Monday, 24 August 2015

Special Economic Zone- Concept, Benefits and Tax Savings

Special Economic Zone is not a new concept. China has successfully boosted its export and share in world trade through SEZs. In India, SEZs contribute approximately 30% of total exports of goods and services. However, not many SEZs have come in manufacturing sector and maximum SEZs are in IT and ITeS sector. One of the key benefit for SEZs is exemption from taxes / duties on construction material and from income tax.

Introduction

SEZs are considered deemed foreign territory within the country for extending tax benefits. Thus supplies to SEZ are considered export and purchases from SEZ are considered import.
Persons establishing SEZs are termed as SEZ Developer. Persons doing exports from SEZ are termed as SEZ unit. Developer lease out the space in SEZ to individual units.

Governing law

Initially, SEZs were governed by Chapter 7 of Foreign Trade Policy of India. However, in 2005, Parliament passed a separate enactment (SEZ Act, 2005) and subsequently rules (SEZ Rules, 2006) were framed.

Governing authority

Approval to set up SEZ is granted by Board of Approval at Ministry of Commerce and Industry after recommendation of concerned State Government and Development Commissioner. After setting up, regular interaction of developer happens with Development Commissioner.
Approval to set up SEZ unit is granted by Unit Approval Committee / Development Commissioner of SEZ. After setting up, regular interaction of developer happens with Development Commissioner.

Single window clearance

Initially Government intended to provide single window clearance to SEZ units and Developers in terms of registrations and approvals under various applicable laws. However, it has not happen till date due to lack of co-ordinations amongst the authorities.

Sector

SEZ can be set up for
  • manufacturing of any product,
  • service or
  • trading.
SEZs may be set up for manufacture of multiple products, services and trading are known as multi-product SEZ.
Free Trade and Warehousing Zones (FTWZ) are SEZ set up for trading activities. FTWZ may be set up as standalone SEZ or part of any multi-product SEZ.

Investment

There is no minimum investment limit in SEZ.

Location

SEZ can be set up anywhere in India by a Developer after obtaining clearances from State Government and Environmental clearances. SEZ units can be set up only inside an approved SEZ.

Customs duty and Excise Duty

Customs and Excise duties are exempt on import of construction material and capital goods by SEZ developer.
For SEZ unit, Customs and Excise duties are exempt on import or domestic procurement of capital goods, construction material, raw material, packing material, consumables etc. required for authorised operations.
All goods falling under ‘restricted’ category under ITC (HS) may be imported in India by SEZ Developer and unit without any import licence .
Exemption from Customs and Excise duty to SEZ Developer and unit is also available to their contractor and sub-contractors under “Bill to –ship to arrangement”.
There is no special Notification for exemption from Excise duty and Customs duty for SEZ either under Central Excise law or Customs law. Exemption from duties is in terms of provisions of SEZ Act.

Service tax

Service tax is exempt on provision of services to SEZ if services are fully consumed within the SEZ. In case services are consumed partly for SEZ and partly for domestic operations of SEZ owner then refund of Service tax on proportionate basis available under Notification No. 20/2013-ST dated 1 August 2013.
For availing exemption, unit needs to get the following:
  • Approval to list of services by unit approval committee (Unit approval of committees of SEZs have issued a default list of services to avoid hassle of granting approval to each individual unit and developer.)
  • Form A-1 attested from specified officer of SEZ Customs and Form A-2 from Service tax authorities.
Exemption from Service tax is not available on services provided procured by contractor and sub-contractors engaged by SEZ developer / unit.

Central Sales Tax (CST)

CST is exempt on inter-state procurement of goods by SEZ Developer or unit against Form I specified under Section 8 of CST Act, 1956. Exemption from Service tax is also not available to contractor and sub-contractors engaged by SEZ developer / unit.

Value Added Tax (VAT)

Exemption from VAT depends on State specific VAT legislations. In some States, exemption from VAT is granted on sale of goods to SEZ developer and unit both while in some States exemption is granted on sale of goods to only SEZ units engaged in manufacture of goods (since they generate revenue for states on sale of manufactured goods) and not to service sector units. E.g. Government of Haryana has clarified in February 2013 that exemption from VAT would be available on goods supplied to SEZ units.

Income tax

Profits of an undertaking being a SEZ unit derived from export of services are exempt from tax under the provisions of section 10AA of the Income Tax Act, 1961 (‘Act’) in the following manner:
Tenure of deductionQuantum of deduction
First 5 consecutive years100% of export profits
Next 5 consecutive years50% of export profits
Next 5 consecutive years50% of export profits, subject to fulfilment of certain conditions
  • Provisions of Minimum Alternate Tax (MAT)**applicable on export profits earned w.e.f. 1 April 2012. Accordingly this becomes an important factor while deciding the location of SEZ unit from entity level perspective.
  • Units in SEZ are subject to provisions of Dividend Distribution Tax w.e.f 1 June 2011
  • All other provisions of the Act shall become applicable while computing profits of the undertaking

Sale to goods and services in India domestic tariff area (DTA)

There is no restriction or limit on sale of goods or services by a SEZ unit in DTA.
In terms of Section 3 of Central Excise Act, Excise duty is not applicable on goods manufactured in SEZ. Goods manufactured in SEZ and sold in DTA are subject to Customs duty equivalent to duties applicable on import of such goods from abroad.
Restrictions or conditions if any applicable on import of goods from abroad would also apply to goods sold from SEZ into DTA. Customs authorities of SEZ may also examine valuation of goods under Customs Valuation Rules, 2007.
Provision of services by SEZ units in DTA is subject to Service tax as applicable on services provided by any other service provider.
SEZ units and developer are out of CENVAT regime hence they cannot avail CENVAT credit of Excise duty paid on inputs/ capital goods and Service tax paid on input services.

Foreign Direct investment (FDI)

  • 100% FDI is freely allowed in manufacturing sector in SEZ units under automatic route, except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes.
  • No cap of foreign investments for SSI reserved items.

Drawback

Supplies to SEZ are treated at par with exports. In case of supplies to SEZ unit, DTA supplier can claim benefit of duty drawback similar to exports outside India provided SEZ units makes payment in foreign currency to DTA suppliers.
SEZ developers cannot make payment in foreign currency hence supplies to them is not eligible for drawback benefit. However, Government has provided benefit to DTA suppliers under a different scheme –‘Reimbursement of Duty in lieu of Drawback’.
Application for the benefits would be submitted by units before Development Commissioner and by Developer before specified officer of SEZ Customs.

Net foreign Exchange earner

A Unit is required to achieve positive NFE cumulatively for a period of 5 years from commencement of production. NFE for this purpose to be calculated as under :
Positive NFE = A – B > 0
A = Free on Board value of exports and other specified supplies;
B = Sum total of the cost, insurance and freight value of all imported inputs and capital goods, value of goods obtained from another SEZ unit/ Export Oriented Unit/ bonded warehouse etc, foreign exchange payments made for commission, royalty, fees, dividend, interest on External Commercial Borrowing etc.

Off-Shore Banking Units (OBUs)

  • Setting up of OBUs allowed in SEZs.
  • OBUS are entitled for 100% exemption from income tax for 3 years and 50% for next 2 years.

Exemption under miscellaneous laws

  • Agricultural Produce Cess Act, 1940
  • Coffee Act, 1942
  • Mica Mines Labour Welfare Fund Act, 1946
  • Rubber Act, 1947
  • Tea Act, 1953
  • Salt Cess Act, 1953
  • Medicinal and Toilet Preparations (Excise Duties) Act, 1955
  • Additional Duties of Excise (Goods of Special Importance) Act, 1957
  • Sugar (Regulation of Production) Act, 1961
  • Textiles Committee Act, 1963
  • Produce Cess Act, 1966
  • Oil Industry (Development) Act, 1974
  • Tobacco Cess Act, 1975
  • Additional Duties of Excise (Textile and Textile Articles) Act, 1978
  • Sugar Cess Act, 1982
  • Jute Manufactures Cess Act, 1983
  • Agricultural and Processed Food Products Export Cess Act, 1985
  • Spices Cess Act, 1986
  • Research and Development Cess Act, 1986
  • Marine Products Export Development Authority Act, 1972
  • Coal Mines (Conservation and Development Act, 1974
 

 Other important points

  • Excise duty if any paid on supplies to SEZ can be claimed as rebate also
  • No time limit for bringing export proceeds in India
  • 100% export proceeds can be maintained in export earner’s foreign currency (EEFC) account
  • Merger of SEZ units belonging to same legal entity or different legal entities allowed by Unit Approval Committee
  • Shifting of SEZ unit from one SEZ to another allowed with the permission of Unit Approval Committee
  • Sharing of infrastructure between two SEZ units allowed
  • Migration or shifting of STP units to SEZ allowed (only disclosure needs to be made to Unit Approval Committee)
  • Old plant and machinery upto 20% of total investment in plant and machinery allowed. If this limit is violated, exemption from income tax would be denied (no impact on indirect tax exemptions)
  • Work from home allowed to authorised employees of IT/ ITES SEZ unit subject to conditions
  • IT/ ITES SEZ units allowed to set up their war site/ hot site/ disaster recovery site/ business continuity plansite in any EOU, SEZ or STP unit
  • SEZ developer and unit required to register with Export Promotion Council for EOU and SEZ
  • Transfer Pricing provisions apply to units located in SEZ having international transactions with their associate enterprises to ensure that the units receive arm’s length price even if their profits are exempt from income tax

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