Special Economic Zone (SEZ) Scheme was introduced under the Export & Import policy by Government of India w.e.f. 1-4-2000 with a view to provide an international competitive and hassle-free environment for export.
The SEZ is an enclave, a foreign territory outside the customs territory of India, with special rules for export-oriented production.
Salient features are :
- SEZ units can import duty-free all their requirements for export production. No import licences are required. Even second-hand equipment can be imported. Capital goods can also be sourced from Indian/foreign leasing firms.
- SEZ units can be set up for any type of activity, manufacture of goods, rendering of services, production, processing, assembling, trading, repair, remaking, reconditioning, or re-engineering. The only exceptions are arms and ammunition, atomic substances, psychotropic substances, and tobacco products.
- SEZ units are allowed considerable operational freedom in routine operations. Activity is not Customs-supervised. There is no Customs examination of import and export consignments. Units are allowed to use their own seals. Consignments are allowed through, on an examination of the outer seals and marks and numbers. Operations are on the basis of self-declaration and self-certification by the units.
- Foreign Direct Investment (FDI) is permitted. All permissions granted by the Development Commissioner for the SEZ under single window. In certain cases, such permission may be granted by the Board of Approval.
- SEZ units are obligated to achieve only positive Net Foreign Exchange (NFE) cumulatively over a period of five years commencing from the year of production. Positive NFE implies, FE inflows through Exports earnings (Direct Exports + Third party exports + deemed exports) should exceed FE outflows by way of Import outgo on raw materials/consumables + FE payments of commission/royalty/fees/dividends/foreign travel + interest on ECB + amortised value of imported capital goods by at least $ 1.
- The SEZ regime facilitates risk-free ECB funding. Export proceeds need to be brought in within 12 months of export. 100% of export proceeds can be retained in foreign currency (in EEFC account). This makes foreign currency financing exchange risk-free. Foreign currency borrowings make available funds at lower cost.
- SEZ units are allowed to subcontract/out-source part of their production or part of their production process. Units can subcontract to units abroad, in the SEZ or in the Indian Domestic Tariff Area. SEZ units can undertake job work for export on behalf of Indian Domestic Tariff Area units. Units can also import raw materials and components free of cost for job work.
- SEZ units are allowed to procure their requirements from the Indian Domestic Tariff Area free of all duties and taxes. Sup-plies to SEZ units are deemed exports, and suppliers are eligible for Advance Licence for import of intermediate inputs, exemption from payment of Central Excise Duty, or alternatively refund of Excise Duty, reimbursement of Central Sales Tax, and for Deemed Export Drawback. SEZ units can avail the Deemed Export Drawback and Refund of Terminal Excise Duty on getting disclaimed from Indian Domestic Tariff Area supplier.
- SEZ units can sell their product to the Indian market on payment of full duties, subject to NFE being positive.
- SEZ unit can import furnace oil without payment of Customs duty.
- 100% income exempt for a block period of 5 years, 50% exemption for 2 years and 50% exemption for next 3 years subject to certain conditions.
- SEZ units are permitted commodity hedging.
- SEZ units are entitled to reimbursement of Central Sales Tax, Central Excise Duty if paid and are also exempt from payment of such tax and duty.
- No restriction on payment of royalties, dividends and other remittances out of India.
Setting up of Special Economic Zones :
Any private/public/joint sector or State Government or its agencies can set up Special Economic Zone (SEZ). Guidelines on setting up of SEZ are given in (Appendix 14.11.N) of handbook of Procedure of Import and Export.
Proposals for setting up SEZ in the public/private/joint/State sector are required to meet the following conditions :
(i) Minimum size of the SEZ shall not be less than 1000 hectares. This would however, not apply to existing EPZs converting into SEZ as such or for notifying additional area as a part of such SEZ or an SEZ developed for a specific product, port/airport.(ii) The SEZ and units therein shall abide by local laws, rules, regulations or bye-laws in regard to area planning, sewage disposal, pollution control and the like. They shall also comply with industrial and labour laws and such other laws/rules and regulations as may be locally applicable.(iii) Such SEZ shall make adequate arrangements to fulfil all the requirements of laws, rules and procedures as applicable to such SEZ.(iv) Only units approved under the SEZ Scheme would be permitted to be located in these SEZ.(v) At least 25% area of the SEZ shall be used for developing industrial area for setting up of such units.
A State Government shall forward the proposal for setting up an SEZ to the Department of Commerce, Government of India whether such SEZ is developed by Private Indian, NRI, Foreign Companies, State Government or in joint sector, along with following commitments :
Setting up an industrial unit in SEZ :(i) The area incorporated in the proposed SEZ is free from environmental prohibition;(ii) Water, electricity and other services would be provided as required;(iii) Full exemption in electricity duty and tax on sale of electricity for self-generated and purchased power;(iv) To allow generation, transmission and distribution of power within SEZ;(v) Exemption from State sales-tax, octroi, mandi tax, turnover tax and taxes, duty, cess, levies on supply of goods from Domestic Tariff Area to SEZ units;(vi) For units inside the Zone, the powers under the Industrial Disputes Act and other related Acts would be delegated to the Development Commissioner;(vii) The Zone will be declared as a Public Utility Service under Industrial Disputes Act;(viii) Single point clearance system would be provided to the units in the Zone under State Laws/Rules.
- All applications are to be filed with the Development Commissioner (DC) concerned.
- Development Commis-sioner is competent to clear/ approve in all cases within a period of 15 days, if the application is otherwise in order.
- The Development Commis-sioner is also competent to approve all cases involving FDI falling under the automatic route. For cases not falling under the automatic route, the DC recommends the case to the FIPB (Foreign Investment Promotion Board).
- A limited number of cases are referred by the DC to the Board of Approvals in Dept. of Commerce for approval :
(i) Manufacturing activities requiring compulsory industrial licensing and those reserved for the Public Sector.(ii) Service activities other than software and IT-enabled services.(iii) Cases in which location of a project not covered by the locational restrictions as notified by Dept. of Industrial Promotion & Policy.
- On approval of a proposal, the DC issues a Letter of Permission/Letter of Intent to the unit concerned.
- The Letter of Permission is valid for a period of three years within which the prospective investor is required to execute the legal undertaking.
- The investor is required to execute a bond with the Custom and Excise Department.
A new bill for administration and regulation for SEZ was placed in the Parliament. This bill when passed, will fade away all Government controls and each SEZ will be controlled and managed by an autonomous corporate body.
Various benefits available would be :
- Documents executed will not require paying Stamp Duty
- Insurance can be effected from a foreign insurance company
- Foreign branch will be entitled to open off-shore branches
- All investigations and regulations will be enforced by SEZ authorities
- All permissions will be granted by SEZ authorities
- Business-friendly labour regulations
- SEZ units will not be governed by the Rules and Regulations of Indian Stamp Act, Insurance Act, Banking Regulations Act, and Sick Industrial (Special Provisions) Act. Further, no inspection, search and seizure will be carried on such SEZ units by outside agencies.
SEZ — Income-tax exemption :
Units set up in the SEZ which start manufacture or produce articles or computer software after 1-4-2003, shall be entitled for 100% income-tax exemption for income derived from export of such articles or things or computer software, for a period of consecutive 5 years beginning with assessment year in which such undertaking begins to manufacture or produce such articles or things or computer software. In the next 2 years, such unit will be entitled for deduction of 50% of its profit of such exports. Thereafter, for next 3 consecutive assessment years so much of the profit, not exceeding 50% of the profit being credited to a specified reserve account viz. ‘Special Economic Zone Reinvestment Reserves Account’ will be allowed as deduction from the profit of such units.
The amount transferred to the specified reserve account shall be utilised within a period of 3 years for the acquisition of new plant and machinery for the purpose of SEZ unit. Till such acquisition, such amount will be utilised for the purpose of business of the SEZ unit other than for distribution of dividend. To qualify for deduction under Income-tax Act, it is essential that such SEZ unit is not formed by splitting up or reconstruction of a business already in existence. The plant and machinery that are previously used for any other purpose in India should not be transferred to such SEZ unit except to the extent of 20% of cost of total plant and machinery.
However, second-hand imported plant and machinery can be used. Such SEZ units are required to bring export proceeds in India within a period of 6 months or as extended by the competent authority. The profit exempt relatable to export made by such SEZ units shall be determined in the ratio the export turnover bears to total turnover of such SEZ unit. Such SEZ unit to avail deduction from income-tax will be required to get its accounts audited from a Chartered Accountant and to submit such reports along with the return of income.
An SEZ unit is entitled for necessary deduction of export of computer software which has been defined to include any computer program recorded on any disk, tape or any other information storage device or any customised electronic data or any product or service of similar nature as notified. The following services have been notified to be entitled for tax deduction as ‘computer software’ :
(i) Back-office operations(ii) Call centres(iii) Content development or animation.(iv) Data processing(v) Engineering and design(vi) Geographic information system services(vii) Human resources services(viii) Insurance claim processing(ix) Legal databases(x) Medical transcription(xi) Payroll(xii) Remote maintenance(xiii) Revenue accounting(xiv) Support Centres and(xv) Web-site services.
In case a unit develops software at client’s site abroad, such development of software shall be treated as exports.
The terminology ‘Manufacture’ or ‘Produce’ shall include cutting and polishing of precious or semi-precious stones. It is clarified that although the SEZ units can undertake activities of trading and providing of services other than manufacture or produce of an article or thing or computer software, such other activities will not be entitled for income-tax deduction.
With effect from 1-4-2004, the sales effected by a manufactur-ing unit situated outside SEZ and sold to an undertaking situated in SEZ, is eligible for deduction u/s.80HHC of the Income-tax Act, 1961. Such sales effected by an industrial undertaking situated outside SEZ, shall be deemed to be an export outside India for the purpose of calculation of deduction of export profit entitled for deduction u/s.80HHC. Such deduction will be available till 31-3-2005.Income-tax exemption to SEZ developer :
The above income-tax deduction deals with the deduction available to an industrial unit situated within an SEZ. Such deduction is available for a period of 10 consecutive assessment years out of a block of 15 assessment years beginning from the assessment year in which the SEZ is developed. The profit derived by the developer from such SEZ, shall be exempt to the extent of 100%, if one develops and operates or maintains and operates such SEZ before 31-3-2006 as notified by the Central Government. In accordance with the Scheme framed, 100% profit of such undertaking from these activities will be exempt as specified hereinabove.
In case the SEZ is set up after 1-4-2001, and such undertakings transfer the operation and maintenance of such SEZ to another undertaking, deduction as specified under the Section shall also be allowable to transferee undertaking for the remaining period of 10 consecutive assessment years. In terms of the above provision, the Ministry of Commerce and Industry has framed a scheme for development, maintaining and running of SEZ as notified on 24-1-2002.
Income by way of dividend, interest or long-term capital gain earned by an infrastructure capital fund or an infrastructure capital company from investment made by way of shares or long-term finance in such undertaking is exempt from taxation provided such infrastructure capital fund is approved by the Central government on application made.
Exemption from sales-tax :
Central Government has granted exemption from payment of central sales-tax on purchases effected by the unit set up in SEZ or for the development and maintaining and running of such SEZ. Similarly, all the State Governments, while applying to Central Government for setting up of an SEZ unit, grant exemption from sales-tax for all purchases effected by such units in undertaking developing and maintaining, running such SEZ. State Government has also granted exemption from the duty payable on electricity consumed.
Certain other incidental benefits have been allowed as in case of Industrial unit set up in SEZ. Managing Director, Whole Time Director or the Manager of a company which has set up an industrial unit in SEZ or engaged in the development and maintaining of an SEZ, need not be a resident in India and a non-resident will be entitled for such an appointment by virtue of necessary exemption provided in the Companies Act, 1956.
The maximum remuneration payable has been fixed at Rs.2,40,00,000/- per annum or Rs.20,00,000/- per month as against limit of Rs.24,00,000/- or Rs.2,00,000/- per month under the Companies Act, 1956. In such cases, Board Meeting can be held by way of video-conferencing. A single window mechanism for registration of the company in SEZ is also provided.
Establishment of branch office/
units in Special Economic
Reserve Bank of India has granted under its Circular dated 16-1-2004, a General Permission to foreign companies to establish branch offices/units in SEZs to undertake manufacturing and service activities, subject to the following conditions :
(I) Such units are functioning in those sectors where 100% FDI is permitted(II) Such units comply with part XI of the Companies Act (S. 592 to S. 602)(III) Such units function on a stand-alone basis(IV) In the event of winding-up of business and for winding-up proceeds, the branch/ unit shall approach an Authorised Dealer with the following documents prescribed under Regulation 6 (1)(iii) of Notification No.FEMA-13/2000-RB dated May 2000, viz.
- Auditor's certificate
- No-objection or tax clearance certificate from Income-tax authority for the remittance; and
- Confirmation from the applicant that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.