fdi in india and its growth linkages - Department Of Industrial Policy ...

SPECIAL ECONOMIC ZONES (SEZS) AND FDI IN INDIA
generous tax holidays for manufacturing units, and unlimited duty-free imports of raw, intermediate and final goods as
well as capital goods.
4.10.2 Provision of Infrastructure in SEZs
The provision of infrastructure was done on a regional basis rather than restricting the benefits to the SEZ alone. Cities
like Shanghai started a comprehensive programme of resource mobilisation and expenditure management, and built new
infrastructure. It set up separate transport and energy funds in municipal revenue collection, guaranteeing much of the
funding for the two sectors, and tapped into the international market to lure direct investment. Municipal service
departments were given full responsibility for planning, investment, operations, and maintenance. They adopted an
independent cost-accounting system to facilitate sector management and financing, and increased user charges for
infrastructure services like bus transport, gas supplies, water, waste-water discharge, and sanitation services. The city also
raised funds by leasing land, in the process attracting a large volume of FDI into real estate development, including
commercial and apartment complexes that catered to foreign companies.
4.10.3 Local Autonomy
The growth process was accompanied by considerable delegation of authority to the provincial governments. Each was
allowed to introduce its own legislation to govern investment, approval procedures relating to foreign institutional
enterprises and local tax concessions. Local authorities could clear foreign investment proposals without referring to the
Centre. They were also permitted to retain a large share of incremental taxes generated as a result of the increased
economic activity, which was used to invest in infrastructure as well as equity contributions to joint ventures with foreign
investors. The four SEZs and their home provinces, Guangdong and Fujian, were awarded financial benefits in the form
of more advantageous fiscal and foreign exchange revenue contracts. Beginning in 1980, Guangdong and Fujian were
awarded five-year fiscal contracts permitting them to retain almost all of the taxes and industrial profits generated by
firms in their jurisdiction. In contrast, the three provincial-level cities of Beijing, Tianjin and Shanghai were still required
to turn over 63 to 88 per cent of their revenues. In terms of foreign exchange retention, the SEZs were allowed to retain
all of the hard currency they earned from trade, in contrast to the average of 25 per cent allowed to other localities.
4.10.4 Labour Policies
Under the planned economy system in China, the urban and rural labour forces were separated from each other and
deployed strictly according to government plans. Urban job seekers were provided with employment by the government
and rural labourers could not be employed in urban areas without the permission of the government. Employees had no
right to choose their jobs and the employer had no right to select what they needed either. After the reform, the
relationship between the employer and employee underwent a major change. In 1983, certain localities experimented
with gradual replacement of permanent employment with contract labour. The government formalised this practice in
1986 and promulgated “Provisional Regulations on Employment in State-owned Enterprises”. All the state organs,
government institutions and state-owned enterprises had to execute labour contracts for new employees, either on longterm
contracts (one year or more) or short-term contracts. In the 1995 Labour Law, contracts were made mandatory in
all industrial enterprises, including Town and Village Enterprises (TVEs).
4.10.5 Tax Policy
Chinese SEZs usually did not provide a long tax holiday. Instead, production enterprises attracted a reduced tax rate
with a substantial investment tax credit that varied from 100 per cent for investment in export-oriented and high-tech
enterprises to 40 per cent for investment in other FIEs. Among the preferential policies for FDI firms in the SEZs were,
for example, a reduction of income tax to 15 per cent (FDI firms engaged in production and scheduled to operate for a
period of 10 years or more were exempted from income tax in the first and second profit-making years and allowed a 50
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