The commerce ministry is considering converting one of the coastal Union Territories to a special economic zone. Consultancy firm KPMG has been asked to work out a plan.

Ministry officials said Daman & Diu and Pondicherry had been shortlisted. Pondicherry has also been informed about the proposal.

The Planning Commission had suggested the move at a review after the Exim Policy was announced. None of the private special economic zones cleared has achieved financial closure and is nowhere near execution.

A commerce ministry official, however, said there were several issues pending before the proposal could be implemented. One is putting in place a system to check sales from units in the zone to the domestic tariff area or to households within the Union Territory. This is because production activity in special economic zones is meant only for exports.

A strategy has to be evolved for the existing units in the Union Territory once it is declared a special economic zone. Since sales to the domestic tariff area will not be permitted without payment of duty, many of the units may be unwilling to be a part of the zone.

The ministry official pointed out that relocation of the existing industries could hinder the implementation of the plan, and KPMG would have to work out the issues.

China had pioneered the concept of special economic zones in the eighties, and now has several such zones in Shenzhen, Guangdong, Fujian, Hunchun, Hainan and Pudong (Shanghai). The Shanghai zone, for instance, attracted foreign investment worth $10.57 billion in 2002 -- higher than the annual accretion in India -- and its trade has been estimated at $72.66 billion.

Proximity to ports is one of the main reasons behind the exports from these zones. Incentives like tax exemption during the initial years, a low tax of 15 per cent of profits, and an even lower tax in the case of companies earning income largely from exports, have helped these zones.

Back home, a special economic zone near Indore is likely to be operational in a month. Another project in Jaipur was in progress, the commerce ministry official said. Both the projects have been undertaken by the respective state governments.