INTRODUCTION:

A free trade zone (FTZ) also called foreign-trade zone, formerly free port is an area within

which goods may be landed, handled, manufactured or reconfigured, and re-exported without

the intervention of the customs authorities. Only when the goods are moved to consumers

within the country in which the zone is located do they become subject to the prevailing

customs duties. Free-trade zones are organized around major seaports, international airports,

and national frontiers—areas with many geographic advantages for trade.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. The world's first Free Trade Zone was

established in Shannon, County Clare, Shannon Free Zone. This was an attempt by the Irish

Government to promote employment within a rural area, make use of a small regional airport

and generate revenue for the Irish economy. It was hugely successful, and is still in operation

today. The number of worldwide free-trade zones proliferated in the late 20th century. In the

United States free-trade zones were first authorized in 1934.

Most FTZs located in developing countries: Brazil, Colombia, India, Indonesia, El Salvador,

China, the Philippines, Malaysia, Bangladesh, Pakistan, Mexico, Costa Rica, Honduras,

Guatemala, Kenya, Sri Lanka, and Madagascar have EPZ programs. In 1997, 93 countries

had set up export processing zones employing 22.5 million people, and five years later, in

2003, EPZs in 116 countries employed 43 million people.

Corporations setting up in a zone may be given tax breaks as an incentive. Usually, these

zones are set up in underdeveloped parts of the host country; the rationale is 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. The

Latin American Free Trade Association (LAFTA) was created in the 1960 Treaty of

Montevideo by Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay. However,

the rapid development of free trade zones across the region dates from the late 1960s and the

early 1970s. Latin American Integration Association is a Latin American trade integration

association, based in Montevideo.

Free Trade Zones are also known as Special Economic Zones in some countries. Special

Economic Zones (SEZs) have been established in many countries as testing grounds for the

implementation of liberal market economy principles. SEZs are viewed as instruments to

enhance the acceptability and the credibility of the transformation policies and to attract

domestic and foreign investment.

In 1999, there were 43 million people working in about 3000 FTZs spanning 116 countries

producing clothes, shoes, sneakers, electronics, and toys. The basic objectives of EPZs are to

enhance foreign exchange earnings, develop export-oriented industries and to generate

employment opportunities.

Many in the economic development community and real estate development field have heard

much about how the Foreign-Trade Zone program attracts firms of all types to FTZ

designated industrial parks and property. Many Foreign-Trade Zone projects have been

started with the philosophy of “establish it, and they will come”. The reality is that for FTZ

Grantees to receive the economic development benefits they desire, the right choices in many

areas must be made. The Foreign-Trade Zone Corporation will guide Grantees and

developers so that the best choices are made so that the FTZ project maximizes its potential

by attracting prospective companies as well as providing an avenue to providing the

maximum benefit to existing companies in the area. One choice that Grantees are faced with

is whether or not to expand a Foreign-Trade Zone or reorganize it using the Alternative Site

Framework (ASF).

In January 2009, the Foreign-Trade Zones Board adopted a FTZ Board staff proposal to make

what it called the Alternative Site Framework (ASF) as a means of designating and managing

general-purpose FTZ sites through reorganization. The ASF provides Foreign-Trade Zone

Grantees with greater flexibility to meet specific requests for zone status by utilizing the

minor boundary modification process. The theory of the ASF is that by more closely linking

the amount of FTZ designated space to the amount of space activated with Customs and

Border Protection, Zone users would have better and quicker access to benefits. When a FTZ

Grantee evaluates whether or not to expand its FTZ project in order to improve the ease in

which the Zone may be utilized by existing companies, as well as how it attracts new

prospective companies, the Alternative Site Framework (ASF) should be considered. The

ASF may be an appropriate option for certain Foreign-Trade Zone projects, but the decision

of whether to adopt the new framework and what the configuration of the sites should be will

require careful analysis and planning. Regardless of the choice to expand the FTZ project, the

sites should be selected and the application should be drafted in such a manner as to receive

swift approval, while maximizing benefit to those that locate in the Zone. Successful zone

projects are generally the result of a plan developed and implemented by individuals that

understand all aspects of the FTZ program.[5]

The Foreign Trade Zone Board (FTZB) approves the reorganization of Foreign Trade Zone

(FTZ) 32 under the alternative site framework. The application submitted by its grantee, The

Greater Miami Foreign Trade Zone was approved and officially ordered by the FTZB on

January 8, 2013. From California, to Oklahoma to North Carolina to New York State, FTZs

all across the nation have recently been making use of the flexible opportunities offered by

the Alternative Site Framework (ASF) program. The ASF program is designed to serve zone

projects that want the flexibility to both attract users/operators to certain fixed sites but also

want the ability to serve companies at other locations where the demand for FTZ services

arises in the future. FTZ 32 was founded in 1979 and processes over $1 billion in goods with

products from more than 65 countries and exported to more than 75 countries worldwide,

with speed and efficiency. According to the official order from the FTZB, FTZ 32 existing

site 1, Miami Free Zone will be classified as a magnet site.

RESEARCH METHODOLOGY:

RESEARCH OBJECTIVES:

1) To study the Characteristics of FTZ in india

2) To study the types of FTZ

3) To study the contributions of FTZ in India

4) To study the Procedures of FTZ in India

5) To analyse the problems faced by FTZ in India

RESEARCH DESIGN:

The researcher has selected Exploratory research and Descriptive or survey research design

Exploratory research:

It is a type of research conducted for a problem that has not been clearly defined. Exploratory

research helps determine the best research design, data collection method and selection of

subjects. It should draw definitive conclusions only with extreme caution. Given its

fundamental nature, exploratory research often concludes that a perceived problem does not

actually exist.

SOURCES OF DATA:

Secondary data:

The data existing already can be obtained from internet, books.

LOCATION OF FTZ:

Free trade zones are generally located near a country’s ports of entry.

For convenience purposes, locations with a close proximity to seaports and airports are

commonly designated free trade zones.

Usually, these zones are set up in underdeveloped parts of the host country; the rationale is

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 are utilized by everyone from large manufactures to small businesses to

individuals. Any person or entity that intends to import or export goods and can consider

taking advantage of free trade zones.

FTZ IN INDIA:

Kandla Free Trade Zone:-

established in 1965,

India's first free trade zone.

The basic infrastructure facilities for the units like developed land,

Standard design factory buildings, power , water and customs clearance

facilities are provided here. India

Inspira Pharma and Renewable Energy Park, Aurangabad, Maharashtra, India

Sricity Multi product SEZ, part of Sricity which is a developing satellite city in the

epicentre of Andhra Pradesh & Tamil Nadu, India

Arshiya International Ltd, India's first Free Trade and Warehousing Zone

The largest multi-product Free trade and warehousing infrastructure in India. Arshiya's first

165 acre FTWZ is operational in Panvel, Mumbai, and is to be followed by one in Khurja

near Delhi. Arshiya's Mega Logistics Hub at Khurja to have 135 acre FTWZ, 130 acre

Industrial and Distribution Hub (Distripark) & 50 acre Rail siding. Arshiya International will

be developing three more Free Trade and Warehousing zones in Central, South and East of

India.

Kandlar Trade Free Zone, India

Cochin SEZ is a Special Economic Zone in Cochin, in the State of Kerala in

southwest India, set up for export- oriented ventures. The Special Economic Zone is a

foreign territory within India with special rules for facilitating foreign direct

investment. The Zone is run directly by the Government of India.

Cochin SEZ is a multi-product Zone. Cochin is strategically located. It is in southwest India,

just 11 nautical miles off the international sea route from Europe to the Pacific Rim. Cochin

is being developed by the Dubai Ports International as a container transhipment terminal with

direct sailings to important markets of the world, which could position it as Hub for South

Asia.

FREE TRADE ZONES BENEFITS:

A free trade zone (sometimes called a special economic zone) is an area,

usually a city with a sea port, where the government has liberalized foreign trade terms

beyond what are in force in the rest of the country. They are usually found in developing

countries. The usual reason for doing this is to promote intense economic growth in a

particular area by attracting international investment and increased mercantile activity. It is

possible for a government that is already engaging in free trade to create a "free trade zone"

by making trade there even freer. In fact, it is a not unusual practice for governments to

designate free trade areas and offer incentives, such as tax exemptions, to investors and

traders that would allow them to undercut domestic competition elsewhere in the country.

Some free trade zones even offer things which, strictly speaking are anti-free trade, such as

government subsidies.

COMPARATIVE ADVANTAGE

Comparative advantage is central to the theory of free trade. What free trade is supposed to

do is allow countries with particular advantages in producing a given commodity or service to

export that and compete on a more or less equal footing with foreign competitors, both in the

competitors home country and in the country's of third parties. This could take the form of

superior quality, cheaper production costs (usually due to cheaper labor), or both. The

consumers win because they have access to better goods at a cheaper price, and the economy

as a whole wins because it is freed to re-task resources to focusing on its strengths, or

comparative advantages.

DEVELOPMENT

As previously noted, a free trade zone is mostly about attracting investment, but this does not

mean that it does not take advantage of comparative advantage. What most countries setting

up a free trade zone have to offer in terms of comparative advantage is cheap labor, allowing

manufacturers to undercut their competition in production costs. A foreign company can set

up a factory in the free trade zone, take advantage of the more favorable local labor

conditions, and export the product. Another comparative advantage could be an advantageous

location. A good example of that is the entire city-state of Singapore, which is located on the

heavily-trafficked Straits of Malacca, and essentially made its entire territory into a free trade

zone early on in its independence. It should be noted that not all free trade zones permit

domestic producers from locating their enterprises inside the free trade zone. Indeed, since

the point is to attract foreign investment, some specifically exclude them. In such cases, the

host government is shooting themselves in the foot, because by allowing foreigners access to

privileges that domestic producers lack, they are effectively strangling domestic ownership of

the economy.

EXPERIMENTATION

Another advantage of a free trade zone is that by limiting the scope of trade liberalization, it

allows a government to experiment with economic policies without the risks of applying

them to the economy as a whole. A free trade zone can function as an economic laboratory,

allowing a government to learn what will be of the most benefit to their economy over the

long-term.

ADVANTAGES OF FREE TRADE ZONE:

Free trade has many advantages. Although there are some disadvantages, this article willd

focus on the advantages of free trade zones. Liberalization of trading laws among free trade

members generally leads to growth in economic activity inside the member states. Such zones

also lead to better and more efficient production among the industrial manufacturing

companies. Free trade zones also create more job opportunities for member countries.

INCREASED PRODUCTIVITY

When boundaries are liberalized between the nations in the free trade zone, the market reach

of the countries in the free trade region is broadened. This means that each nation under the

free trade region would strive to increase industrial manufacturing base to meet the increasing

demand for their manufactured goods and services.

EFFICIENCY IN PRODUCTION:

The demand for goods and services in the free trade region also lead to efficiency in the

industrial manufacturing process. Since all countries in the free trade region would be

competing with one another for the markets, efficiency in the manufacturing process is

boosted. Industrial efficiency would in turn reduce costs of labor and raw materials.

LOWER CONSUMER PRICES

Competition for the markets in the free trade region would in turn create competition among

the industrial manufacturers of the free trade zone. This competition would in turn lead to

price reductions, a direct consequence which would benefit the consumers in the region.

When companies compete with one another, consumers are the immediate beneficiaries.

NEW JOB CREATION

Free trade regions always stimulate new job opportunities. The new job opportunities come in

the industrial manufacturing sector. The jobs created tend to be good paying jobs, on average.

Although free trade zones may also come with free movement of persons across international

boundaries, such movement may not be permanent. In the case of European Union, some

conditions are attached to free movement across the Euro zone countries. Any citizen of any

EU country may move across to another EU country and stay for a designated period. Unless

they secure employment within the initial authorized period, they are required to go back to

the state from where they

THE DISADVANTAGES OF FREE TRADE ZONES

A free trade zone, commonly known as an FTZ, is a designated area where goods are traded

without any barriers such as quotas and tariffs attached by customs officials. FTZs are formed

by governments to attract foreign investors. FTZs are mostly located in places such as

airports and seaports. Free trade zones have many benefits but also some disadvantages.

REDUCTION OF GOVERNMENT REVENUE

Businesses in free trade zones are not charged customs duty on the goods that they sell there.

This means that the government loses large sums of money which could have gone to the

exchequer. Because of this, many governments place strict conditions on the operation of the

free trade zones.

SMUGGLING

Free trade zones increase the chances of goods being sneaked into the free trade zones to

avoid the payment of taxes. Although goods that are sold in these zones are clearly labeled,

fraudsters are able to bring into the zones goods that do not qualify to be sold there. Care

should be taken to prevent legal loopholes that might aid such practices.

MONEY LAUNDERING

Free trade zones have presented an avenue for money laundering. A study done in March

2010 on money laundering vulnerabilities of free trade zones said the zones are misused to

aid in money laundering and terrorist financing. Some of the factors attributed to this include

a relaxed oversight by the domestic authorities and a lack of adequate coordination between

the customs officials. (See Reference 2.)

CUSTOMS FRAUD

Customs fraud occurs as a result of collusion between customs officials. It occurs when trade

officials change trade certificates to indicate that the products originated from regions that

suit their personal needs.

THE EFFECTS OF THE ACTIVITIES OF FREE TRADE ZONE

Free Trade Zone (FTZ) is any area, such as an airport or seaport, into which raw materials,

components or finished goods are imported without any tariffs, processed and then exported.

The main effects of FTZs are bringing in foreign currency revenue, direct investment, job

creation and establishment of useful links between businesses operating inside an FTZ and

the rest of the economy in a country. As of mid-2010, there are more than 3,000 Free Trade

Zones.

SPECIAL PROVISION RELATED TO FTZ:

Sec 10 A provides a deduction of such profits and gains as are derived by an

undertaking from the export of the articles or things or computer software for

certain consecutive assessment years.

FORM OF ORGANIZATION:

Deduction u/s 10A is available to an undertaking from export of articles etc. this

section does not provide any particular form of organization for undertaking.

Thus undertaking can be operated as sole proprietorship, partnership firm,

company etc.

ESSENTIAL CONDITIONS TO BE FULFILLED:

What to manufacture or produce? [Sec 10 A (2)(i)] The undertaking must

manufacture or produce articles or things or computer software etc.

Location of undertaking any zones notified by central government of India as FTZs.

Export out of India

Undertaking must export out of India, the articles or things or computer software

manufactured or produce

Setup in FTZ or SEZ which begins operation on or after 01-04-01 but before 01-04-02

100% of profit and gains from export is allowed as deduction for 10 consecutive

years.

Undertakings which begin operations on or after 01-04-02 but before 01-04-05 in any

SEZ or FTZ

-100% of profit and gains from export is allowed as deduction for 5 consecutive

years.

- 50% of profit and gains from export is allowed as deduction for next 2 consecutive

years.

-50% of profit and gains from export is allowed as deduction for next 3 consecutive

years, if certain special conditions are fulfilled.

Furnishing of the return on or before due date [u/s 139 (1)]

Calculation of the profit from exports [Sec 10A (4)]

Deduction =100% of [Profit of the * Exp Turn Over ]

u/s 10 A under taking Total Turn Over

Example

Sancha Ltd. Located in Kandla Free Trade Zone is eligible to claim deduction u/s 10A. The

company started claiming this deduction from A.Y. 2005-06. the company provides

following information:

Export sales = Rs 92,00,000

Domestic sales = Rs 20,00,000

Profit of the business of the undertaking

= Rs 24,00,000

Calculate deduction u/s 10 A.

FREE TRADE & WAREHOUSING ZONES:

OBJECTIVE:

The objective is to create trade-related infrastructure to facilitate the import and export of

goods and services with freedom to carry out trade transactions in free currency. The scheme

envisages creation of world-class infrastructure for warehousing of various products, state-of-

the-art equipment, transportation and handling facilities, commercial office-space, water,

power, communications and connectivity, with one-stop clearance of import and export

formality, to support the integrated Zones as ‘international trading hubs’. These Zones would

be established in areas proximate to seaports, airports or dry ports so as to offer easy access

by rail and road.

STATUS

The Free Trade & Warehousing Zones (FTWZ) shall be a special category of Special

Economic Zones with a focus on trading and warehousing.

ESTABLISHMENT OF ZONE:

(i) Proposals for setting up of FTWZs may be made by public sector undertakings or

public limited companies or by joint ventures in technical collaboration with

experienced infrastructure developers. The proposals shall be considered by the Board

of Approval in the Department of Commerce. On approval, the developer will be

issued a letter of permission for the development, operation and maintenance of such

FTWZ.

 

(ii) Foreign Direct Investment would be permitted up to 100% in the development and

establishment of the zones and their infrastructural facilities.

 

(iii) The proposal must entail a minimum outlay of Rs.100 crores for the creation and

development of the infrastructure facilities, with a minimum built up area of five lakh

sq.mts.

(iv) The developer shall be permitted to import duty free such building materials and

equipment as may be required for the development and infrastructure of the zone.

Such equipment and materials as are sourced from the DTA shall be considered as

physical exports for the DTA suppliers.

(v) Once it has developed the FTWZ, the developer shall also be permitted to

sale/lease/rent out warehouses/workshops/office-space and other facilities in the

FTWZ to traders/exporters.

MAINTENANCE OF ZONE

The developer shall itself or through suitable special purpose arrangements, ensure a

reliable mechanism for the proper maintenance of the common facilities and security of the

FTWZ.

FUNCTIONING

(i) The scheme envisages duty free import of all goods (except prohibited items, arms

and ammunitions, hazardous wastes and SCOMET items) for ware housing. As far as

bond towards customs duty on import is concerned, the units would be subject to

similar provisions as are applicable to units in SEZs.

 

(ii) Such goods shall be permitted to be re-sold/re-invoiced or re-exported. Re-export

shall be permitted without any restrictions. However export of SCOMET items shall

not be permitted except with the permission of Inter-Ministerial Committee.

(iii) These goods shall also be permitted to be sold in the DTA on payment of customs

duties as applicable on the date of such sale. Payment of duty will become due only

when goods are sold/delivered to DTA and no interest will be charged as in the case

of bonded warehouses.

(iv) Packing or re-packing without processing, and labeling as per customer or marketing

requirements could be undertaken within the FTWZ.

(v) The maximum period that goods shall be permitted to be warehoused within the

FTWZ will be two years, after which they shall necessarily have to be re-exported or

sold in the DTA. On expiry of the two year period, customs duties as applicable

would automatically become due unless the goods are re-exported within such grace

period, not exceeding three months, as may be permitted.