A2Z of SEZ
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.
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
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.
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,
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
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..