International Business

ASSIGNMENT ON INTERNATIONAL BUSINESS Submitted by: Amal Barman Roll no: 03/D/08

Export Processing Zones In order to encourage exports, the Government of India has provided special incentives for units set up primarily for manufacturing goods for export. Such units can be set up in designated Export Processing Zones (EPZs). These EPZs are designed to provide an internationally competitive duty free environment at low cost for export production. Each of the zones provide basic infrastructure facilities like developed land, standard design factory buildings, roads, power, water supply, drainage and customs clearance facilities. The terms Free Trade Zones and Export Processing Zones in the Indian context are synonymous. The first EPZ set up in India was in 1965 - the Kandla Free Trade Zone. Subsequently, six more EPZs have been set up at Santa Cruz (Bombay) Falta (West Bengal) Madras (Tamil Nadu) Noida (UP) Cochin (Kerala), and Visakhapatnam (Andhra Pradesh). The scheme for EOUs (Export oriented Zones) is complementary to the EPZ schemes. It adopts the same production regime but offers wider locational options with reference to sourcing of raw material part of the exports, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. 100% foreign equity is welcome in EOUs and EPZs. However, there are differences in the way countries set up and operate their EPZs. China alone has seven different types of zone ranging from industrial parks to entire cities and high-technology zones.

EPZ host countries incur two types of costs: first, the direct costs for establishing EPZ infrastructure and subsidized services; and second, the indirect costs in the form of foregone government revenue and national income as a result of exemptions from taxes, import and export duties, etc. The question of labour standards and labour relations continues to be one of the most controversial aspects of EPZs. The vast majority of EPZ workers are young women, especially in the electronics and textile industries. EPZ companies that are engaged in low skill cheap-labour production regard women as better able to perform monotonous, repetitive work. Such young women are seen as docile and cheap workers with nimble fingers. Applications for aproval of EOUs and EPZ units are to be addressed to the Development Commissioners of Export Processing Zones in the case of EPZs and to the Secretariat for Industrial Approvals (SIA) in the case of EOUs. Some incentives given to EPZs and EOUs Single Window Clearance No import licenses are required Import of all industrial inputs exempt from customs duty Supplies from the DTA to EOUs and EPZ units are regarded as deemed exports and are hence exempt from payment of excise duty which means that high quality inputs are available at lower costs. On fulfillment of certain conditions, EPZs, and EOUs are exempted from payment of corporate income tax for a block of 5 years in the first 8 years of operation. Export earnings continue to be exempt from tax even after the tax holiday is over. Industrial plots and standard design factories are available to EOUs and EPZ units at concessional rates. Private bonded warehouses in the 7 EPZs can be set up for Import and sale of goods including in the DTA, subject to payment of applicable duties at the time of sale Trading including re-export after repacking/labeling Re-export after repair, reconditioning or re-engineering EOUs and EPZs are permitted to sub-contract part of their production processes for job work to units in the DTA on a case by case basis. Supplies to the DTA under international competitive bidding against payment in foreign exchange to other EOUs and EPZ units and against import licenses are considered towards fulfillment at the export obligation. The FOB value of exports of EOUs and EPZ units can be clubbed with that of parent companies located in the DTA for the purpose of obtaining a Trading or Export House status EOUs and EPZ units may export goods through Trading and Export Houses or other EOU and EPZ Units.

Export Oriented Unit The EOU scheme was introduced in the year 1980 vide Ministry of Commerce resolution dated 31st December 1980. The purpose of the scheme was basically to boost exports by creating additional production capacity. It was introduced as a complementary scheme to the Free Trade Zones/ Export Processing Zone (EPZ) Scheme introduced in the sixties which had not attracted many units due to locational restrictions. The exporters showed willingness to set up units with long term commitment to exports under Customs bond operations provided they had the freedom to locate them in places of their choice and given most of the benefits as provided to units set up in the Zones. Objectives of the Export oriented unit: The main objectives of the EOU scheme is to increase exports, earn foreign exchange to the country, transfer of latest technologies stimulate direct foreign investment and to generate additional employment. Major Sectors in EOUs: GRANITE TEXTILES / GARMENTS FOOD PROCESSING CHEMICALS COMPUTER SOFTWARE COFFEE PHARMACEUTICALS GEM & JEWELLERY ENGINEERING GOODS ELECTRICAL & ELECTRONICS AQUA & PEARL CULTURE

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

Arms and ammunition, Explosives and allied items of defense equipment, Defense aircraft and warships, Atomic substances, Narcotics and psychotropic substances and hazardous chemicals, Distillation and brewing of alcoholic drinks, Cigarettes/cigars and manufactured tobacco substitutes. In the above mention cases, EOU owner are required to submit the application form to the Development Commissioner who will then put them up to the Board of Approvals (BOA). The Customs exemption notifications for import & related Central Excise exemption notification when the goods are procured from local manufacturing units, prescribe several conditions to be fulfilled by the beneficiaries keeping in view the objective of the Scheme and to prevent abuse. Working in Customs Bond is one of the essential prerequisite-there being few exceptions. They also provide various flexibilities in the matter of taking out the materials for jobwork, inter-unit transfer. The EOUs are required to achieve the minimum NFEP (Net Foreign Exchange Earning as a Percentage of Exports) and the minimum EP (Export Performance) as per the provisions of EXIM Policy. The NFEP and EP vary from sector to sector. As for instance, the units with investment in plant and machinery of Rs.5 crore and above are required to achieve positive NFEP and export US$ 3.5 million or 3 times the CIF value of imported capital goods, whichever is higher, for 5 years. For electronics hardware sector, minimum NFEP has to be ‘positive’ and minimum EP for 5 years is US$ 1 million or 3 times the CIF value of imported capital goods, whichever is higher. NFEP is calculated cumulatively for a period of 5 years from the commencement of commercial production according to a prescribed formula. Goods Manufactured from Indigenous Materials in 100% EOUs-

A concessional duty has been prescribed for goods sold in DTA which are manufactured entirely out of indigenous materials. In such cases, the duty charged is the effective rate of excise duty which is leviable on like goods manufactured & cleared by DTA units. (Reference: notification No.8/97-CE dated 1-3-97). However, if such goods manufactured by a DTA unit are fully exempt from excise duty or are chargeable to ‘nil’ rate of duty, the EOUs are required to pay 30% of each of duties of customs leviable on similar imported goods. (Reference: Notification No.13/98-CE, dated 2-6-98) Exports during 2003-2004 from EOUs were of the order of Rs. 27364.15 crores as compared to the export of Rs.22615.59 cores achieved during 2002-2003, representing a growth of 21%.

Export Performance

Electronic Hardware Technology Park (EHTP) Scheme The EHTP Scheme is a 100% Export Oriented Scheme for undertaking manufacturing of electronic hardware equipment/components and other items in India. This scheme is unique in its nature as it focuses on one product/sector, i.e. Electronic Hardware. An EHTP unit is also allowed to manufacture items other than those specified in the approval letter, provided that such other items fall in the category of Electronic Hardware, the design and production facilities are common and have similar manufacturing process. Scheme Benefits & Highlights The Central Government, State Government, Public or Private sector undertakings or any combination thereof may set up the Electronic Hardware Technology Park (EHTP). A company may set up STP unit anywhere in India. Foreign equity permissible upto 100%. 100% foreign equity investment in the companies permissible under the 'Automatic Route' of RBI.

Approvals are given under single window clearance. Project costing less than Rs. 100 million investments are cleared by local STPI Authorities. Income Tax holiday as per IT Act of Ministry of Finance, Govt. of India applicable time-to-time. EHTP units are exempted from payment of corporate Income Tax. Capital invested by Foreign Entrepreneurs, Know-How Fees, Royalty, Dividend etc., can be freely repatriated after payment of Income Taxes due on them, if any. EHTP unit is a duty free bonded area under section 65 of the Customs Act, 1962. 100% Customs Duty exemption on imports of Capital Goods and inputs (Raw Materials, Components, Consumables, Parts and packing Materials) 100% Excise Duty exemption on indigenous items procurement. Import of Capital Goods on outright purchase, loan, free of cost and lease basis is permitted. Import of second hand capital goods is permitted. (Except prohibited items). Re-Export of capital goods is permitted Central Sales Tax reimbursement on indigenous items procurement. Green card enabling priority treatment for government clearances / other services. Sales in the DTA (Domestic Tariff Area) up to 50% of the foreign exchange earned by the EHTP unit. Inter Unit Transfer between EOU/STP/EHTP/EPZ is permitted. Sub-contracting between EOU/STP/EHTP/EPZ is permitted. Simplified Net Foreign Exchange Earnings (NFEP) & Export Performance (EP) norms, as applicable at the time of signing EHTP agreement. Simplified depreciation norms on Capital Good.

Software Technology Parks of India Software Technology Parks of India (STPI) is a government agency in India, established in 1991 under the Ministry of Communications and Information Technology, that manages the Software Technology Park scheme. It is an export oriented scheme for the development and export of computer software, including export of professional services. It provides physical infrastructure, including dedicated high speed connectivity to technology parks, freedom for 100% foreign equity investment and tax incentives. STPI provides physical hosting for the National Internet Exchange of India. STPI claims to have played a seminal role in India having earned a reputation as an information technology superpower. More than 6,000 businesses are registered under the STPI umbrella, with 36% growth by value in 2005-06 exports over the previous year. The state with the largest export contribution was Karnataka (see Bangalore). STPI has a presence in many of the major cities of India including the cities of Bangalore, Bhubaneswar, Chennai, Hyderabad, Guwahati, Noida, Mumbai, Kolkata, Kanpur, Lucknow, Dehradun, Patna, Ranchi, Gandhinagar etc. STP schemes provide facilities for the IT industry, helping them undertake software development and IT enabled services for 100% exports that include professional services.

For that, data communication links have been established, providing high speed connectivity. The concept of STP Scheme was evolved in 1991 and enunciated the following objectives: To establish and manage infrastructure resources such as Data Communication facilities, Core Computer facilities, Built-up space and other common amenities. To provide 'single window' statutory services such as Project approvals, import certification software valuation and certification of exports for software exporters. To promote development and export of software services through technology assessments, market analyses, market segmentation and marketing support. To train professionals and to encourage design and development in the field of software technology and software engineering.

Free Trade Zones A free trade zone (FTZ) is one or more special areas of a country where some normal trade barriers such as tariffs and quotas are eliminated and bureaucratic requirements are lowered in hopes of attracting new business and foreign investments. It is a region where a group of countries has agreed to reduce or eliminate trade barriers. Free trade zones can be defined as labor intensive manufacturing centers that involve the import of raw materials or components and the export of factory products. Most FTZs are located in developing countries. Bureaucracy is typically minimized by outsourcing it to the FTZ operator and corporations setting up in the zone may be given tax breaks as an additional incentive. Usually, these zones are set up in underdeveloped parts of the host country, the rationale being that the zones will attract employers and thus reduce poverty and unemployment and stimulate the area's economy. These zones are often used by multinational corporations to set up factories to produce goods (such as clothing or shoes). Free trade zones in Latin America date back to the early decades of the 20th century. The first free trade regulations in this region were enacted in Argentina and Uruguay in the 1920s. However, the rapid development of free trade zones across the region dates from the late 1960s and the early 1970s.

Criticism The creation of special free trade zones is criticized for encouraging businesses to set up operations under the influence of other governments, and giving foreign corporations more economic liberty than is given indigenous employers who face large and sometimes insurmountable "regulatory" hurdles in developing nations.

However, many countries are increasingly allowing local entrepreneurs to locate inside FTZs in order to access export-based incentives. Because the multinational corporation is able to choose between a wide range of underdeveloped or depressed nations in setting up overseas factories, and most of these countries do not have limited governments, bidding wars erupt between competing governments. Often the government pays part of the initial cost of factory setup, loosens environmental protections and rules regarding negligence and the treatment of workers, and promises not to ask payment of taxes for the next few years. When the taxation-free years are over the corporation which set up the factory without fully assuming its costs is often able to set up operations elsewhere for less expense than the taxes to be paid, giving it leverage to take the host government to the bargaining table with more demands in order for it to continue operations in the country. Often if human rights, labor or environmental abuses are challenged, subcontracted local entities may face consequences, but parent companies in the United States are rarely held accountable.

DOMESTIC TARIFF AREA Domestic Tariff Area means area within India which is outside the Special Economic Zones and Economic Oriented Zones, electronic hardware Technology Parks, Software Technology Parks, and BTP. The Business Zone is divided into a Domestic Tariff Area (DTA) and three sectors specific Special Economic Zones for IT (Services & Manufacturing), and Fashion Accessories. The Special Economic Zone status ensures that companies get the advantage of fiscal benefits, tax holidays, and proactive support from the government, an onsite customs office and self certification process. Companies experience a productive, hassle-free environment. The Domestic Tariff Area (DTA) provides facilities for companies to set up manufacturing units to cater to the needs of the domestic market. Besides enjoying similar infrastructural advantages of the SEZ, the DTA also gives companies the space to function and flourish within a conducive business ecosystem.