The GOI has established several foreign trade zone schemes to encourage export-oriented production. These provide a means to bypass many of the domestic economy's fiscal and infrastructure related obstacles that otherwise make Indian goods and services less competitive in international markets. The most recent of the schemes is the Special Economic Zone (SEZ), a duty-free enclave with separately developed industrial infrastructure. Other schemes include the Export Processing Zone (EPZ) and the Software Technology Park (STP), both of which are designated areas for export-oriented activities. In addition, India allows an individual firm to be designated an Export Oriented Unit (EOU). All of these schemes are governed by separate rules and granted different benefits. Seeking to promote the SEZ model, the GOI has announced plans to introduce legislation in 2005 that would give additional fiscal incentives to SEZ
developers and member companies.

SEZs are regarded as foreign territory for the purpose of duties and taxes, and operate outside the domain of the custom authorities. SEZ units benefit from a seven-year tax exemption scheme, starting at 100 percent before dropping to 50 percent in the last two years. They are allowed to retain 100 percent of their foreign exchange earnings in special Export Earners Foreign Currency Exchange accounts. All SEZ units are free to sell goods in the domestic tariff area (DTA) on payment of applicable duties. In May 2004, the GOI put sales from DTA firms to SEZ units on par with regular trade transactions and hence eligible to benefit from all export incentive and foreign currency exemption schemes. In addition, many state governments have granted a sales-tax exemption for DTA-SEZ sales. SEZ units are also exempt from the central government's service and excise tax regimes.

SEZ businesses are expected to be a positive foreign exchange earner within five years from the commencement of production. None of the FDI equity caps are applicable to units in SEZs, including those sectors reserved for small-scale industries. SEZs are exempted from the requirements of industrial licensing. The Indian government in April 2003 allowed branches of foreign companies operating in India to undertake 3/3/2005 manufacturing and trading in SEZs. To encourage investments, SEZ units are allowed to carry forward their losses for eight years.

To generate the infrastructure development needed to establish an SEZ, the GOI has granted private developers a ten-year tax holiday on the returns from their investment. To further enhance SEZ infrastructure, the GOI has encouraged Indian banks, including subsidiaries (but not branches) of foreign banks, to set up overseas banking units (OBUs) in the SEZs in return for fiscal incentives. The GOI grants OBUs a five-year income tax holiday on profits from SEZ transactions at 100 percent for the first three years and 50 percent in the remaining two. The OBUs are barred from undertaking overseas lending.

Four SEZs have started operation since 2001 (Kandla, Mumbai, Cochin, and Surat). There are eight government promoted and 13 private and state government promoted SEZs in various stages of implementation. Seven EPZs, located in Mumbai, Calcutta, Kochin, NOIDA near Delhi, Kutch, Chennai, and Vishakhapatnam, have been converted into Special Economic Zones (SEZs). Although the SEZs benefit from many tax incentives and relaxed regulatory requirements, they are still governed by India’s
restrictive labor law, which some observers say is a disincentive to investors, both foreign and domestic.

EPZs are industrial parks with incentives for foreign investors in export-oriented business. STPs are special zones with similar incentives for software exports. EPZ/STP units may import intermediate goods duty-free. The minimum net foreign exchange earning as a percentage of exports by EPZ/STP units is required to be at least 3 percent. EPZ/STP units may sell up to 50 percent of their level of exports on the domestic market after payment of taxes, with the exception of motor cars, alcoholic beverages, tea, books, and refrigeration units.

EOUs are industrial companies established anywhere in India that export their entire production. There are approximately 2,300 fully operational EOUs in India. They are granted; duty-free import of intermediate goods duty-free; a ten-year income tax holiday; exemption from excise tax on capital goods, components, and raw materials; and waiver of sales taxes. EOUs may sell up to five percent of "seconds" on the domestic market after paying appropriate taxes.