A2Z of SEZ
Shailesh Prajapati
Editorial Note:
It is inevitable to know the Rules and Act of SEZ to give
guidance to the company who wants to expand the business with the tax benefits.
It is also difficult to know all the areas of Incentives available to SEZ
units. Hence author here tried to compile the most of the areas of benefit to
SEZ unit in terms of operational as well as the Incentives.
Introduction.
With a view to overcome
the shortcomings experienced on account of the multiplicity of controls and
clearances; absence of world-class infrastructure, and an unstable fiscal
regime and with a view to attract larger foreign investments in India, the
Special Economic Zones (SEZs) Policy was announced in April 2000
The SEZ Act 2005
envisages key role for the State Governments in Export Promotion and creation
of related infrastructure. A Single Window SEZ approval mechanism has been
provided through a 19 member inter-ministerial SEZ Board of Approval (BOA). The
applications duly recommended by the respective State Governments/UT
Administration are considered by this BOA periodically.
The SEZ Rules
provide for different minimum land requirement for different class of SEZs.
Every SEZ is divided into a processing area where alone the SEZ units would
come up and the non-processing area where the supporting infrastructure is to
be created.
The
SEZ Rules provide for:
a) " Simplified procedures for
development, operation, and maintenance of the Special Economic Zones and for
setting up units and conducting business in SEZs;
b) Single window clearance for setting
up of an SEZ;
c) Single window clearance for setting
up a unit in a Special Economic Zone;
d) Single Window clearance on matters
relating to Central as well as State Governments;
e) Simplified compliance procedures and
documentation with an emphasis on self certification
Approval
mechanism and Administrative set up of SEZs
Approval Mechanism
The developer
submits the proposal for establishment of SEZ to the concerned State
Government. The State Government has to forward the proposal with its
recommendation within 45 days from the date of receipt of such proposal to the
Board of Approval. The applicant also has the option to submit the proposal
directly to the Board of Approval.
Administrative
set up
The functioning of
the SEZs is governed by a three tier administrative set up. The Board of
Approval is the apex body and is headed by the Secretary, Department of
Commerce. The Approval Committee at the Zone level deals with approval of units
in the SEZs and other related issues. Each Zone is headed by a Development
Commissioner, who is ex-officio chairperson of the Approval Committee.
Once an SEZ has been approved by the Board of Approval and Central Government
has notified the area of the SEZ, units are allowed to be set up in the SEZ.
All the proposals for setting up of units in the SEZ are approved at the Zone
level by the Approval Committee consisting of Development Commissioner, Customs
Authorities and representatives of State Government. All post approval
clearances including grant of importer-exporter code number, change in the name
of the company or implementing agency, broad banding diversification, etc. are
given at the Zone level by the Development Commissioner. The performances of
the SEZ units are periodically monitored by the Approval Committee and units
are liable for penal action under the provision of Foreign Trade (Development
and Regulation) Act, in case of violation of the conditions of the approval.
Detailed
Article on SEZ.
Eligibility and
approval of SEZ Unit
Section 3 of the said SEZ Act states that a SEZ may be
established for “ manufacture of goods or rendering services of for both..”
However, on ground of environmental and other considerations
few activities are not encouraged in the SEZs which are as follows:
a) Recycling
of Plastic Scrap or waste
b) In
respect of textile units, reprocessing of garments/used clothing/ secondary
textile materials and other recyclable textile materials into clippings/
yarn/shoddy wools/yarn /blankets/ shawls
c) Import
of used goods for recycling ( but
activity of reconditioning, repair and reengineering is allowed)
d) Exports
of special chemicals, organisms, materials, equipment and technologies unless
it satisfies the prescribed conditions.
e) Use
of plant and machinery previously used in DTA.
An Application is required to be made in the prescribed “
Form F” in 5 copies with an additional Copy for the Developer of the SEZ. The
same is to be accompanied by a crossed bank draft of Rs. 5000/- in favour of
the Pay and Accounts Officer of the SEZ concerned.
The application is
required to be submitted along with the
following documents:
a) Project
report on the economic and commercial viability of the project
b) Copy
of certificate of incorporation and Article of Association and Memorandum in
the case of companies and partnership deed in the case of partnership firms.
c) Income
Tax Return of the proprietor or partners or in the case of a company its
audited balance sheet.
d) Proof
of residence ( passport, ration card etc) of the proprietor or partners or
Directors of the company to the satisfaction of the Development Commissioner.
If the application satisfies the specified condition like
positive NFE etc, the approval committee shall approve the proposal as it is or
with modifications within 15 days of its receipt. It can also reject the
proposal, but the same is to be done in 15 days.
LOA for SEZ unit:
When a proposal for setting up a unit is approved, the same
shall be conveyed by issue of letter of Approval (LOA) as provided under
section 15 (9) of the said SEZ Act read with Rule 19 of the said SEZ Rules. The LOA shall be issued by the Development
Commissioner concerned and shall be an authorization for carrying out the
approved operations.
The LOA shall be applicable only for an identified earmarked
premise. The LOA shall also be construed as a license for all purpose under the
scheme, including for procurement of raw materials and consumables either
directly or through designated agency.
The LOA shall be valid for 1 year from its date of its issue
during which time the unit should commence its approved activity. The LOA shall
automatically lapse if an application for the extension of its validity is not
made before the end of the said period. The extension can be made available for
another 2 years.
The LOA shall be valid for 5 years once the unit commences
its approved activity of manufacture or providing services. The LOA may be
renewed for another 5 years at a time if the unit should choose to continue
under the scheme.
The registering authority for a SEZ unit will be the
Developments commissioner concerned. A separate registration cum membership certificate (RCMC) which is
ordinarily required to be obtained by any importer/exporter in terms of FTP shall not be necessary for the
SEZ unit.
When the LOA is cancelled then the SEZ unit is no longer
entitled to any benefits or concessions. The unit is required to furnish within
30 days of the cancellation the details of exemption, concessions and benefits
availed in respect of the capital goods, finished goods, raw materials and
consumables in stock. (section 16 read with Rule 77). The Development Commissioner
shall direct the DC/AC of Customs at the SEZ to determine the amount to be
remitted by the unit.
The Unit is required to remit the determined amount within 3
months of the date of communication
from the DC/AC of Customs and thereafter clear the goods in the DTA.
General conditions of
approval of SEZ unit ( Rule 18):
a) The
proposal meets the requirement of achieving positive Foreign Exchange Earnings
(NFE)
b) The
unit undertakes to fulfill applicable environmental and Pollution control
norms.
c) The
approval period for the SEZ unit shall be 5 years, renewable for further 5
years at a time.
d) The
LOA will be valid for one year from the
date of its issue within which period the unit shall implement the project and
commence commercial production.
e) The
unit shall export its production of goods and services as per the conditions of
its approval with option to exit after the approval period of 5 years or continue under the scheme.
f)
The unit is required to confirm the acceptance
of the terms and conditions mentioned in the LOA within a period of 45 days to
Development Commissioner.
g) The
unit shall be required to maintain accounts indicating in value terms the
import, domestic procurement, consumption, utilization of goods, inflow of all
foreign exchange by way of exports and other receipts and outflow of all
Foreign Exchange etc
h) If
unit engaged in both trading and manufacturing activities, is shall be required
to maintain the accounts separately for trading and manufacturing operations.
The accounts shall be kept for a period of 7 years from the end of the relevant
financial year.
i)
The achievement of positive NFE shall be
necessary for the SEZ unit and the failure to do so shall render the unit
liable for penal action under the FTA, 1992.
j)
If an Industrial enterprise is operating both as
domestic unit and SEZ unit, it shall have two distinct identities with separate
accounts including separate bank accounts. It is not necessary for the SEZ unit
to be a separate legal entity. It should be possible to distinguish the import
or export or other supplies made by SEZ unit from those made by the other domestic Unit of the enterprise.
k) Foreign
Companies can also set up manufacturing units as their branch operations in accordance with the Foreign Exchange
Management Regulations, 2000.
l)
The ECB shall be subject to approval of RBI in
terms of FEMA, Act 1999. Loan agreement may be entered into for raising ECB upto USD 500 million a year
without any maturity restrictions and for refinancing an existing ECB without
prior approval.
m) Repatriation
of dividend and profits and foreign Travel expenses are allowed.
n) 100%
FDI holding in the undertaking is allowed through automatic route. It is also
informed that the promoters contribution shall not fall below 51% and in case
this is proposed, prior approval of the BOA is necessary.
o) Royalty
will be calculated on the basis of the Net ex factory sales of the product
exclusive of excise duty minus cost of standard bought out components and
landed cost of the imported components.
p) The
payment of lump sum amount is allowed upto USD 2 million and 8% royalty on
account of foreign technology
agreements over a period of five years form the date of commencement of the
production.
Bond cum Legal Undertaking by SEZ Unit ( Rule 22)
SEZ
unit shall execute a Bond Cum Legal undertaking with Development Commissioner
concerned and DC/AC of Customs at the SEZ.
The
value of the Bond cum Legal Undertaking shall be equal to effective duty
leviable on the projected requirement of imported and indigenous capital goods
and raw materials, spares, consumables intermediates, components, parts and
packing material to be held in stock for a period of 3 months. The bond shall
be executed by Managing Director in case of Private Limited company.
The
said undertaking shall be monitored on the basis of the Annual Progress Report
and in case of shortfall in the amount a fresh or additional Bond Cum Legal
Undertaking shall be furnished by the unit.
NFE and Performance Review (Rule 53)
Every
SEZ unit shall achieve the export obligation cast upon it in terms of having
positive Net Foreign Earnings (NFE).
NFE
is to be calculated cumulatively for a period of five years from the
commencement of commercial production as per the formula given below. The NFE
is to be calculated in terms of Indian Rupees only.
Positive NFE will be P-Q > 0
P
: Free on Board (FOB) value of Exports by SEZ Unit ( Actual Exports out of the
country directly contribute to the Foreign exchange earnings.)
Q:
sum total of CIF value of imported inputs ( i.e RM, intermediates, components,
consumables, parts and Packing Materials), imported capital goods and value of
all payment made in foreign exchange by way of commission, royalties, fees,
dividends, interest on ECB during the first five years or any other Charges.
In case of determining P, the following should be included.
a) Exports
to Nepal and Bhutan in freely convertible currency
b) Supply
of goods against Advance License or Remission Scheme
c) Supply
of Capital goods under the EPCG
d) Supplies
to project funded by UN agencies
e) Supplies
to Nuclear Power projects through competitive bidding
f)
Supplies to EOU/SEZ
g) Supplies
of goods against special entitlement of duty free goods to DTA ( Notification
21/2002 customs dated 01/03/2002.
h) Supplies
of Services by Service units rendered within SEZ or in the DTA that are paid
for in free foreign exchange or in Indian Rupees.
i)
Supply of goods to the DTA against payment in
foreign exchange from EEFC account of
the DTA buyer or free exchange received from abroad
Rule 54 of SEZ Rules provides penal action under the FTA,
1992.
It
is provided that that since the NFE is determined in Rupee Terms, in the event
it is negative on account of exchange rate fluctuations, then the Approval
committee may consider such cases provides the SEZ unit gets the computation
certified by Authorised Bank.
Accounts and Returns : Rule 12 and Rule 22 of the SEZ Rules.
All
SEZ units are required to maintain
certain accounts and furnish prescribed Reports.
a) Format
of account is not prescribed. It should be financial year wise.
b) Accounts
will be maintained separately for
trading and manufacturing activity of SEZ Unit.
c) The
accounts of the SEZ must include the following information in Value terms:
a. Goods
imported or procured from DTA
b. Consumption
or utilization of goods
c. Manufacture
or production of goods including by- products, waste, scrap.
d. Disposal
of goods manufactured or produced by way of exports, DTA sales or transfer to
other SEZ/EOU
e. Goods
in Stock.
Duty Free Import
Section 7 and 26 of the SEZ Act provide that any goods and
services imported by a SEZ unit shall be exempt from taxes subject to
fulfillment of prescribed conditions.
a) SEZ
allowed to import the required goods without payment of duties, taxes and cess
for their approved activities
b) Bond
cum Legal undertaking should be executed for achieving positive NFE.
c) Shall
maintain proper account in any convenient format.
d) Imported
construction material also permitted
e) Import
thru SEZ unit is also allowed.
Indigenous Procurement
of Goods and Services.
Section 7 and 26 of the said SEZ Act provides that any goods
and services procured by SEZ unit from
the domestic market shall be exempt from taxes subject to fulfillment of
following conditions.
a) Goods
brought into the SEZ from the DTA shall be exempt from Excise duties levied in
terms of the ECA, 1944
b) Services
provided to SEZ shall be exempt from
Service Tax . The exemption is available even for services procured for
construction of a unit.
c) Goods
and services shall be utilized or exported or disposed of on Payment of duty
within a period of 5 years or such extended period as may be allowed.
Sub- Contracting in
DTA or other SEZ Units
Sub – contracting is
allowed to SEZ units : Rule 41 to 44
a) SEZ
units may subcontract a part of the production or production process in the DTA
or through other SEZ/EOU units with annual permission of the DC/AC of the
Customs at the SEZ.
b) No
permission is necessary if sub-contracting is done through the other units in
SEZ.
c) SEZ
units may be allowed to undertake job work for export on behalf of the DTA
units.
d) The
permission to be taken at the time of prior approval.
e) The
goods shall be sent out under cover of serially numbered challans
pre-authenticated by the owner or Managing Director.
f)
The custom officer at the SEZ shall note the
identification marks of the goods being sent out for sub-contracting for
verification when received back after sub-contracting.
g) Exports
of finished goods directly from the sub-contractor’s premise may be permitted
provided the sub-contractor is EOU/SEZ unit or a central excise registered unit
in DTA.
h) If
the sub-contracting process is done abroad, the goods after processing, shall
either be brought back to the SEZ unit or sold abroad .
Sub- Contracting for
DTA Units : Rule 43
It allows the SEZ unit to undertake sub contracting work for
export on behalf of DTA units with the approval of the DC/AC of customs at the
SEZ. The permission will be given on annual basis. This facility is aimed at
utilization of idle capacity, if any in the SEZ units. Following are some of the conditions.
a) Export
of finished goods shall take place direct from SEZ unit.
b) Semi
finished goods, RM and consumables shall be supplied by the DTA unit to SEZ
Unit.
c) The
Shipping bill shall be filed jointly in the name of the DTA and the SEZ unit.
d) No
export benefit shall be available to the SEZ unit and the export shall not be
taken into consideration towards fulfillment of its export obligation.
e) When
the duty paid material is provided by DTA unit to the SEZ unit, the DTA unit
will be entitled to refund of duty paid on the material by way of Brand rate of
Duty drawback.
DTA Clearances (
Section 30 of SEZ Act and Rule 47 of SEZ Rules)
Following are some of the guidelines for the sale of
Finished goods and scrap in the DTA by SEZ unit.
a) It
is subject to payment of Applicable duties as per Customs Act.
b) It
should be for the goods approved under LOA
c) The
SEZ units are free to sell their goods in the DTA without any quantitative or
value limit
d) The
DTA sales facility is not available to SEZ units engaged in activities of
reconditioning , repair and re-engineering.
Temporary removal of
goods : Rule 50
A SEZ unit may temporarily take the imported /procured goods
or the manufactured goods outside the SEZ into DTA without payment of duty.
Following are some guidelines.
a) Capital
goods and parts thereof may be taken out for repairs.
b) Goods
may be taken out for job work, test , repairs, replacement, refining, calibration,
re-engineering, reconditioning and R &D)
c) Manufactured
goods may be taken out for display, export promotion or exhibition and samples.
d) Laptop
or notebook computers or video projection systems for use by an authorized
employee of SEZ unit or Developer.
e) Over
and above the points mentioned above, SEZ unit may also temporarily remove any
other goods to the DTA with the prior approval of the Customs officer at SEZ.
Exports : Rule 45
The term Exports has a wider meaning in context of the SEZ
units as the same are physically in India but legally treated as if outside the
country. Exports means;
a) Taking
goods or providing services out of India from a SEZ by any mode
b) Supplying
goods or providing services from the DTA to SEZ
c) Supplying
goods or providing services from on SEZ to another SEZ unit
Export for participation in exhibitions abroad: Rule 46 (9)
The above Rule allows the export of goods for display or
participation in exhibition abroad. Following are some of the guidelines.
a) SEZ
unit requires to give advance intimation to the Development commissioner for
participating in the exhibition or for
display the goods.
b) The
SEZ unit shall submit proof of Inward remittance in respect of goods sold
during exhibiton abroad.
c) The
goods unsold in the exhibition or display tours shall be re-imported within 45
days of the close of exhibition/display.
d) The
re-import of goods shall be allowed admission free of duty in the SEZ unit.
Exports through third
parties : Rule 46 (10)
It allows the SEZ units the option to export its goods
through a merchant exporter/status holder or any other EOU/SEZ unit.
a) The
manufacture of the goods will be done in SEZ unit and the facility extended
only to the marketing of the goods by the third parties.
b) The
export document shall contain the name of the SEZ unit and the third party
exporter.
c) The
NFE in this case will be on the basis of the price at which the goods are
supplied by the SEZ unit to the merchant exporter/status holder or any other
EOU/SEZ unit.
d) Such
exports shall be counted towards fulfillment of obligation of the SEZ unit
only.
e) Merchant
exporter or status holder shall export
the goods under a Free shipping bill and submit a disclaimer that no
claim of Drawback, DEPB Credit or fulfillment of Export obligation under any
export promotion scheme shall be availed by them.
Fiscal benefits
Income Tax ( Section
10A)
a)
The
Assessee is an entrepreneur as defined in section 2(j) of SEZ Act, 2005.
Entrepreneur is a person who has been granted a letter of approval by the
Development Commissioner to set up a unit in a SEZ.
b)
The
unit in SEZ begins to manufacture or produce articles or things or provide
services during the financial year 2005-2006 or any subsequent year.
c)
Should
not be formed by splitting/ reconstruction of Business
d)
It is
not formed by the transfer of a new business of machinery or plant previously
used for any purpose. Further the tax concession is not denied in a case where
the total value of used machinery or plant transferred to the new business does
not exceed 20% of the total value of the machinery or plant used in that
business.
e)
The
assessee has exported goods or provided services out of India from the SEZ by
land, sea, air or by any other mode whether physical or otherwise.
f)
Books
of Accounts should be audited.
g)
Return
of Income to file within time period.
Amount of deduction : General
Provision
Profit
of the business of the undertaking X
Export Turnover ( including sales to SEZ/EOU) / Total Turnover
Period of deduction :
Amount of deduction ; It is
available for first 15 A.Y.
First
5 years : 100% of profits and gains
Sixth to Tenth Year : 50% of profits and gains
For Next five
years : 50% of Profits and gains
provided equal amount is debited to profit and loss account and credited to
special Economic Zone Re- investment allowance reserve account.
Exemption of Capital Gain on Shifting
to SEZ
Exemption of capital gains on transfer of assets in cases of
shifting of industrial undertaking from urban area to any Special Economic
Zone.
a)
The exemption is available to all categories of assesses on capital
gain arising on the transfer of certain capital asset of industrial undertaking
from urban area to SEZ. (whether developed in an urban area or not)
b)
The Asset transferred should be machinery or
plant or building or land or any rights in building or land
The capital gain should be utilized within one year before
or three years after the date of transfer for the specified purpose
a) purchased
machinery or plant , acquired building or land or constructed building
b) shifted
the original asset and transferred the establishment of such undertaking to the
Special Economic Zone; and
c) incurred
expenses on such other purposes as may be specified in a scheme framed by the
Central Government for the purposes of this section.
c)
The amount of capital gain which is not so
utilized for the specific purposes should be deposited in an account with any
specified bank or institution and utilized in accordance with the scheme
notified by the Central Government
If the Amount of Capital Gain < = Cost and expenses
incurred for specified Purposes
Exemption :Entire Capital Gain exempt
If the Amount of Capital Gain > Cost and expenses
incurred for specified Purposes.
Exemption: To the extent of cost and expenses incurred
Exemption from service tax
a) The
exemption from payment of service tax on taxable services rendered to a Developer or a Unit (including
a Unit under construction)
b) by
any service provider
c) and
shall be available for the authorized operations in a Special Economic Zone. –
Section 26(1)(e) and rule 31
Exemption from Central Sales tax
a)
Every Developer and the entrepreneur is
entitled exemption from the levy of
taxes on the sale or purchase of goods other than newspapers under the Central
Sales Tax Act, 1956 if such goods are meant to carry on the authorized
operations by the Developer or entrepreneur. – Sec 26(1)(g)
b)
This is subject to the condition that the dealer
selling goods in the course of inter state
trade or commerce to a registered dealer under the Central Sale Tax Act,
1956 shall furnish a declaration in
Form – I prescribed under the Central Sales Tax (Registration and Turnover)
Rules, 1957.- Proviso to Rule 32
c)
No CST
shall be payable by any dealer in respect of sale of any goods made by
such dealer,
w
in the
course of inter-State trade or commerce,
w
to a registered dealer( developer of SEZ or SEZ Unit as the case may be)
w
for the purpose of manufacture, production,
processing, assembling, repairing, reconditioning, re-engineering, packaging or
for use as trading or packing material or packing accessories in an unit
located in any special economic zone,
w
if such registered dealer has been authorised to
establish such unit by the authority specified by the Central Government in
this behalf. (Development Commissioner is of SEZ is authorized to permit a
person to set up unit in SEZ)
(Section 8(6) of Central Sales Tax Act, 1956)
Exemption from Stamp Duty under Indian Stamp
Act,1899
a)
Exemption from stamp duty on any instrument
executed, by, or, on behalf of, or, in favour of the Developer, or Unit or in
connection with the carrying out of purposes of the Special Economic Zone.(
Section 3 Third Proviso of Indian Stamp Act,1899)
b)
Effected by
Change in Indian Stamp Act,1899 by Special Economic Zones Act ,2005
Third Schedule ,Part III
Foreign Direct investment
FDI is allowed through automatic route for all manufacturing
activities in SEZ except
a)
Arms and ammunition , Explosives and allied
items of defence equipments, Defence aircrafts and warships,
b)
Atomic substances, Narcotics and Psychotropic
Substances and hazardous Chemicals,
c)
Distillation and brewing of Alcoholic drinks and
d)
Cigarette/cigars and manufactured tobacco
substitutes.
Item 20 of Annexure B of Schedule I of Foreign Exchange
Management( Transfer or Issue of Security by a person Resident outside India)
Regulations, 2000,
a)
100% FDI in trading activity will not be
permitted
b)
SEZ Unit can manufacture articles reserved for
SSI even if foreign equity exceeds 24%.No License is required (Department of
Industrial License Press Note No 5 dated 29-03-2000 Notification 7(11)/2000-IP
dated 04-12-2000)
Direct Dispatch of documents to Foreign buyer
a)
SEZ Units can dispatch export documents direct
to consignee outside India.
b)
These need not be routed through authorized
dealer
c)
Remittance should be obtained and GR/SDF form
should be submitted to authorized dealer within 21 days for monitoring RBI
Circular 8/2005-06 dated 01/07/2005
Conclusion:
The benefits mentioned above goes without saying that the
benefits in terms of Exports from SEZ as well as to the SEZ and EOU will give
increase in After Tax profit as the Tax benefit in the initial years are 100%.
This also indicates that the domestic sales from SEZ becomes non-effective as
the incentives on the domestic sales are not much and attractive. With
reference to the Single window clearance, the administrative hassles also
minimal in case the route to SEZ for
Tax planning is adopted..