A Special Economic Zone

“A Comparative Study Of Sez And Land Acquisition: Magical Similarity Or Mere Eyewash? ”

Part I : Sez Act 2005 : Birth Of A Baby Or Appearance Of A Lost Cousin?

1. 1. Understanding The Concept Of ‘SEZ’

A Special Economic Zone is a geographical region that has economic laws that are more liberal than a country’s typical economic laws. Usually the goal is an increase in foreign investment. Considering the need to enhance foreign investment and promote exports from the country and realizing the need that a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally, the Govt. of India had in April 2000 announced the introduction of Special Economic Zones in the country, deemed to be foreign territory for the purposes of trade operations, duties and tariffs. SEZs enjoy exemptions from customs duties, income tax, sales tax, service tax. After passing of the SEZ Act by the Parliament in June 2005, the law came into effect in February 2006, though some states like Gujarat had passed provincial SEZ legislation in 2004 itself.

2. 2. The Object Behind SEZs

The Preamble of SEZ Act 2005 states the object of the Act to be ‘promotion of exports’. The stated purpose of creating SEZs across India is “the promotion of exports”. The Commerce and Industries Ministry claims that exports will ultimately grow five times, GDP will rise 2% and that 30 lakh jobs will be generated by SEZs across India. It is also claimed by the government that SEZs will attract global manufacturing through foreign direct investment (FDI), enable transfer of modern technology and will also create incentives for infrastructure.

SEZ primarily appears to touch one of the major component of industries that is land, hence keeps functional linkages with other three primary factors of industry as such labour, capital, organization. As classical economists identify 4 factors such as land. Labour, Capital and Organisation as primary equal stakeholders for any industrial unit, each of such component including land for SEZ conceptually reserves at least 25% of share of total value of an industry.

3. 3. SEZS And Land Acquisition: How Are They Inter-Related?

In the era of liberalization and privatization the issue of land acquisition has assumed new dimensions with the setting up of the Special Economic Zones. SEZs and land acquisition are interconnected, for in the setting up of SEZs huge amounts of land are required. The government of India is encouraging the setting up of SEZs in the country for they help in the economic and industrial growth of the nation.

Land acquisition refers to the process by which the government forcibly acquires private property for a public purpose without the consent of the land owner, which is different from a market purchase of land. The law of land acquisition derives its legitimacy from the juridical principle of the power of Eminent Domain of the State – a power by which the state enjoys “sovereign control over all property in a state, with the right of expropriation.” The Land Acquisition Act 1894 confers upon the Central and State governments this power to acquire land “for public purposes and for Companies and for determining the amount of compensation to be made on account of such acquisition.” Since this Act finds a place in the Concurrent List of the Constitution, the various State governments have made necessary amendments.

Therefore a question naturally arises as to why was a need felt for a separate specific legislation on SEZs, when the land for the same could have been acquired under the Land Acquisition Act. Though there is no one explanation or answer for this question but it can be found on exploring the similarities and the differences between the procedure followed under the two along with other aspects. It is the hypothesis in this paper that the concept behind land acquisition for SEZ has emerged from land acquisition under the land Acquisition Act as is apparent from the similarity of procedure followed under both at the same time SEZ incorporates certain distinguishing features, therefore SEZ Act appears to be both the baby and the lost and found cousin of the Land Acquisition Act depending on the aspect that is being examined.

1. 1. Purpose For Which Land Is Acquired Under Land Acquisition Act And SEZ Act:

Under the Land Acquisition Act, 1894 Appropriate Govt. can acquire land only for ‘public purpose’ or for the purpose of a Company. The Act takes a broad definition of ‘public purpose’ permitting a diverse range of projects. In a number of cases the Supreme Court (SC) has highlighted concerns relating to fair compensation, valuation of land, definition of public purpose and other issues relating to land acquisition. The court has also held that the constitution permits acquisition by the state of private property only if it is required for a public purpose. In the recent cases of land acquisition, the “public purpose” is being questioned. But for development to take place, particularly at a time when the agriculture sector is on the decline, land has to be acquired for industrial growth. The question is when, how and in what situations should the state intervene to acquire land. Under the SEZ Act, the only purpose for which land can be acquired is for the establishment, development, and management of SEZs. While the preamble to the SEZ Act 2005 says that SEZs have been established ‘for the promotion of exports’, Section 5 of the Act says that the Central government will be guided by the following principles while notifying any area as a SEZ, viz.: ‘(a) generation of additional economic activity, (b) promotion of exports of goods and services, (c) promotion of investment from domestic and foreign sources, (d) creation of employment opportunities, [and] (e) development of infrastructure facilities. However the underlying object seems to have been established to have a nexus with the ‘public purpose.’ That is to say that there are several reports which establish that setting up of SEZs has helped the country to prosper in ways more than one thereby serving ‘public purpose’.

2. 2. Procedure Adopted For Acquisiiton Of Land Under The Land Acquisition Act

      And The SEZ Act

Under Land Acquisition Act, two separate procedures have been provided for acquisition of land for ‘public purpose’ and for ‘companies.’ For the former, the process commences with publication of preliminary notification of Govt. intention to acquire a particular land, followed by hearing of objections, publication of declaration that it is needed for a public purpose, acquisition by Collector, notice to persons interested, ultimately leading to enquiry and award by the Collector. For the purpose of acquisition for companies, there has to be previous consent of the appropriate Govt. along with an agreement executed by the Company.

Under the SEZ Act, 2005, the person intending to set up SEZ first makes a proposal to the State Govt. or to the BOA. Even the State Govt., if it intends to set up SEZ can make a proposal to the Board. This is followed by authorization to Developer to operate, and notification of SEZ.

Thus functioning of the SEZs is governed by a three tier administrative set up. The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce. The Approval Committee at the Zone level deals with approval of units in the SEZs and other related issues. Each Zone is headed by a Development Commissioner, who is ex-officio chairperson of the Approval Committee.

Once an SEZ has been approved by the Board of Approval and Central Government has notified the area of the SEZ, units are allowed to be set up in the SEZ. All the proposals for setting up of units in the SEZ are approved at the Zone level by the Approval Committee consisting of Development Commissioner, Customs Authorities and representatives of State Government. All post approval clearances including grant of importer-exporter code number, change in the name of the company or implementing agency, broad banding diversification, etc. are given at the Zone level by the Development Commissioner. The performance of the SEZ units are periodically monitored by the Approval Committee and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of violation of the conditions of the approval.

Broadly speaking there is a similarity in the procedure adopted to acquire land under Land Acquisition Act and SEZ Act to the extent that the consent of the landowner is not required under both. However under Land Acquisition, the final authority is the appropriate Govt. whereas under SEZ it is the Board of Approval.

3. 3. Advantages And Disadvantages Of Land Acquisition Act And SEZ

SEZ’s and land acquisition often involve in agricultural land and the central and state governments are acquiring the land from the farmers. The various advantages of the SEZ’s and land acquisition in India are that it has helped in bringing in huge amounts of foreign currency into the country, increased the number of jobs for the people and to bring technological advances to Indian industry, and make it a cost-effective producer. On the other hand the disadvantages are that it is estimated that more than ten lakh people, who are dependent upon agricultural land, will be evicted from their lands. It is estimated that the farming families will have to face a loss of around Rs.212 crores each year in total income, and it will also lead to putting the food security of India to risk. Land acquisition in India has now resulted in dissent, uproar and opposition from farmers for the livelihood has been put to stake. Whether it is Nandigram, Singur, Koodankulam, Jagatsinghpur (POSCO), Kannamangal or Bastar, the issues are the same. In the name of development, land acquisition is being done forcibly without due respect to basic human rights the right to life and personal liberty. The government promises ‘humane’ displacement followed by relief and rehabilitation. However, historical records show that an estimated 40 million people have lost their land since 1950 on account of displacement due to large development projects. At least 75% of them still await rehabilitation. Moreover compensation is being discussed only for those who hold titles to land. No compensation had been planned for those who don’t till the Narmada Water Disputes Tribunal provided for it. The present system of payment of compensation to the farmers is perceived to be totally unfair. If the land is being acquired for a commercial purpose under the garb of public purpose then let the market decide the price of the land as free markets are not about corporate entities ,or even industrialisation, they are about freedom. Then why restrict freedom of the farmers to sell their land at the market price. (Mutual negotiation, with the prospect of reverting to Land Acquisition only after 90% of the Land has been bought by negotiation, may become necessary.)

No doubt that for development to take place land has to be acquired by the government. There are a few success stories of land acquisition as well, which has been very smooth, resulting in the development of the area. Market forces have awakened rural India as well. The government will have to have new mechanisms in place so that the farmers become partners in the process of development. The acquisition of farmland at low prices is hurting farmers’ interests, which shows our current rural land acquisition system has not adjusted to the demands of the times, there must be reform. A fresh look needs to be taken at the land acquisition policy, including legislation, packages for compensation and advance plans for rehabilitation.

Exploring The Differences And Identifying The Unique Features Of SEZ

Though on a conceptual level land acquisition and SEZ seems related but it is worth noting that SEZ is a much specific and comprehensive subject in itself. Once the land is acquired under the Land Acquisition Act, it becomes the property of the Govt. and the Govt. can use it in any manner as it likes as long as it is used for a purpose for which it was acquired. But sometimes, if the purpose for which it was acquired cannot be fulfilled any longer for some reason, the Govt. can still use it for a different purpose altogether as long as there is no malafide intention on its part. But the land notified for SEZ cannot be used for any other purpose. Also under the SEZ Act, 2005, once the land is notified as SEZ, its ownership rests with the private person or with the state Govt. as the case may be.

Secondly, SEZ Rules provide for certain facilitative procedures which are absent in the case of Land Acquisition Act. They are as follows:

• “Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs;
• Single window clearance for setting up of an SEZ;
• Single window clearance for setting up a unit in a Special Economic Zone;
• Single Window clearance on matters relating to Central as well as State Governments;
• Simplified compliance procedures and documentation with an emphasis on self certification

Similarly there are several benefits and exemptions given in SEZ which are altogether absent in the case of ‘other public purpose’ under Land Acquisition. The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:-

• • Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units
  • 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.
  • Exemption from minimum alternate tax under section 115JB of the Income Tax Act.
  • External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.
  • Exemption from Central Sales Tax.
  • Exemption from Service Tax.
  • Single window clearance for Central and State level approvals.
  • Exemption from State sales tax and other levies as extended by the respective State Governments.

The major incentives and facilities available to SEZ developers include:-

• • Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.
  • Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.
  • Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.
  • Exemption from dividend distribution tax under Section 115O of the Income Tax Act.
  • Exemption from Central Sales Tax (CST).
  • Exemption from Service Tax.

Thirdly, though there are specific provisions under Land Acquisition Act for compensation to the interested persons, SEZ Act does not provide for them. The compensation in case of SEZ are generally determined on the basis of the policy of the government.

Fourthly, under SEZ, the applicability of several laws itself can be exempted. Thus several labour laws, environmental laws, industrial laws are relaxed as a form of incentive. But the land that is acquired under Land Acquisition is not entitled to get any such relaxation.

Part IV : Identifying Some Critical Issues Underlying Land Acquisition And SEZ

4. 4. Displacement Resulting From SEZ And Grab Of Land Under Land Acquisition Act

It has already been noted that consent of the land owner is not required either under SEZ or under land Acquisition Act. Estimates show that close to 114,000 farming households (each household on an average comprising five members) and an additional 82,000 farm worker families who are dependent upon these farms for their livelihoods, have been displaced due to SEZs. Experts calculate that the total loss of income to the farming and the farm worker families is at least Rs. 212 crores a year. This does not include other income lost (for instance of artisans) due to the demise of local rural economies.

The government promises ‘humane’ displacement followed by relief and rehabilitation. However, the historical record does not offer any room for hope on this count: an estimated 40 million people (of which nearly 40% are Adivasis and 25% Dalits) have lost their land since 1950 on account of displacement due to large development projects. At least 75% of them still await rehabilitation. Almost 80% of the agricultural population owns only about 17% of the total agriculture land, making them near landless farmers. Far more families and communities depend on a piece of land (for work, grazing) than those who simply own it. However, compensation is being discussed only for those who hold titles to land. No compensation has been planned for those who don’t.

Therefore the debate of development versus the rights of the land owners and more so of poor adivasis continues to be a unresolved issue attracting the displeasure and wrath of a millions.

5. 5. Violation Of Laws – How Many, How Much?

The constitutionality of Land Acquisition Act has been challenged more than one time, but the Supreme Court observed it to be in consonance with the Constitution as though it appears to touch upon the right to property and might appear violative of Art. 14 on the face of it, the provision regarding opportunity to be heard, and adequate compensation along with proper mechanism for dispute redressal makes it perfectly constitutional. Though the fire seems to be extinguished for now but all is not that calm as doubt regards its constitutionality might reappear especially in the wake of SEZs and the consequent linkage drawn between the two. However though the constitutionality of SEZ Act has not been challenged as such, it is alleged to be violative of several laws. The following are the main legal violations because of the SEZ Act, 2005:

• • It violates the letter and spirit of the Indian Constitution.
  • It infringes the fundamental rights of the citizen guaranteed in Part III of the Constitution.
  • Relaxation/inapplicability of many labor laws (including under the Industrial Disputes Act, Contract Labor Act, Factories Act, Minimum Wages Act, Trade Union Act)
  • Environment (Protection) Act is inapplicable to SEZs. No environmental clearance needed.
  • Violates Panchayat Raj Act (1996) for local selfgovernment
  • Violates laws granting rights and control to Adivasi communities over their land
  • Violates many international conventions on human rights

Part V : Suggestions : The Way Ahead

Why does a landowner of agricultural land hesitate to dispose his/her land right to the industrialist/ government for SEZ development or for land acquisition even with an offer of lucrative compensation package? The sole answer to this can be found from the sentiments of the landowners who are forced to dispose land for SEZ development. They often complain that they got so much income every year out of their agricultural crop production, which would cease now permanently if disposed for development of SEZ. If a way is found to safeguard the land ownership right of landowner as well as compensating loss of livelihood generated out of land in a sustainable manner, no landowner would perhaps be disinterested to lease out his land. However with certain pre-conditions such model framework is to be developed. To develop such corporate-private partnerships, Panchayati Raj Institutions (PRIs) can play a dual role.

• During the acquisition of agricultural/ private land for SEZ development, ownership right should not be fully sold out rather should be given to the entrepreneur under a lease agreement for 25 years, which means neither the Govt. nor the entrepreneur operating in SEZ would enjoy absolute ownership of land.
• Since land conceptually keeps a minimum importance of 25% of stake in an industrial unit, the land components should be regarded as minimum 25% of the stake of the total value of the industry. This means, in tune of growth of the industry, the value of land would be increasing and with downfall of the industry, the value of land will be coming down to its original price. Hence, an industrial unit coming up in SEZ ideally needs to allocate 25% share of its industrial value to the land owners. An Industry coming up in SEZ often enjoys acquisition right with nominal price over Govt. land However, private land belongs to farmers or local inhabitants, which of consists a small portion of SEZ need only to be acquired with proper compensation.
• The industry acquiring the agricultural/ private land need to employ at least the sole bread earner of the family of landowner from the very day the owner losses its right to earn agricultural livelihood from its land.
• High priority to be given to local work force for unskilled labour utilization in the industries of SEZ.
• The entrepreneurs should ensure local skill up gradation as per the requirement of industry through setting up Industrial Training Institutes in the surrounding areas of SEZ.

These suggestions are basically for SEZ. For, land acquisition under Land Acquisition Act, though compensation is paid, there still exists some sort of mysterious cloud as regards the intention of the govt. Therefore it is suggested that every time Govt. acquires a land for ‘public purpose’, it should make an attempt on its part to communicate such intention to the people adequately and if possible to make them a part of such project by engaging them for the same. But these are at best directory guidelines.

In conclusion, though there are several similarities in Land Acquisition Act and SEZ Act which might appear magical, there are ample differences too which might such similarities to mere eyewash. The need of the hour is to maximize the utility of both for the welfare of public and reduce the discontentment caused thereby to whatever extent possible.