proposal to establish a special economic zone. A person intending to set up a zone submits a proposal to the State Government concerned, identifying the area, and the State Government forwards it to the Board of Approval with its recommendation, though the Act also permits a proposal to be made directly to the Board in the circumstances it specifies, and permits a person who holds land to seek approval for a zone on it. The State Government’s role at this threshold is not decorative. Section 5 requires the Central Government, in notifying a zone and in approving and authorising a Developer, to be guided by considerations that include the generation of additional economic activity, the promotion of exports of goods and services, the promotion of investment from domestic and foreign sources, the creation of employment, the development of infrastructure, and the maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign States. Land, water, power, law and order and the local consequences of a large acquisition all sit with the State, so the statutory route runs through the State even where the approval sits at the Centre.

Section 4 performs the constitutive act. After approval of a proposal, the Central Government notifies the area as a special economic zone, and the Developer is approved and authorised to undertake the operations authorised by the Board. The authorised operations are the hinge concept of the entire regime. Almost every benefit in the Act, every exemption and every procedural simplification, is expressed to apply to authorised operations and to nothing else. A Developer who builds a facility that was not authorised, or a Unit that manufactures a product outside its letter of approval, stands outside the fiscal shelter for that activity. The letter of approval is therefore not a permit in the loose sense; it is the boundary of the legal regime, and the Act’s enforcement provisions are largely concerned with policing that boundary.

Section 6 divides the notified area into a processing area and a non-processing area. The processing area is where Units are set up and authorised operations are carried on, and it is the area to which the customs fiction and the fiscal provisions attach with full force. The non-processing area carries the supporting infrastructure: housing, commercial and social facilities, and the services that a large industrial enclave requires. The division is demarcated and the boundary matters, because goods and persons cross between an area treated as outside the customs territory and an area that is not, within the same notified perimeter. Rules made under the Act prescribed minimum area requirements for different classes of zone, distinguishing multi product zones from sector specific zones and from zones for particular services, and prescribed the minimum share that the processing area must occupy. Those minima were revised downwards in stages over the life of the regime, as the original thresholds proved difficult to assemble in land scarce regions and as policy shifted toward smaller, sector focused zones. The direction of travel in the rules is a compressed history of the scheme: beginning with an assumption that a zone should be a large, self contained industrial city, and ending with an acceptance that most viable zones would be modest in area and specialised in function.

The guidelines in section 5 also required the Central Government to have regard to the requirement that a zone’s area be free from environmental restrictions in the manner prescribed and that the land be contiguous and vacant in the sense the rules developed, requirements that were relaxed in stages as Developers found that assembled parcels were rarely perfectly contiguous and that access corridors, water bodies and pre existing structures interrupted otherwise viable sites. Each relaxation was defensible on its own facts, and together they mark the distance between the self contained industrial city of the original conception and the bounded business park that most zones became.

Two further features of the establishment chapter deserve notice because they explain later disputes. First, the Act does not itself acquire land. It approves a proposal and notifies an area; the land must be held by the Developer, and how it was assembled, whether by private purchase, by State acquisition under the land acquisition law, or by allotment of government land, is a question governed by other statutes. The Act’s silence on acquisition is the reason the land question, taken up later in this article, was fought under a different Act altogether. Second, approval was not a one way door. Zones could be and were de-notified, in whole or in part, and the Board’s power under section 10 to suspend a letter of approval and to transfer a zone in the circumstances stated, together with the exit arrangements developed in the rules and in policy, meant that the map of notified zones was always larger than the map of functioning ones. Notification was a legal event; operation was an economic one; the gap between them is one of the central facts of the regime.

Who approves a proposal to establish a zone?

The Board of Approval, an inter ministerial body constituted under section 8 and chaired by the Secretary in the Department of Commerce, approves proposals for zones and for Developers, acting on proposals routed through the State Government, which forwards them with its recommendation under section 3.

The Board of Approval: sections 8 to 10

The Board of Approval is the apex decision maker of the regime and one of the more unusual institutions in Indian economic legislation, because it is a single inter ministerial body that takes decisions which in other sectors are distributed among several ministries and regulators. Section 8 requires the Central Government to constitute it by notification, and its composition as settled under the Act and the rules is of nineteen members drawn from the ministries and departments whose jurisdictions intersect inside a zone: commerce, revenue, economic affairs, industry, and others whose clearances a zone or a Unit would otherwise have to seek separately. It is chaired by the Secretary in the Department of Commerce. The design intention was that a Developer or an investor should face one table at which the Government of India sat assembled, rather than a sequence of doors.

Section 9 states the Board’s duties, powers and functions, and the list is wide. The Board promotes and ensures the orderly development of zones and Units, grants approval or rejects proposals for the establishment of zones, grants approval to Developers and to co-Developers, authorises operations, grants approval for foreign direct investment and for setting up offshore banking units and international financial services centres in zones, and hears appeals against orders of Approval Committees in the matters the Act assigns to it. Section 10 gives the Board a disciplinary and corrective power of real consequence: where a Developer fails to discharge the functions or duties imposed, or acts in a manner inconsistent with the terms of approval, the Board may suspend the letter of approval and transfer the zone to another Developer in accordance with the procedure prescribed. The existence of that power matters for the assessment of the regime, because it means the statute anticipated Developer failure and provided a statutory remedy for it that did not depend on cancelling the zone and displacing every Unit inside it.

The Board’s position also explains a feature of the regime that puzzles readers who approach it from other regulatory fields. There is no independent regulator for special economic zones, no commission insulated from the ministry, and no adjudicatory tribunal of the kind created for securities, electricity or competition. Regulation is departmental and hierarchical: the Board at the top, the Development Commissioner in the zone, the Approval Committee at the counter. The advantages claimed for that design were speed and coordination. The costs, which critics named early and often, were that the promoter of the scheme and its regulator were the same department, that decisions were taken in a body whose proceedings were not those of an adjudicatory authority, and that an aggrieved person’s remedies ran largely inside the same hierarchy or into the writ jurisdiction of the High Courts. Both descriptions are accurate, and the choice between them is a choice about what kind of institution an export enclave needs. The wider field within which that choice sits, between entry control by licence and conduct control by regulator, is mapped in the guide to industrial and competition law in India.

The Development Commissioner and the Approval Committee

If the Board is the apex, the Development Commissioner is the regime’s resident officer, and for most Units the Commissioner is the State for practical purposes. Section 11 provides for the appointment of a Development Commissioner for one or more zones. Section 12 sets out the functions: to guide entrepreneurs in setting up Units and establishing zones, to ensure and take suitable steps for effective promotion of exports from the zone, to supervise and control the Developer and the Units and to secure compliance with the Act and the rules, to discharge the functions assigned under other enactments to the extent the Act and notifications provide, and to perform the administrative functions that the single window design requires to be performed in one office. The Commissioner is supported by officers including customs officers posted to the zone, and the office issues, renews and where necessary moves to cancel the instruments on which Units depend.

Section 13 constitutes an Approval Committee for each zone, chaired by the Development Commissioner and including representatives of the customs administration and of the State Government among its members. Section 14 gives it the power to approve, modify or reject proposals for the setting up of Units, to approve proposals for the diversification of production and for broad banding, to approve the enhancement of production capacity, and to monitor the performance of Developers and Units, including whether a Unit is meeting the net foreign exchange earning requirement that the rules impose over a block of years. The Committee is the single window made flesh. A Unit’s proposal, its changes of product, its additional locations and much of its continuing compliance pass through a committee that sits in the zone and that contains the very authorities whose separate approvals the design was meant to replace.

The net foreign exchange requirement deserves a paragraph of its own because it later became the point of international legal difficulty. A Unit was required, under the rules, to achieve positive net foreign exchange earnings, computed over a block of five years from the commencement of production, taking exports and other foreign exchange earnings against imports and other outflows including royalty, dividend and repatriation. The requirement was not an incidental condition. It was the mechanism that connected the fiscal concessions to the export purpose stated in section 5, and it was the mechanism by which a Unit’s entitlement to remain in the regime was tested. It is also, on its face, a benefit conditioned on export performance, which is the category of subsidy that the subsidies agreement of the World Trade Organization prohibits for countries that have crossed its income threshold. The domestic design and the international objection were aimed at the same clause, from opposite directions.

Section 15 governs the setting up of a Unit. A person intending to set up a Unit for carrying on authorised operations submits a proposal to the Development Commissioner, who places it before the Approval Committee. The Committee may approve the proposal without modification, approve it with modifications on terms it imposes, or reject it, and in the case of modification or rejection it must afford the person a reasonable opportunity of being heard and record its reasons. A person aggrieved by the Committee’s order may appeal to the Board. On approval, the Development Commissioner grants a letter of approval specifying the operations authorised. Section 16 provides for cancellation of that letter where the entrepreneur fails to comply with its terms or with the conditions of approval, again with procedural safeguards. Around those two sections the rules built an operating system: a bond cum legal undertaking by which the Unit binds itself to the customs and net foreign exchange obligations, periodic performance reports, annual performance reporting to the Committee, and exit procedures for a Unit that wishes to leave the scheme, which involve paying the duties forgone on goods still held and settling the net foreign exchange account.

Sections 17 and 18 carry the financial services dimension, which grew into the regime’s most durable component. Section 17 provides for the setting up and operation of offshore banking units in a zone, with the approval of the Board and the permission of the Reserve Bank. Section 18 provides for the establishment of an international financial services centre in a zone, approved by the Central Government, within which financial services could be offered under a framework that treated the centre, for specified purposes, as outside the domestic financial system. The Gujarat centre at Gandhinagar became the principal instance, and the later creation of a unified authority for international financial services centres built on the statutory space that section 18 had opened. Sections 19 provides for a single application form, a single return and a single set of accounts for Units, so that the information a Unit owes the State is collected once. The promise of one form was only partly redeemed in practice, since Units continued to file under tax and company law in the ordinary way, but the direction of the provision records what the designers thought the burden was.

The customs fiction: section 53, and the domestic tariff area boundary

Everything fiscal in this Act depends on a deeming provision placed near its end. Section 53 provides that a special economic zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorised operations, and that a zone shall, with effect from a notified date, be deemed to be a port, airport, inland container depot, land station or land customs station under section 7 of the Customs Act 1962. Two consequences follow, and together they are the regime.

The first consequence concerns movement. Section 30, on domestic clearance by Units, provides that goods manufactured or produced in a zone and removed to the Domestic Tariff Area are chargeable to the duties of customs that would be leviable on those goods if they were imported into India, and that a Unit may sell goods and services in the Domestic Tariff Area in accordance with the conditions prescribed, which include the payment of those duties and compliance with the net foreign exchange and other conditions of its approval. Read with the definition of Domestic Tariff Area in section 2, which is the whole of India including its territorial waters and continental shelf but excluding the areas of the zones, the scheme is symmetrical. Goods supplied from the Domestic Tariff Area into a zone are treated as exports from India. Goods supplied from a zone into the Domestic Tariff Area are treated as imports into India. Services supplied from a zone to a recipient outside India are exports of services; services supplied to a Domestic Tariff Area recipient are dealt with as imports or as domestic supplies according to the tax statute in force. The zone is inside India for sovereignty, for criminal law, for labour law and for land. It is outside India for one purpose only, the charging of customs duty on authorised operations, and section 53 is careful to say so.

The second consequence concerns technique. Because the boundary is a customs boundary, the Act did not need to write a separate exemption for every transaction a Unit might enter into. Duty exemption is achieved by the treatment of the transaction as an export or as occurring outside the customs territory, and the exemptions stated in sections 7 and 26 operate alongside that treatment to cover taxes that the fiction alone would not reach, such as excise on domestic procurement, central sales tax on inter State purchases and service tax on services received. That is also why the arrival of the goods and services tax changed the regime without amending it: supplies to a zone came to be treated as zero rated inter State supplies under the integrated goods and services tax legislation, and the older exemptions from central sales tax and service tax lost their object because the taxes themselves had been subsumed. A statute drafted around a customs fiction proved adaptable to a tax reform its drafters had not foreseen, while a statute drafted around a list of named taxes would have required rewriting.

What duty is payable when a Unit sells into the domestic market?

Customs duty as if the goods were imported into India. Section 30 charges goods manufactured in a zone and removed to the Domestic Tariff Area with the duties leviable on like goods on import, subject to the conditions prescribed for domestic sales by a Unit.

It is worth pausing on the limits of the fiction, because the phrase foreign territory is used loosely in public discussion and the looseness misleads investors. A zone is not foreign territory. It is not outside the jurisdiction of Indian courts, its land is not ceded, its workers are not outside Indian labour legislation, and a company incorporated to operate a Unit is an Indian company or an Indian establishment subject to Indian company law, Indian tax residence and Indian exchange control. The exchange control dimension is one the Act touches only lightly, yet it shaped how zone income was received and repatriated, and it belongs to the longer statutory story told in the account of the passage from FERA to FEMA. What section 53 deems is a customs status, for authorised operations. Everything else about a zone is domestic, and a promoter who advised a client that a zone was offshore in the general sense would have been giving dangerous advice.

The fiscal core as enacted: sections 7, 26 and 27

Section 7 is the shortest of the fiscal provisions and the broadest in form. It provides that, subject to the provisions of the Act, any goods or services exported out of, imported into, or procured from the Domestic Tariff Area by a Unit in a zone or a Developer shall be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule, in the manner and subject to the terms and conditions prescribed. The First Schedule is therefore the operative list, and section 54, which empowers the Central Government to amend that Schedule by notification, is the operative flexibility. Section 7 does not name a tax. It names a list, and the list can be changed without a Bill.

Section 26 is the detailed provision and the one on which litigation concentrated. It provides that, subject to the terms and conditions prescribed, every Developer and entrepreneur is entitled to a set of exemptions, drawbacks and concessions that include exemption from duties of customs on goods imported into a zone for authorised operations, exemption from duties of customs on goods exported from a zone to a place outside India, exemption from duties of excise on goods brought from the Domestic Tariff Area into a zone, exemption from service tax on taxable services provided to a Developer or a Unit to carry on authorised operations, exemption from central sales tax on inter State purchases of goods, exemption from securities transaction tax in the circumstances stated, and exemption from taxes, duties and cess under the enactments in the First Schedule. Two features of the drafting matter. The entitlement is expressed to be subject to terms and conditions prescribed under the respective enactments, a formulation that generated a line of disputes about whether the exemption in this Act was self executing or whether it depended on notifications issued under each tax statute. Courts dealing with service tax and customs questions read section 26 together with section 51’s overriding effect and with the notifications under the taxing statutes, and the resulting position was neither the complete self sufficiency that some Units argued for nor the complete dependence that the revenue argued for. The second feature is that section 26 confers indirect tax relief. It does not confer the income tax deduction. That deduction lives in another statute.

Section 27 provides that the provisions of the Income-tax Act 1961 shall apply to Developers and entrepreneurs with the modifications specified in the Second Schedule. The deduction itself is section 10AA of the Income-tax Act for a Unit and section 80-IAB for a Developer, and both were inserted and shaped in connection with this regime. Section 10AA allowed an entrepreneur, being a Unit in a zone that had begun to manufacture or produce articles or things or to provide services, a deduction of one hundred per cent of the profits and gains derived from the export of articles, things or services for the first five consecutive assessment years, fifty per cent for the next five assessment years, and, for a further five assessment years, an amount not exceeding fifty per cent of such profits credited to a Special Economic Zone Re investment Reserve Account and used for the purposes the section specifies. The measure of profit was export profit, computed by reference to export turnover against total turnover, and the benefit was therefore worth most to a Unit whose output was entirely exported and whose margins were high, which in practice meant information technology and information technology enabled services. Section 80-IAB allowed a Developer a deduction of one hundred per cent of the profits and gains derived from the business of developing a zone, for ten consecutive assessment years within a period of fifteen years, at the Developer’s election, a design intended to let a Developer match the deduction to the years in which development income arose. Both deductions were generous, both were time bounded by design, and both were later closed by sunset to new entrants, which is a different thing from being repealed.

The withdrawal sequence: 2011, 2017, 2020

The fiscal history of the regime after 2006 is a sequence of four moves, made by three different techniques, and the techniques matter as much as the dates. None of the four amended the Special Economic Zones Act in a way that a reader of the Act would notice. Two were made by the annual Finance Act altering the Income-tax Act. Two were made by sunset clauses in the Income-tax Act taking effect by the passage of time. A fifth change, the largest in monetary terms for many Units, was made by replacing the indirect tax system.

The first move was the Finance Act of 2011. Before it, the zone regime enjoyed two exemptions in the Income-tax Act that were separate from the deduction for export profits. Section 115JB, which imposes minimum alternate tax on companies on the basis of book profit, did not apply to a Developer or to a Unit in a zone, and section 115O, which imposed dividend distribution tax, did not apply to dividends declared by a Developer. The Finance Act of 2011 withdrew both. The exemption from dividend distribution tax ceased with effect from 1 June 2011, and the exemption from minimum alternate tax was withdrawn with effect from 1 April 2012, so that from assessment year 2012 to 2013 onward a Unit in a zone computed and paid minimum alternate tax on its book profits in the ordinary way, generating tax credit that could be carried forward and set off in later years when tax under the normal provisions exceeded the minimum. The practical effect was to convert a tax holiday into a tax deferral for a substantial class of Units. A Unit in its one hundred per cent deduction years, which had expected to pay no direct tax at all, instead paid minimum alternate tax at the rate in force and accumulated a credit whose value depended on its profits after the holiday ended. The Government’s stated reasoning was horizontal equity and revenue: exemptions from minimum alternate tax had allowed profitable companies to report large book profits and pay no tax, a result the minimum tax existed precisely to prevent, and there was no principled reason to exempt zone Units from a floor that applied to every other company. The industry’s answer was reliance: capital had been committed, premises leased and staff hired on the basis of a package whose terms included those exemptions, and changing them mid stream altered the economics of projects that could not be relocated. Both arguments are about the same fact, which is that a fiscal incentive offered by statute is, in Indian law, a matter of legislative policy that a later Parliament may revise, and that the doctrine of promissory estoppel runs against the revenue only within narrow limits. The deduction regime itself, and the way sections are inserted, modified and closed by Finance Acts, is set out in the guide to the Income-tax Act 1961.

The second move was the developer sunset. Section 80-IAB was closed to a Developer that had not begun to develop a zone before 1 April 2017. After that date a new Developer could still be approved, could still notify a zone, could still claim the indirect tax exemptions and could still earn rental and development income, but it could not claim the ten year deduction for development profits. The third move was the unit sunset, and it is the one that defines the present position. Section 10AA was framed so that the deduction is available only to a Unit that began to manufacture or produce articles or things, or began to provide services, within the window the section prescribes, and that window closed at the end of March 2020. A Unit that began on or before 31 March 2020 keeps its deduction and runs it down over its own fifteen year sequence of five years at one hundred per cent, five at fifty per cent and five at the reinvestment reserve rate. A Unit that began later gets nothing under section 10AA, however completely it exports, however much employment it creates, and however new its investment is. The sunset was announced years in advance and was not a surprise; a rush of commencements in the months before the deadline was widely reported, as firms accelerated fit outs and first invoices to fall inside the window.

One qualification to the unit sunset must be recorded, because it is frequently misstated in both directions. During the disruption of 2020, relaxation legislation extended the time for beginning manufacture, production or the provision of services to 31 March 2021 for a limited class: Units whose letter of approval had been issued on or before 31 March 2020 and which had been unable to commence within the original time. That was a compliance relaxation for Units already approved inside the window, not a reopening of the deduction to new entrants, and it did not move the sunset for a Unit approved later. Statements that the sunset was extended by a year for everyone, and statements that no extension of any kind was given, are both inaccurate.

The fourth move was indirect and structural. A concessional corporate tax regime introduced in 2019 offered domestic companies a materially lower rate in exchange for surrendering exemptions and deductions, with a still lower rate for new manufacturing companies incorporated after a stated date and commencing production within a stated period. For a prospective investor comparing locations after 2020, the choice was no longer between a zone with a full holiday and a domestic location with full tax. It was between a zone with no income tax deduction but with customs and procedural advantages, and a domestic location with a low headline rate. That comparison, more than any single amendment, explains why the question asked about zones changed from how to obtain the benefit to whether the remaining benefits justify the compliance structure at all.

What a zone offered and what it offers after the withdrawals

The table below is the findable artifact of this article. It states each benefit as it stood at enactment, the instrument that changed it, the date of the change, and the position that follows. The rows in which the resulting position is that the benefit is unavailable to a new entrant are the argument of the article in tabular form.

Benefit	Position as enacted	Instrument of change	Date	Position after the change
Customs and excise exemption for authorised operations	Exempt under sections 7 and 26 for goods imported into, exported from, or procured from the Domestic Tariff Area for authorised operations	Goods and services tax legislation subsumed excise and several other levies; supplies to a zone treated as zero rated inter State supplies	1 July 2017	Available. Customs duty exemption for authorised operations continues; excise exemption lost its object on subsumption
Income tax deduction for a Unit	Section 10AA: one hundred per cent of export profits for five years, fifty per cent for five years, fifty per cent through a reinvestment reserve for five years	Sunset clause in section 10AA of the Income-tax Act 1961	Window closed 31 March 2020	Unavailable to a Unit that began production or services later; a Unit inside the window runs down its own fifteen year sequence
Income tax deduction for a Developer	Section 80-IAB: one hundred per cent of development profits for ten consecutive assessment years within fifteen years	Sunset clause in section 80-IAB of the Income-tax Act 1961	1 April 2017	Unavailable to a Developer that had not begun development before that date
Minimum alternate tax exemption	Section 115JB did not apply to a Developer or to a Unit in a zone	Finance Act 2011	1 April 2012	Withdrawn. Minimum alternate tax is payable on book profits, with credit carried forward
Dividend distribution tax exemption	Section 115O did not apply to dividends declared by a Developer	Finance Act 2011	1 June 2011	Withdrawn. Dividend distribution tax applied until that tax itself was abolished in 2020
State levies	Section 50 enabled exemption from State taxes, duties and levies where the State legislature provided for it	No central change; the position always depended on State legislation	Varied by State	Available only to the extent a State has legislated; never a central entitlement
Single window clearance	Approval Committee under sections 13 and 14, single application form and return under section 19	No change	Not applicable	Available and in force; the machinery was never withdrawn
Deemed foreign territory fiction	Section 53: a zone deemed territory outside the customs territory of India for authorised operations	No change	Not applicable	Available and in force; domestic sales remain chargeable under section 30 as if imported

Read the table by column and a pattern emerges that a narrative can blur. Every row in the upper half, which is the fiscal half, carries a date and an instrument. Every row in the lower half, which is the procedural half, carries neither. The statute was not repealed, was not substantially amended, and was not judicially struck down. Its inducement was removed by legislation addressed to other statutes, and its machinery, which cost nothing in revenue, was left standing. This is also the reason that published summaries of the Act are so often wrong in the direction of generosity: a summary drawn from the Act’s own text will describe the exemptions in sections 7 and 26 accurately and will say nothing about section 10AA’s sunset, because the sunset is not in this Act.

Single window, enforcement and Designated Courts: sections 19 to 25

Chapter V is headed Single Window Clearance, and its later sections are about what happens when the window is abused. Section 20 empowers the Central Government to notify agencies to inspect authorised operations. Section 21 provides for a single enforcement officer or agency for notified offences under specified enactments, so that a Unit does not face separate enforcement visits from each department whose law applies inside the zone. Section 22 confers powers of investigation, inspection, search and seizure in relation to notified offences, exercisable in the manner the Act prescribes and with safeguards drawn from the criminal procedure framework. Section 23 requires the State Government, with the concurrence of the Chief Justice of the High Court, to designate courts to try suits and notified offences arising in a zone, an arrangement intended to concentrate zone litigation in identified courts rather than dispersing it. Section 24 provides an appeal to the High Court from a Designated Court on questions of law and in the circumstances stated. Section 25 deals with offences by companies, attributing liability to persons in charge of and responsible for the conduct of the business, with the usual defence of absence of knowledge or due diligence.

A structural observation is required here, because it qualifies the single window claim. The Act creates relatively few offences of its own. Its enforcement design works by notification: offences under other enactments, including customs, excise as it then stood, foreign trade and exchange control legislation, are notified for the purposes of sections 21 to 23, and the single enforcement and designated court machinery then applies to them. Penalties for the underlying conduct are therefore found in the underlying statutes, and a Unit’s exposure for a customs misdeclaration or an exchange control breach is measured by those statutes, not by this one. What the Act adds is forum and coordination. That is a real benefit, and it is a smaller benefit than the phrase single window suggests to a reader who assumes that one statute has replaced the others. In practice, Units remained subject to assessment under the Income-tax Act, to audit under the Companies Act, to the goods and services tax framework for their domestic transactions, and to State labour and factory inspectorates, alongside the Development Commissioner’s supervision. The claim that a zone is a jurisdiction apart does not survive a reading of Chapter V, and the Act does not make that claim.

The Zone Authority: sections 31 to 41

Chapter VII creates a Special Economic Zone Authority for each zone, constituted under section 31, with the Development Commissioner as its chairperson and a membership that includes Developer and Unit representation in the manner prescribed. Section 34 states its functions, which are operational and financial rather than regulatory: to develop infrastructure, to maintain and manage the zone’s common facilities, to collect and apply the charges levied for the use of those facilities, and to perform the functions assigned to it. Sections 35 to 37 provide for grants and loans from the Central Government, a fund into which the Authority’s receipts are paid and from which its expenditure is met, and accounts and audit. Section 38 empowers the Central Government to give directions, section 40 to supersede the Authority in the circumstances stated, and section 41 deems its members and officers to be public servants.

The Authority chapter is the part of the Act that commenced latest among the major chapters, on 1 October 2008, and its late arrival is worth noting because it indicates where the designers’ attention was. The fiscal provisions and the approval machinery were needed on the first day, since the scheme’s selling point was a benefit and its delivery mechanism was an approval. A body to run common infrastructure and to hold a fund could wait, and in many zones the Developer performed those functions in substance under its own approval. The Authority is best understood as an attempt to give a mature zone a measure of self administration and a financial identity separate from both the Developer and the department, rather than as a regulator. Its existence also completes a four tier picture that a reader should hold: the Board approves, the Commissioner administers and supervises, the Committee decides applications in the zone, and the Authority operates common services. Only the first three of those are gates. The fourth is a landlord with statutory personality.

Sections 49, 50 and 51: the power to switch laws off, and its limits

Three provisions in Chapter VIII do the constitutional and interpretive heavy lifting, and they are frequently confused with one another.

Section 49 empowers the Central Government, by notification, to direct that any of the provisions of this Act other than sections 54 to 56, or any provisions of any other Central Act, or any rules, regulations, notifications, orders or directions under them other than those relating to the making of rules, shall not apply to a zone or a class of zones or all zones, or shall apply only with such exceptions, modifications and adaptations as are specified. This is a Henry VIII power of an unusually wide kind: it authorises the executive to modify the application of primary legislation to a defined territory by notification. Its justification is the logic of the enclave. A zone regime that required a parliamentary amendment every time a procedural provision of another Act proved unworkable inside a fence would be unmanageable, and the power was used to adapt procedural and administrative provisions to zone conditions. Its risk is the mirror image: a power to disapply Acts by notification is a power to legislate for a territory without a Bill, and it has to be read as confined to the purposes of the Act and subject to judicial review for excess. Section 49 should not be confused with section 53. Section 53 deems a customs status. Section 49 switches provisions off or modifies them. One is a fiction, the other is a delegated power.

Section 50 addresses State taxation. It provides for exemption from State taxes, duties and levies in the manner the section states, and its operation depends on the State legislature, because taxes on the State and concurrent fields are not the Centre’s to remit. In substance the Act invites and enables a State to exempt zone activity from its own levies, such as stamp duty on zone transactions, electricity duty and State sales taxes as they then stood, and States did so unevenly, by their own notifications and with their own conditions. A Developer comparing two States was therefore comparing two different fiscal packages even though the central statute was identical, and the State component was often decisive on land related and power related costs.

Section 51 is the overriding effect clause: the provisions of this Act shall have effect notwithstanding anything inconsistent contained in any other law for the time being in force or in any instrument having effect by virtue of any other law. Clauses of this kind are standard in Indian economic legislation and are routinely over read. Section 51 resolves an inconsistency in favour of this Act. It does not repeal other laws inside a zone, it does not exempt a Unit from a law with which this Act is not inconsistent, and it does not prevent Parliament from later legislating inconsistently, which is what the Finance Act of 2011 did in the field of minimum alternate tax by amending the Income-tax Act’s application to zone assessees. The relationship between section 51 and section 26 produced the most persistent interpretive dispute of the regime: whether the exemptions in section 26 were available on the strength of this Act alone, or only on the terms of notifications issued under each taxing statute named in section 26. High Courts that considered the question, in service tax and customs matters, treated the Act as a special statute with overriding effect but read the exemption as operating through the machinery of the relevant tax law, so that procedural conditions in a notification could govern the manner of claiming without defeating the exemption itself. The practical lesson for an adviser is that section 51 is an argument about priority, not a substitute for reading the notification under the tax statute in question. Information in this article is general legal information about a statute and its history, and a Unit or Developer with a live claim should take advice on the notifications in force for the period in dispute.

Does the Special Economic Zones Act override other laws?

Within its field, yes. Section 51 gives the Act effect notwithstanding anything inconsistent in another law, so an inconsistency is resolved in favour of this Act. It does not disapply laws with which the Act is not inconsistent, and it does not bind a later Parliament.

The land question

No account of this Act is honest without the land question, and no account of the land question is accurate if it attributes to this Act powers it does not contain. The Act approves, notifies and regulates. It does not acquire. A Developer needed land, and land had to come from somewhere: from private negotiation with holders, from allotment of land already held by a State industrial development corporation, or from acquisition by the State under the land acquisition law then in force, the Act of 1894, using the public purpose machinery and the urgency provisions that were a standing source of grievance. Because the visible institution was the zone and the visible beneficiary was often a private Developer, opposition to acquisition was expressed as opposition to zones, and in several States proposals for zones became the focus of sustained local resistance concerning the loss of agricultural land, the adequacy of compensation, the absence of consent, the treatment of persons dependent on the land without title to it, and the suspicion that land notified for industry would be converted to real estate development in the non-processing area.

The concerns deserve statement in their strongest form, and so does the response. The strongest form of the objection was structural rather than episodic. A regime that offers large fiscal concessions to a Developer, that requires large contiguous parcels, that permits a substantial non-processing area in which commercial and residential development is allowed, and that relies on State acquisition powers to assemble the parcel, creates an incentive to acquire more land than production requires and to value the land itself as the asset. On that account the controversy was not a public relations failure but a predictable output of the design. The strongest form of the response was also structural. India needed serviced industrial land with assured power, water, effluent treatment and customs facilities if it was to compete for export manufacturing, assembling such land parcel by parcel through private negotiation in a system of fragmented holdings and imperfect titles was close to impossible, and the States that succeeded in establishing functioning zones generated exports and employment on a scale that dispersed industrial estates had not. Both accounts can be true of different zones at the same time, and the evidence differs sharply between a zone built on government held industrial land and a zone assembled by acquiring cultivated land.

What can be said without taking sides on particular acquisitions is that the political cost of the land controversies changed national law. The movement for a new land acquisition framework, with consent requirements, social impact assessment, and compensation and rehabilitation as statutory entitlements rather than administrative grace, drew much of its force from disputes over acquisition for industrial projects including zones, and it produced the statute of 2013 that replaced the Act of 1894. That statute, its consent thresholds and its compensation formula belong to the article on the land acquisition Act of 2013, which owns that ground in this series. For this Act the relevant consequence is narrower. After 2013 the cost and time of assembling land by acquisition rose substantially, and zone proposals came to depend far more on land already in public hands or on private purchase. A fiscal regime that had already lost much of its inducement thus also lost the land assembly mechanism that had made large zones feasible, and the two changes together explain the shape of the notified but non operational zone map better than either does alone.

Minimum area requirements in the rules interacted with the land problem in a way that reformers identified early. High thresholds for multi product zones required very large parcels and therefore large acquisitions, while the thresholds for sector specific and service zones were far smaller. Successive reductions in the prescribed minima, and relaxations of the requirement that land be contiguous and free of encumbrances in specified circumstances, were attempts to reduce the acquisition burden without abandoning the idea of a bounded enclave. The pattern is the same one visible in the fiscal history: where the Act itself was difficult to change, the rules were changed; where the rules could not cure the problem, the benefit was left and the practice moved elsewhere.

The international dimension: the dispute in DS541

The zone regime was designed in a domestic idiom, as an instrument of export promotion, and it was eventually judged in an international idiom, as a set of subsidies. The United States requested consultations in 2018 and then the establishment of a panel, challenging a group of Indian export related measures: the export oriented units scheme and related sector schemes, the export promotion capital goods scheme, the merchandise exports scheme, the duty free imports for exporters scheme, and the special economic zones scheme. The complaint was that these measures provided subsidies contingent on export performance, prohibited by Articles 3.1(a) and 3.2 of the Agreement on Subsidies and Countervailing Measures, and that India was no longer entitled to the special and differential treatment that had sheltered developing countries listed in Annex VII of that Agreement, because India’s per capita gross national product had crossed the threshold of one thousand dollars in constant 1990 dollars for the period the Agreement specifies.

The panel reported on 31 October 2019. It found that the challenged schemes, including the zones scheme, provided subsidies contingent in law or in fact on export performance inconsistently with the subsidies Agreement, it rejected the argument that India remained within the Annex VII shelter or was entitled to a further transition period, and it recommended that India withdraw the prohibited subsidies within periods the panel specified for each measure, the period for the zones scheme being one hundred and eighty days. The elements of the zones scheme that attracted the finding were the exemptions and the income tax deduction insofar as they were tied to export performance, together with the net foreign exchange earning requirement that made export performance a condition of a Unit’s place in the regime. It is important to be precise about what the panel did not do. It did not find that special economic zones are unlawful. It did not find that customs duty relief for goods used in export production, structured as duty drawback or exemption for inputs consumed in exports, is prohibited; the subsidies Agreement treats several such mechanisms as permissible. Its objection was to benefits conditioned on export performance in the hands of a country that had graduated from the developing country shelter.

India appealed on 19 November 2019. That appeal could not be heard to a conclusion, because the Appellate Body of the World Trade Organization ceased to be able to sit with the minimum quorum of three members in December 2019, when the terms of two of its remaining members ended and appointments remained blocked. An appeal filed into that vacancy has the procedural effect of preventing the panel report from being adopted by the Dispute Settlement Body, and an unadopted report does not create an obligation to implement its recommendations. Commerce and Industry Minister Piyush Goyal stated that position to Parliament in terms: India was under no obligation to implement the panel’s recommendations because the appeal was pending and, owing to the non functioning of the Appellate Body, stood in suspension. Critics of that position, in India and elsewhere, replied that an appeal that can never be heard is a device for indefinite non compliance, that the practice of appealing into the void damages the credibility of the dispute settlement system on which India’s own complaints against other countries depend, and that the substantive finding on export contingency was unlikely to be reversed on the law as it stands. Defenders replied that the Appellate Body’s paralysis was not of India’s making, that a respondent is entitled to exhaust its appellate rights, and that India’s objection to aspects of Appellate Body practice was shared by many members. Both positions are stated here because the dispute is genuinely unresolved, in the strict procedural sense, and any account that describes India as having been finally held in breach of the subsidies Agreement misstates the legal position, as does any account that describes the panel as having found in India’s favour.

The domestic significance of DS541 was not the obligation, which never crystallised, but the design constraint. Once a panel had held that export contingent benefits were prohibited for India, a replacement regime built on export contingency would carry a known legal defect from its first day. That constraint, more than any revenue consideration, shaped the committee work and the draft legislation that followed, because it removed the option of simply restoring the 2006 package under a new name.

An assessment in two voices

The favourable case for the regime rests on output and on assets. Its proponents point to the growth of exports from zones from a small base at the start of the century to a substantial share of India’s exports of goods and services, to employment in zones running into lakhs of direct jobs concentrated in sectors where India had not previously competed at scale, to the role of zones in the growth of information technology and information technology enabled services exports from cities that were not traditional industrial centres, and to the physical infrastructure created inside zone boundaries: reliable power, water, effluent treatment, data connectivity and customs facilities on site, of a standard that the surrounding industrial areas often did not match. On this account the concessions were not a gift but a purchase. India bought export capacity, employment and infrastructure with forgone revenue, at a time when its general industrial infrastructure was the binding constraint on export growth, and the assets remain in place and in use after the concessions have ended. Proponents add that the fiscal cost of open ended exemptions was never quantified against the counterfactual, that much of the activity would not have occurred in India at all without the package, and that a Unit that has built a campus, trained a workforce and established client relationships does not relocate when a deduction expires, so the State retains the activity after it stops paying for it.

The critical case rests on reliance, on distribution and on land. Its proponents point to the sequence of withdrawals as a breach of faith in substance if not in law: the minimum alternate tax and dividend distribution tax exemptions were withdrawn five and six years into a regime whose deduction periods ran to fifteen years, and investors who had modelled projects on the package as enacted found the model changed under them. They point to the sectoral concentration of benefit, arguing that the deduction was worth most to high margin services exporters who were already India’s most competitive exporters and who would have exported from domestic locations in large numbers, so that a substantial part of the revenue forgone subsidised location rather than activity. They point to notified zones that never became operational, to zones de-notified after approval, and to land held in zones with low utilisation, as evidence that the approval system allocated a scarce asset, serviced land with fiscal privilege, to applicants whose projects were speculative. And they point to the land controversies as a cost borne by people who received none of the benefit. The Export Promotion Council for export oriented units and special economic zones, representing the industry, pressed a narrower and more practical version of the reliance argument in seeking extension of the direct tax benefit for Units that had been approved but could not commence operations before the sunset, on the ground that approved projects were stranded by a deadline they had not chosen and, in 2020, by a pandemic. Successive governments declined to reopen the sunset in general terms, and that refusal is itself evidence about where the fiscal consensus had settled.

A verdict is possible on one part of this and not on the whole. On the narrow question of predictability, the record supports the critics. A State that offers a fifteen year graded deduction in a statute, and then withdraws two associated exemptions by Finance Act within six years and allows the principal deduction to close on a timetable that strands approved projects, has made a choice in favour of revenue and horizontal equity at the price of the credibility of its next offer. That price is real and it is paid by later schemes, which is why committees that examined the regime kept returning to the need for stability of policy as a recommendation in its own right. On the broader question of whether the regime was worth its cost, the evidence does not support a single answer, because the counterfactual, what those exports, jobs and campuses would have looked like under a different policy, is not observable. What is observable is the distribution of outcomes between zones, which was wide enough to suggest that the instrument was neither uniformly successful nor uniformly wasteful, and that the quality of the Developer, the State and the sector mattered more than the concessions, which were common to all.

There is a further comparison that a reader of this series is well placed to make. A zone is a status conferring statute: it takes a defined area and a defined class of enterprise and attaches legal consequences to the status of being inside and approved. Indian legislation uses that technique in several fields, and the closest parallel in this batch of the series is the statute that confers status and benefits on micro, small and medium enterprises by registration and definition, considered in the article on the MSME Development Act 2006. The comparison is instructive because the two statutes allocate risk differently. A status that depends on a definition can be lost by growth. A status that depends on a location and an approval can be lost by a change in tax law that leaves the approval untouched. Both are reminders that a benefit conferred by one statute and measured by another is only as durable as the weaker of the two.

The replacement that was announced and never introduced

Reform of the regime was under official consideration well before the fiscal package closed. In June 2018 the Ministry of Commerce and Industry constituted a group of eminent persons under the chairmanship of Baba Kalyani, Chairman of Bharat Forge, to study the special economic zones policy. The group reported in November 2018. Its central recommendation was a change of objective: a framework shift from export growth as the organising purpose to broad based employment and economic growth, with zones recast as employment and economic enclaves. It recommended separate rules and procedures for manufacturing and service zones, a shift from a supply driven to a demand driven approach, an enabling framework for ease of doing business inside the enclaves, measures to improve utilisation of existing capacity, retention or extension of fiscal benefits and of the sunset timetable, and arrangements that would make the framework compatible with the subsidies Agreement rather than contingent on export performance. The report is the intellectual source of everything proposed later, and its most consequential idea was the first one: if a zone’s purpose is employment and economic activity rather than export earnings, then the net foreign exchange test and the export contingency that had created the international difficulty lose their rationale, and domestic sales cease to be an exception to be charged and become part of the design.

The legislative sequel was announced on 1 February 2022, when the Finance Minister’s Budget speech stated that the Special Economic Zones Act would be replaced with new legislation that would enable States to become partners in the development of enterprise and service hubs. The proposal acquired a name, the Development of Enterprise and Services Hub Bill, and a description: development hubs covering existing zones, a focus wider than exports and extending to the domestic market, an online single window, and a structure intended to be compatible with the subsidies Agreement. It was expected in the monsoon session of 2022. It was not introduced in that session, nor in any later session. Inter ministerial differences, principally between the commerce ministry and the revenue authorities over the fiscal content of the proposal, including a proposed concessional corporate tax rate for new units and the treatment of domestic sales and of the net foreign exchange requirement, were reported as the cause of the delay. In the period that followed, the reported direction of policy shifted from a replacement statute to amendment of the existing Act and changes in the rules, with the replacement Bill described in reporting as shelved or scrapped in favour of that narrower route.

Precision matters here because the point is often got wrong in both directions. The Development of Enterprise and Services Hub Bill was announced by the Government, drafted within the Government, and discussed between ministries. It was not introduced in Parliament, it was not debated, no committee examined it, and it is not law. It therefore conferred no rights, imposed no obligations and repealed nothing. The Special Economic Zones Act 2005 remained the governing statute throughout, amended only at the margins, and the zones, Boards, Commissioners and Approval Committees continued to function under it. An investor or a student who treats the announcement as a change in the law will misstate the position. Equally, an account that omits the episode misses the most revealing fact about the regime’s later years: that the Government announced its replacement as a settled intention, found itself unable to agree the fiscal content of the replacement, and left the original statute in place with its machinery working and its inducement gone. The Act’s afterlife is not neglect. It is the residue of an unfinished decision.

The definitions that carry the regime: section 2

Statutes of this kind are won and lost in their definitions, and section 2 rewards attention. Authorised operations are defined by reference to the operations authorised under section 4 for a Developer and under section 15 for a Unit, which makes the definition circular in form and precise in effect: an operation is authorised because an approval says so, and the approval is the operative document. Developer is defined to include an Authority and a co-Developer, and co-Developer is a person or State Government holding a letter of approval under section 3 to undertake infrastructure facilities or services in a zone on the basis of an agreement with the Developer, a device that allowed specialised infrastructure providers to build power, water, telecommunications and logistics facilities inside a zone developed by someone else, with the fiscal treatment attaching to their authorised operations. Entrepreneur is the person granted a letter of approval by the Development Commissioner to set up a Unit. Unit is defined as a unit set up by an entrepreneur in a zone for carrying on authorised operations, and includes an existing unit, an offshore banking unit and a unit in an international financial services centre. Existing zone and existing unit are defined so that the export processing zones and free trade warehousing arrangements operating before commencement were carried into the new statute rather than stranded outside it, a transitional choice that spared the Government the task of re approving functioning industrial estates under a new law.

Two definitions do conceptual work beyond their length. Domestic Tariff Area means the whole of India, including the territorial waters and continental shelf, but not including the areas of the special economic zones. The definition is a subtraction: India is defined, and the zones are taken out of it, for the purposes of the Act. Almost every operative provision is drafted by reference to movement between the two areas so created. The second is the definition of services and of manufacture, which determine what a Unit may do. Manufacture is defined widely, to include manufacture, production, processing or assembly and a range of related processes, and the width of that definition was contested in cases about whether particular activities, such as the refurbishment or re engineering of imported equipment, amounted to manufacture for the purposes of the regime and of the tax benefits attached to it. The pattern is familiar from other fiscal statutes in this series. A benefit is attached to a word, the word is defined broadly, and the litigation is about the boundary of the definition in cases the drafters did not foresee.

The life of a Unit: approval, operation, exit

A Unit’s existence under the Act has a recognisable biography, and setting it out exposes how much of the regime is administrative rather than fiscal. It begins with a proposal to the Development Commissioner and approval by the Approval Committee, followed by a letter of approval stating the authorised operations, the location and the period of validity. The entrepreneur then executes a bond cum legal undertaking, binding itself to observe the conditions of approval, to achieve the net foreign exchange position undertaken, and to pay the duties and penalties that would follow on failure. Space is allotted by the Developer, construction or fit out follows, and the Unit applies for the commencement of production to be recorded, a date of more than ceremonial importance because the net foreign exchange block of five years runs from it, and because, during the years when section 10AA was open, the commencement date determined whether the Unit was inside the sunset window at all. Few dates in Indian tax administration have carried as much value as the date of commencement of production of a zone Unit in March 2020.

During operation the Unit files periodic and annual performance reports, its net foreign exchange position is monitored by the Approval Committee, its imports and procurements are accounted for against its authorised operations, and its domestic sales are cleared on payment of duty under section 30. Renewal of the letter of approval, broad banding of products, diversification, change of ownership and merger of Units all require approval, so that a Unit’s corporate life is conducted in a continuing relationship with a committee rather than under a one time licence. Exit is correspondingly formal. A Unit may exit the scheme with the Approval Committee’s permission, on payment of the duties forgone on capital goods, raw materials, components and finished goods held in stock, computed on the basis prescribed, and on settlement of its net foreign exchange position and any pending proceedings. Where a Unit has failed to achieve positive net foreign exchange or has otherwise defaulted, exit does not extinguish liability, and the bond is the instrument through which the liability is enforced. De-notification of a zone, or part of a zone, is a separate and heavier process requiring Board approval, State recommendation and satisfaction that the fiscal and legal consequences for Units inside the area have been addressed, and it became a significant part of the Board’s work as Developers sought to release land from zones that had not attracted Units.

The significance of this biography is that it survives the fiscal changes without alteration. A Unit approved in 2025 goes through the same proposal, bond, performance reporting, domestic clearance and exit procedures as a Unit approved in 2007. Its tax computation differs. Its regulatory life does not. That is the concrete meaning of the claim that the machinery outlived the inducement, and it is why the Act continues to generate a large volume of administrative work, approvals and litigation despite having lost the feature for which it is best known.

Zones among their neighbours: export oriented units and the older enclaves

The special economic zone was not India’s only export enclave instrument, and the choices available to an exporter explain both the zone’s appeal and its limits. The export oriented unit scheme, which predated the zone policy and continued alongside it, allowed a single unit anywhere in India to obtain duty free import and procurement benefits in exchange for an export obligation and a net foreign exchange commitment, without any requirement to locate inside a notified area. Its advantage was locational freedom; a firm could build on its own land near its workforce and suppliers. Its disadvantage was that it obtained no infrastructure, no single window of the zone kind and no resident customs administration, and its premises were treated as a customs bonded area under supervision rather than as part of an enclave. The zone inverted the bargain: surrender locational freedom, accept the supervision of a Development Commissioner and an Approval Committee, and receive in return serviced land, concentrated infrastructure, on site customs clearance and, during the years when it applied, the income tax deduction that was not available to an export oriented unit on the same terms after the earlier deduction for such units expired.

Sector specific schemes for electronics hardware and biotechnology parks occupied a middle position and were among the measures challenged in the international dispute. The coexistence of these instruments matters for the assessment of the zone regime, because the fiscal cost of zones is sometimes computed as if the alternative were no export promotion at all, when in fact the alternative for many firms was another scheme. It also matters for the legal analysis. The panel in the international dispute treated the schemes together because they shared the feature of export contingency, and a reform that addressed only the zones while leaving export contingency untouched in a neighbouring scheme would not have cured the defect the panel identified. Reform of the zone regime was therefore always, in part, reform of a family of instruments, which is one reason it proved slow.

The courts: withdrawal of benefits and legitimate expectation

The jurisprudence generated by the regime falls into two groups, and the brief for this article directed attention to both: the cases on acquisition of land for zones and on the application of the land acquisition framework, and the cases on the withdrawal of fiscal benefits and legitimate expectation. On the first group, the propositions that emerge are those of land acquisition law generally, applied to a politically charged subject matter. Acquisition for a company or for a project to be executed by a private Developer had to satisfy the public purpose and procedural requirements of the acquisition statute, the courts examined whether the State had applied its mind to the purpose and to the objections of landholders, and acquisitions were vulnerable where the procedure was short circuited or where the purpose stated did not match the use proposed. The zone statute itself supplied no shield, because it conferred no acquisition power. Promoters who assumed that a Board approval would strengthen the State’s hand in acquisition litigation misunderstood the relationship between the two statutes.

On the second group, the doctrine is settled in outline and fact sensitive in application. Fiscal policy may be altered by the legislature, and an exemption granted by statute or notification may be withdrawn or modified by a competent authority acting within its power, including, in the case of notifications issued under a power to grant exemption in the public interest, withdrawal before the period originally indicated. Against that, the doctrine of promissory estoppel may bind the State where a clear and unequivocal representation was made by an authority competent to make it, where a person altered their position in reliance on it, and where it would be inequitable to allow the State to resile, subject always to the overriding considerations of public interest and to the rule that there can be no estoppel against a statute. Courts examining challenges to the withdrawal or modification of export and industrial incentives have repeatedly had to locate a given case on that spectrum, and the recurring distinctions are between a benefit conferred by a statute and a benefit conferred by an executive scheme, between a representation made to an identified person and a general statement of policy, and between a change that operates prospectively and one that reaches back into a period for which a commitment had been given and acted on. The withdrawal of the minimum alternate tax exemption illustrates the point. It operated prospectively, it was effected by Parliament amending the taxing statute rather than by an executive retraction of a promise, and it applied to a class rather than to an identified promisee, which placed it at the end of the spectrum where challenges are least likely to succeed, however strongly the commercial grievance was felt. A different case, in which a State authority had induced a specific investment by a specific assurance for a stated period and then withdrew the benefit within that period without a change in the governing statute, would be argued on materially different ground. Advisers who treat the two as interchangeable mislead their clients.

The third strand of litigation, quieter than either, concerns the exemptions themselves: whether a supply or a service qualified, whether a condition in a notification was mandatory, whether a Unit’s activity fell within its authorised operations, and whether the Development Commissioner or the customs authorities had jurisdiction over a particular demand. Volume litigation of that kind is the ordinary product of a regime that grants relief by reference to purpose and place, and it continued after the fiscal changes because the customs and indirect tax relief that survived still turned on the same questions.

The rules beneath the Act

A pillar article on this Act would mislead if it left the impression that the operative law is in the Act. The Special Economic Zones Rules 2006, made under the rule making powers in sections 55 and 56, contain much of the detail by which the regime is administered: the procedure and documentation for proposals, the minimum area and processing area requirements for each class of zone, the forms of application for Developers and Units, the terms of the bond cum legal undertaking, the manner of computing net foreign exchange, the procedures for import, procurement, inter unit transfer, subcontracting, temporary removal for processing or repair, disposal of waste and scrap, domestic clearance, exit and de-notification, and the returns and reports required. Amendments to the Rules were frequent and were the Government’s preferred instrument of adjustment, because a rule could be amended by notification in a way that a section could not. Relaxations in area requirements, permission for sector specific zones to broaden their sector, changes to the treatment of vacant land and built up area, the admission of trusts and other entities as eligible to set up Units by amendment of the definition of person, and procedural simplifications for exit and for the transfer of Units between zones were all effected at the level of rules or of the Act’s definitions rather than by rewriting its chapters.

Two consequences follow for a reader. The first is that the Act’s text is a poor guide to the conditions on which a zone or a Unit operates at any given time, and must be read with the Rules as amended up to the relevant date, which for a transaction in dispute may be several versions earlier. The second is that the durability of the Act is partly an artefact of this design. A statute that delegates its variable content to rules can absorb a great deal of policy change without amendment, and can therefore appear stable while the regime under it changes substantially. In this case the technique was used in both directions: to soften the regime’s requirements when they proved too demanding, and to leave its fiscal core untouched when the real change was being made elsewhere, in the Income-tax Act.

Section 26 read closely, and sections 28 to 30

Because section 26 is the provision on which claims are founded, its internal structure is worth stating with care. The section is addressed to every Developer and every entrepreneur, and it confers entitlements subject to the terms and conditions prescribed under the enactments it names. Its clauses follow the taxes of 2005. There is exemption from duty of customs under the Customs Act 1962 on goods imported into a zone, and from duty of customs on goods exported out of a zone to a place outside India. There is exemption from duty of excise under the Central Excise Act 1944 on goods brought into a zone from the Domestic Tariff Area. There is exemption from service tax under the Finance Act 1994 on taxable services provided to a Developer or Unit for authorised operations. There is exemption from central sales tax under the Central Sales Tax Act 1956 on inter State sales of goods to a Developer or Unit. There is relief in respect of securities transaction tax for offshore banking and financial services activity in the circumstances stated, and a residuary exemption from taxes, duties and cess under the enactments specified in the First Schedule. The drafting tells a historical story by itself. Two of the statutes named have been subsumed into the goods and services tax, one has been repealed and replaced in the course of the indirect tax reform, and the section reads, in consequence, partly as a historical document. Yet it has not been rewritten to name the goods and services tax, because the treatment of zone supplies under that tax is achieved by the goods and services tax legislation itself, which designates supplies to a zone Developer or Unit for authorised operations in a manner that produces zero rating. The section is thus a standing lesson in how an exemption provision ages: it remains in force, its language remains authoritative for the taxes that survive, and its practical content migrates into other statutes.

Section 28 limits the duration for which goods or services may be held or used in a zone in the manner prescribed, a provision aimed at preventing a zone from becoming a duty free warehouse of indefinite duration for goods with no export destination. Section 29 governs transfer of ownership and removal of goods, requiring that goods be removed from a zone in accordance with the Act and the rules, and it is the provision under which removal other than by authorised clearance is treated as a breach attracting duty and penal consequences under the applicable law. Section 30, already discussed, governs domestic clearance. Read together, sections 28 to 30 are the customs code of the enclave in miniature: how long goods may stay, how they may move, and what is paid when they leave for the domestic market. Subcontracting and job work, by which a Unit sends goods to a Domestic Tariff Area processor or receives goods for processing, sit uneasily within that code because they cross the boundary in both directions for a purpose that is neither export nor import in the ordinary sense, and the rules developed detailed procedures, permissions and time limits for them. Proposals to liberalise job work between zones and the domestic economy, including the idea of reverse job work by which a zone Unit uses spare capacity for domestic orders, were a recurring theme of later reform discussion, precisely because the boundary that gives the regime its fiscal logic is also the boundary that prevents zone capacity from serving the domestic market when export orders are thin. Under utilisation of zone capacity, which critics cite as waste and Developers cite as a regulatory artefact, is in large part a section 30 problem.

A word should also be said about free trade and warehousing zones, which the Act accommodates within the zone framework and which test the customs fiction in its purest form. A free trade and warehousing zone is a zone, or a part of one, in which goods may be imported, stored, and traded with value added services such as packing, labelling and repacking, for re export or for clearance into the Domestic Tariff Area on payment of duty. No manufacture in the ordinary sense need occur. The legal work is done entirely by section 53’s deeming and by section 30’s charging rule: the goods are outside the customs territory while they are stored, and they enter the customs territory, with duty, when they are cleared for home consumption. The warehousing model shows that the zone was never only an industrial policy instrument. It was also a logistics instrument, designed to let traders hold inventory close to the Indian market without paying duty until the moment of domestic sale, and to let India compete for the entrepot trade that regional ports had captured. Its inclusion in the measures examined in the international dispute, and the arguments about whether warehousing and trading benefits were contingent on export performance, illustrate how a single statutory fiction can support activities with very different economic characters and very different legal exposures.

The State dimension

The Act is a central statute operating on land, power, water and local taxation that belong constitutionally and practically to the States, and its working therefore depended on a second layer of State action that summaries often omit. States identified land, recommended proposals, provided trunk infrastructure to the zone boundary, and legislated or notified exemptions from their own levies. Several States went further and enacted their own legislation or adopted formal zone policies dealing with matters within their competence: delegation of State level approvals to the Development Commissioner so that a Unit did not have to seek separate State clearances for matters such as factory licensing coordination, pollution consent facilitation and labour related registrations, exemption from stamp duty and registration charges on zone land and lease transactions, exemption from electricity duty, and single window arrangements at State level. Section 50 of the central Act is the hook for the fiscal part of that layer, but the administrative part rested on State notification and practice, and it varied.

The variation is not a footnote. Two zones approved on identical terms by the Board of Approval could face materially different costs and timelines because one State had delegated its approvals and exempted its levies while another had not, and because land markets and land politics differed. When commentators compare India’s zones unfavourably with zones in other countries, they often compare a central statute in India with a whole system elsewhere, and attribute to the statute differences that belong to land administration and State capacity. The converse error is also common: attributing a successful zone’s performance to the fiscal package when the decisive factors were a State that delivered serviced land quickly and a Developer who built to a standard that attracted tenants. The Act created a common frame. It did not create a common experience, and the dispersion of outcomes across zones is the single most consistent finding of every review of the regime, including the committee review of 2018, which recommended moving to a demand driven model in recognition of the fact that zones succeeded where demand and State support existed and languished where approval had been treated as a substitute for both.

Reading the numbers: exports, employment and forgone revenue

Every assessment of this regime reaches for three numbers, and each of the three is less stable than it appears, which is a reason for stating the caution rather than a set of figures that cannot be verified to the standard this series requires. The first number is exports from zones. It is compiled from Unit reporting and is genuine as a measure of shipments and services supplied from zones, but it includes activity that was relocated from Domestic Tariff Area premises into zones, including the large migration of information technology services into zone campuses, so it measures location as well as additionality. A claim that zone exports rose by a given multiple over a period is compatible with a much smaller claim about exports that would not otherwise have occurred. The second number is employment. It counts direct employment reported by Units and Developers and is a real measure of jobs located in zones, but it is not a measure of net job creation in the economy, and it takes no account of employment displaced elsewhere or of the quality and durability of the jobs. The third number, revenue forgone, is the most contested of all. Estimates of the cost of the income tax deduction and of the indirect tax exemptions were produced by the revenue authorities in tax expenditure statements and by critics using different assumptions, and they diverge because they embed different views about whether the activity would have been taxed in India at all in the absence of the scheme. A benefit that induces an export activity to locate in India rather than in another country costs nothing against a counterfactual of absence; the same benefit granted to an activity that would have located in India anyway is a pure transfer. Since the mix between those two cases is unobservable and varies by sector, honest argument about the regime should present the range of conclusions and the assumption that drives each, rather than a single figure. What is not in doubt is the direction of the sectoral distribution: the deduction’s value was concentrated where export margins were highest, and that concentration, rather than the aggregate cost, is what made the benefit politically vulnerable.

That caution extends to the claims made for the replacement proposal. A new framework addressed to employment and economic enclaves rather than exports would be assessed on employment and investment numbers of exactly the same character, with exactly the same additionality problem, and its proponents would face the same difficulty in demonstrating that the activity would not have happened anyway. Recognising the measurement problem does not make evaluation impossible. It makes it comparative and qualitative: whether zone infrastructure was better than what surrounded it, whether customs clearance was faster, whether firms that entered zones expanded faster than comparable firms outside them, and whether the land notified was used. On those questions the record is mixed in a patterned way, with services zones in metropolitan States performing strongly and large multi product zones on acquired agricultural land performing weakly, which is itself a finding about what the instrument was good for.

Offshore banking and the financial services centre

The financial provisions of the Act deserve separate treatment because they produced the regime’s most durable institutional legacy and because they illustrate a different use of the deeming technique. Section 17 permits offshore banking units to be set up in a zone with the Board’s approval and the Reserve Bank’s permission. An offshore banking unit is a branch of a bank located in a zone and treated, for exchange control and prudential purposes specified by the regulator, as if it were outside the domestic banking system, so that it can raise and deploy foreign currency funds, lend to zone Units and to overseas borrowers, and offer services that a domestic branch could not offer on the same terms. Section 18 permits the Central Government to approve an international financial services centre in a zone, and within such a centre financial institutions could be established to serve non residents and to conduct business in foreign currency under regulatory arrangements drawn from the securities, banking and insurance regulators. The centre established at Gandhinagar in Gujarat became the working instance, hosting banking units, exchanges, clearing corporations, brokers, insurers and fund structures.

Two points of legal interest arise. First, the financial centre used the zone’s statutory space but quickly outgrew the zone’s administrative model. A financial centre needs a single regulator able to write a unified rule book across banking, securities and insurance, and the Development Commissioner and Approval Committee structure was designed for industrial approvals, not for financial regulation. The eventual answer was a separate statute creating a unified authority for international financial services centres, which took over the regulatory function for the centre while the centre remained physically and legally within a special economic zone. The zone Act thus served as an incubator for an institution that then required its own legislation, a sequence that recurs in Indian economic law and that a reader of this series will recognise from other fields. Second, the fiscal treatment of financial centre units followed the same pattern as the rest of the regime: deductions for units in the centre were provided in the Income-tax Act, with their own periods and conditions, and were later extended and modified by Finance Acts as policy toward the centre developed. Where the general zone deduction was allowed to close, the financial centre deduction was repeatedly renewed, because the policy objective, competition with established offshore centres for mobile financial business, was one the Government continued to hold. The contrast is a useful corrective to any account that treats the withdrawal of zone benefits as a general turn against fiscal inducements. It was selective. Inducements were withdrawn where the Government judged that the activity was anchored in India by skills and infrastructure, and retained or extended where the activity was judged mobile enough to leave.

De-notification, stranded zones and the problem of reversal

A regime that approves territory must also provide for unapproving it, and the later history of the Act is in large part the history of that reversal. Developers who had obtained approval and notification for zones that failed to attract Units, or whose land had become more valuable for other uses, applied for de-notification of the whole zone or of part of its area. The Board considered such applications with the State Government’s recommendation, and the conditions developed around them were concerned with protecting the revenue and third parties: refund or payment of the fiscal benefits availed in respect of the area to be de-notified, continuity or orderly exit for any Units operating in that area, no pending legal proceedings that de-notification would defeat, and confirmation that the land would be used in accordance with the applicable State land use framework. Partial de-notification, by which a Developer surrendered the portions of a notified area that had not been developed while retaining the operational core, became common, and it changed the meaning of the published statistics. A count of notified zones or of notified area is a count of legal approvals, some of them a decade old and partly surrendered, and it overstates the operating regime by a wide margin. The count that matters is of operational zones and of Units in production, and the gap between the two series is the measure of the speculative element in the original approvals.

De-notification also exposed a distributional question that the Act does not answer. Where land had been acquired with State assistance for an industrial purpose and the zone was then de-notified, the land could pass to uses of much higher value, and the gain accrued to the Developer rather than to the original holders who had parted with it at acquisition values. States responded in different ways, some by imposing conditions on change of use, some by asserting a share in the enhanced value, and some by requiring that de-notified land be applied to industrial purposes. The central statute’s silence on the point is consistent with its silence on acquisition, since both matters belong to State land law, but the political consequence fell on the zone programme as a whole. Few episodes did more damage to the public standing of zones than reports of acquired land released from a zone into real estate development, and few were less attributable to the text of the Act.

Section 10’s power to suspend a letter of approval and transfer a zone belongs in the same discussion. A zone is a piece of infrastructure on which dozens or hundreds of Units depend for their legal status, their customs treatment and their premises. A Developer who becomes insolvent, or who abandons maintenance of common facilities, or who fails to meet the conditions of approval, threatens the position of every Unit inside the boundary, none of which has any privity with the Board that would let it compel performance. The statutory answer is transfer: the Board may suspend the approval and transfer the zone to another Developer, so that the enclave continues and the Units are undisturbed. The power has been less prominent in practice than the de-notification route, partly because a failing zone is more often one with no Units to protect, but its presence in the Act is a sign that the drafters understood the dependency they were creating. Regimes that confer status by reference to a place must answer the question of what happens when the keeper of the place fails, and most Indian statutes of this kind do not answer it at all.

The calculus that remains

Set the fiscal history aside and a practical question remains for the three audiences the brief for this article identified: a Developer deciding whether to propose a zone, a business deciding whether to take space in one, and an adviser asked whether either should. The considerations that survive the withdrawal of the deduction are real, and they are different in kind from the considerations that drove decisions in 2007.

For a Developer, the surviving advantages are the customs and indirect tax treatment of development activity for authorised operations, the ability to offer tenants an environment in which customs clearance, a resident administrative office and concentrated infrastructure are available, and, in the financial services case, access to a centre with its own fiscal and regulatory framework. Against those stand the loss of the development deduction, the cost of assembling and servicing land under the post 2013 acquisition framework, the area and processing requirements of the rules, the obligation to maintain common facilities to a standard that tenants can obtain in a well run private industrial park without any statutory supervision, and the reputational and political exposure that attaches to large land holdings under a fiscal privilege that the public debate no longer supports. The comparison a Developer must make is not with an unregulated alternative but with an ordinary industrial park, which can offer most of the physical product with none of the compliance structure, and which is why the zone proposals that continued to be made after the sunset were concentrated in sectors where the customs and regulatory features, rather than the tax holiday, were the attraction.

For a Unit, the surviving advantages are duty free procurement for authorised operations, which for an exporter importing a high proportion of its inputs is a genuine working capital and cost advantage; the treatment of supplies to the Unit as exports for the supplier, which affects pricing; on site customs and a single administrative interface through the Approval Committee and the Development Commissioner’s office; and, for services exporters, the campus environment and the ability to operate within a framework clients in regulated industries recognise. Against those stand the net foreign exchange obligation over a five year block, the duty payable on domestic sales under section 30, which limits the ability to serve the Indian market from the same facility and can force a firm to run parallel operations inside and outside the zone; restrictions and procedures on subcontracting and temporary removal; the compliance burden of performance reporting and bond obligations; and the loss of the income tax deduction for a Unit commencing after the sunset, together with the availability of a concessional corporate rate outside the zone for firms willing to surrender exemptions. A firm whose output is wholly exported, whose inputs are largely imported and whose customers require a controlled environment will often still find the account favourable. A firm whose market is substantially domestic will usually not, and the dividing line between the two is drawn by section 30 rather than by the Income-tax Act.

For an adviser, the lesson of the regime’s history is about the location of the law. Advice given from the text of the Special Economic Zones Act alone would have been wrong at almost every point after 2011, because the operative changes were in the Income-tax Act, in the goods and services tax legislation and in the Rules. Advice given from a summary of the original scheme would have been worse, because it would have promised a deduction that had closed. The discipline the Act teaches is to identify, for each benefit, the statute that confers it, the instrument that can withdraw it, and the date on which withdrawal or sunset takes effect, and to record that analysis for the client in terms that survive a change of government. That is also, in the end, the discipline this series applies to every statute it examines: a provision means what the whole statute book says it means on the relevant date, and not what the Act that created the scheme said when the scheme was launched.

Records, filings and the paper life of a zone

A zone generates paperwork out of proportion to its size, because every fiscal consequence in the regime is conditional on documentation. A Unit must be able to show that goods were imported or procured for authorised operations, that they were received in the zone, that they were used or held as its records claim, that exports were made against them, and that its net foreign exchange account is what its returns say it is. The instruments are unglamorous: the letter of approval and its renewals, the bond cum legal undertaking, import and procurement certificates, shipping bills and bills of export, bank realisation records for export proceeds, periodic progress reports, the annual performance report, and the registers maintained for capital goods and consumables. Section 19’s promise of a single application form and a single return was directed at exactly this accumulation, and the administration of the regime moved steadily toward electronic filing through the zone online system, under which applications, approvals and returns are lodged and tracked digitally and customs transactions are processed through linked systems.

The practical point for a Unit is that the documentary record is not an administrative afterthought but the substance of its entitlement. An exemption claimed without the supporting procurement record, or a net foreign exchange computation that cannot be reconciled to realisation certificates, converts a fiscal benefit into a demand with interest and penalty under the underlying tax law. Advisers and finance teams dealing with a zone therefore spend much of their effort on the archive: assembling approval dossiers, performance reports and board and committee papers that circulate as spreadsheets, word processed documents and slide decks, often opened through an office file viewer for zone approval dossiers and performance reports when the file has to be read outside the system that produced it. The detail is mundane and it is where the regime is actually administered. Two Units with identical approvals can have entirely different experiences of the Act depending on whether their records would survive an audit of authorised operations.

There is a wider observation here about the design of incentive regimes. A benefit conferred by reference to purpose, place and export performance cannot be administered without a documentary apparatus capable of testing purpose, place and performance, and that apparatus has a cost that falls on the compliant. The single window and self certification features of this Act were attempts to reduce that cost by substituting trust and post facto audit for prior permission: a Unit certifies its own procurements and transactions, and the administration verifies by inspection and by data matching rather than by approving each consignment. Self certification under the Act and the rules is a genuine and consequential feature, and it is one of the elements of the original design that no later change withdrew, because it cost the revenue nothing and because returning to consignment by consignment approval was not a serious option for either side. When the fiscal inducement was withdrawn and the procedural design retained, what was retained was not an empty shell. It was a working method of administering a customs enclave, and its survival is the strongest evidence that the Act was always two instruments: a tax offer, which a later fiscal policy could and did discontinue, and an administrative technology, which no successor policy has improved on and which the proposed replacement legislation largely intended to carry forward under a different name.

What the Act does not do

A pillar account should end its exposition with the negative, because most errors about this statute are errors of attribution. The Act does not acquire land, and it confers no power to dispense with the acquisition law. It does not exempt a Unit from labour legislation, from factory and environmental approvals as a matter of substantive standards, from company law, or from assessment under the Income-tax Act; it simplifies the route to several approvals and it coordinates enforcement for notified offences, which is a different and smaller thing. It does not make a zone foreign territory, and a person who commits an offence inside a zone commits it in India. It does not guarantee any benefit for any period: the benefits it states in its own sections are indirect tax exemptions tied to authorised operations, and the direct tax benefits that made the scheme famous were conferred by another Act and were closed by that Act. It does not require a State to exempt its own levies, and it does not compel the Central Government to notify any particular area. It does not establish an independent regulator, a tribunal or a right of appeal outside the channels it specifies, and it does not prevent Parliament from changing the fiscal treatment of zones in a Finance Act, as Parliament has done. Finally, it has not been replaced. Announcements of replacement, committee reports recommending replacement and draft Bills prepared within government have no legal effect, and a reader who wants the law on special economic zones in India still begins, as a reader in 2006 began, with Act 28 of 2005 and its Rules, read together with the Income-tax Act and the goods and services tax legislation.

Conclusion: procedure without the exemption

The Special Economic Zones Act 2005 did what it was drafted to do, in the order it was drafted to do it. It created a bounded territory with a customs status, a three tier approval structure, a single window, a resident commissioner, designated courts and an overriding effect clause, and it attached to that structure a fiscal package stated partly in its own sections and partly in the Income-tax Act. The structure is in force. The package, in its original form, is not. Between those two sentences lies the whole interest of the statute for a student of Indian legislation, because it demonstrates a technique of policy reversal that leaves almost no trace in the statute being reversed. A legislature that wishes to end a regime can repeal it, and accept the political and legal cost of repeal, including the treatment of accrued rights. Or it can leave the regime standing and withdraw, one Finance Act at a time and one sunset at a time, the benefits that made the regime attractive, and arrive at the same destination with the statute book still showing an Act of exemptions. The second technique was used here, and it worked, and its cost is the one identified in the assessment above: the next time the State offers a long horizon fiscal inducement in a statute, the offer will be read by investors who remember this one.

For the practical reader the position can be stated shortly. A Developer may still be approved and a zone may still be notified. A Unit may still be approved by an Approval Committee and may still operate under a letter of approval. Customs duty exemption for authorised operations, the treatment of supplies into a zone as exports, the charging of domestic sales under section 30, the single window, and the supervision of the Development Commissioner all continue. What a new Unit cannot obtain is the income tax deduction under section 10AA, and what a new Developer cannot obtain is the deduction under section 80-IAB, and neither can obtain exemption from minimum alternate tax. Whether a zone is worth entering on those terms is a commercial question about infrastructure, customs facilitation, sector specific advantages and the availability of a financial services centre, and it is a question the benefit table in this article is designed to let a reader answer without relying on a summary written when the holiday was still open.

Frequently Asked Questions

Q: What does the Special Economic Zones Act provide?

It provides for the establishment, development and management of special economic zones for the promotion of exports. It creates a Board of Approval to approve zones and Developers, a Development Commissioner for each zone, an Approval Committee at zone level to approve Units, a letter of approval system, single window clearance, Designated Courts for suits and notified offences, and a set of fiscal provisions in sections 7 and 26. Section 53 deems a zone to be territory outside the customs territory of India for authorised operations.

Q: How is a special economic zone approved and governed?

A proposal is made to the State Government, which forwards it to the Board of Approval with its recommendation, and on approval the Central Government notifies the area and authorises the Developer to undertake the operations the Board has approved. The Board is an inter ministerial body chaired by the Secretary in the Department of Commerce. Within the zone, the Development Commissioner supervises the Developer and the Units, and the Approval Committee chaired by the Commissioner approves Units and monitors their performance, including net foreign exchange earnings.

Q: What tax and duty benefits applied to a zone?

As enacted, sections 7 and 26 exempted goods and services imported into, exported from, or procured from the Domestic Tariff Area for authorised operations from customs duty, excise duty, service tax and central sales tax. Section 10AA of the Income-tax Act gave a Unit a deduction of one hundred per cent of export profits for five years, fifty per cent for five years and fifty per cent through a reinvestment reserve for five years. Section 80-IAB gave a Developer a ten year deduction. Exemption from minimum alternate tax and dividend distribution tax also applied.

Q: Why is a zone treated as foreign territory?

Because section 53 deems a special economic zone to be a territory outside the customs territory of India for the purposes of undertaking authorised operations, and deems it to be a port, airport, inland container depot, land station or land customs station under section 7 of the Customs Act 1962. The deeming is confined to customs treatment. It makes supplies from the Domestic Tariff Area into a zone exports and supplies out of a zone imports. A zone remains Indian territory for sovereignty, criminal law, labour law, company law and land.

Q: What happened to the tax incentives?

They were withdrawn or closed in stages, mostly outside this Act. The Finance Act 2011 withdrew the exemption from dividend distribution tax with effect from 1 June 2011 and from minimum alternate tax with effect from 1 April 2012. The developer deduction under section 80-IAB closed for development not begun before 1 April 2017. The unit deduction under section 10AA closed for a Unit that did not begin production or services before 1 April 2020, subject to a relaxation for Units holding letters of approval issued by 31 March 2020. Customs relief for authorised operations continues.

Q: What land and acquisition issues arose?

The Act approves and notifies zones but confers no power to acquire land, so land had to be assembled by private purchase, by allotment of government land, or by State acquisition under the land acquisition law then in force. Acquisition for zones became contested in several States, on grounds including loss of agricultural land, adequacy of compensation, absence of consent, the position of persons dependent on land without title, and the fear that notified land would be used for real estate. Those controversies contributed to the enactment of the land acquisition statute of 2013.

Q: What did the World Trade Organization find?

A dispute settlement panel reported on 31 October 2019 in a complaint by the United States concerning several Indian export related measures. It found that the zones scheme and the other challenged schemes provided subsidies contingent on export performance inconsistently with the Agreement on Subsidies and Countervailing Measures, rejected India’s claim to continued developing country shelter, and recommended withdrawal within stated periods. India appealed on 19 November 2019. The Appellate Body could not sit for want of a quorum, so the report was not adopted and the dispute is unresolved.

Q: What happened to the proposal to replace the zones Act?

A group chaired by Baba Kalyani reported in November 2018 and recommended shifting the framework from export growth to employment and economic enclaves. The Budget speech of 1 February 2022 announced that the Act would be replaced by legislation creating Development of Enterprise and Services Hubs. The Bill was prepared within government and discussed between ministries, but it was never introduced in Parliament, never debated and never enacted. Reporting later described it as shelved in favour of amending the existing Act and its rules.

Q: What is the difference between a Developer and a Unit under the Act?

A Developer is a person or a State Government granted a letter of approval under section 3 to establish and operate a zone, undertaking the authorised operations the Board approves, building infrastructure and allotting space. A Unit is an enterprise set up by an entrepreneur inside the zone under a letter of approval granted by the Development Commissioner after the Approval Committee’s approval, to carry on its own authorised operations such as manufacturing or providing services. The Developer runs the enclave. The Unit does business inside it.

Q: What is the Board of Approval and who chairs it?

The Board of Approval is the apex body of the regime, constituted by the Central Government under section 8 with nineteen members drawn from the ministries and departments whose jurisdictions meet inside a zone. It is chaired by the Secretary in the Department of Commerce. Under section 9 it approves or rejects proposals for zones, approves Developers and co-Developers, authorises operations, approves foreign investment and offshore banking units, and hears appeals assigned to it. Under section 10 it may suspend a Developer’s letter of approval and transfer a zone.

Q: What does the Development Commissioner do in a zone?

The Development Commissioner, appointed under section 11 for one or more zones, is the resident administrative head. Under section 12 the Commissioner guides entrepreneurs, promotes exports from the zone, supervises and controls the Developer and the Units, secures compliance with the Act and the rules, and chairs the Approval Committee. The Commissioner’s office grants letters of approval to Units after the Committee approves them, monitors net foreign exchange performance, processes renewals, broad banding and exits, and coordinates the customs officers posted to the zone.

Q: How does a person set up a Unit in a special economic zone?

By submitting a proposal to the Development Commissioner under section 15. The Commissioner places it before the Approval Committee, which may approve it without modification, approve it with modifications on terms, or reject it, after hearing the person and recording reasons where it modifies or rejects. An aggrieved person may appeal to the Board of Approval. On approval the Development Commissioner grants a letter of approval specifying the authorised operations, and the entrepreneur executes a bond cum legal undertaking before commencing operations.

Q: What does an Approval Committee approve?

An Approval Committee, constituted under section 13 for each zone and chaired by the Development Commissioner, approves the setting up of Units and the operations they may carry on. Under section 14 it also approves diversification of production, broad banding of products, enhancement of production capacity and changes in a Unit’s approved activity, and it monitors the performance of Developers and Units, including whether a Unit has achieved positive net foreign exchange earnings over the block of years prescribed by the rules.

Q: What is payable when goods are sold from a zone into the domestic tariff area?

Duty of customs as if the goods had been imported into India. Section 30 provides that goods manufactured or produced in a zone and removed to the Domestic Tariff Area are chargeable to the customs duties that would be leviable on those goods if they were imported, and that a Unit may sell goods and services in the Domestic Tariff Area only in accordance with the conditions prescribed, which include payment of that duty and compliance with its letter of approval and net foreign exchange obligations.

Q: How was the Section 10AA deduction graded over fifteen years?

Section 10AA of the Income-tax Act 1961 allowed a Unit a deduction measured by its export profits for fifteen consecutive assessment years from the year it began manufacture, production or the provision of services. The rate was one hundred per cent of profits derived from exports for the first five years, fifty per cent for the next five years, and for the final five years an amount not exceeding fifty per cent of such profits, available only to the extent the profit was credited to a Special Economic Zone Re investment Reserve Account and used as the section requires.

Q: When were minimum alternate tax and dividend distribution tax extended to zones?

By the Finance Act 2011. Before that Act, section 115JB of the Income-tax Act, which charges minimum alternate tax on book profits, did not apply to a Developer or to a Unit in a zone, and section 115O, which charged dividend distribution tax, did not apply to a Developer’s dividends. The 2011 Act withdrew the dividend distribution tax exemption with effect from 1 June 2011 and the minimum alternate tax exemption with effect from 1 April 2012, so zone assessees paid minimum alternate tax and earned carry forward credit.

Q: What is the Special Economic Zone Authority created by Chapter VII?

It is a body constituted under section 31 for a zone, chaired by the Development Commissioner with Developer and Unit representation as prescribed, and brought into force on 1 October 2008. Its functions under section 34 are operational rather than regulatory: developing infrastructure, maintaining and managing common facilities, levying and collecting charges for their use, and administering a fund into which its receipts are paid under section 36. The Central Government may give it directions under section 38 and supersede it under section 40.

Q: What are the Designated Courts under the Act?

Section 23 requires the State Government, with the concurrence of the Chief Justice of the High Court, to designate courts to try suits and notified offences arising in a special economic zone. The design concentrates zone litigation in identified courts instead of dispersing it. It works with sections 20 to 22, which provide for notified inspection agencies, a single enforcement officer or agency for notified offences, and powers of investigation, inspection, search and seizure. Section 24 provides an appeal to the High Court, and section 25 deals with offences by companies.

Q: What did the Baba Kalyani Committee recommend in 2018?

The group of eminent persons chaired by Baba Kalyani, Chairman of Bharat Forge, was constituted by the Ministry of Commerce and Industry in June 2018 and reported in November 2018. It recommended a framework shift from export growth to broad based employment and economic growth, recasting zones as employment and economic enclaves, separate rules and procedures for manufacturing and service zones, a shift from a supply driven to a demand driven approach, improved utilisation of existing capacity, retention of fiscal benefits and sunset timelines, and a framework compatible with the subsidies agreement of the World Trade Organization.

Q: What can the Central Government do under Section 49 of the Act?

It may, by notification, direct that any provision of this Act other than sections 54 to 56, or any provision of any other Central Act, or rules, regulations, notifications, orders or directions under them other than those relating to rule making, shall not apply to a special economic zone or a class of zones or all zones, or shall apply only with the exceptions, modifications and adaptations specified. It is a wide delegated power to adapt other legislation to zone conditions, exercisable for the purposes of the Act and subject to judicial review.