ESTABLISHMENT AND PRIVILEGES AVAILABLE TO SPECIAL ECONOMIC ZONES Copyright Gopal Chopra & Associates 1
Contents 1.0 INTRODUCTION... 3 2.0 SPECIAL ECONOMIC ZONES (SEZ)... 3 3.0 FREE TRADE AND WAREHOUSING ZONES (FTWZ)... 4 4.0 ADMINISTRATION FRAMEWORK OF SEZ... 4 5.0 SETTING UP A SEZ... 4 6.0 MINIMUM AREA REQUIREMENTS FOR SETTING UP A SEZ... 6 7.0 EXIT POLICY OF SEZ... 7 8.0 TAX AND DUTY EXEMPTIONS TO SEZ UNITS... 8 9.0 FOREIGN DIRECT INVESTMENTS IN SEZ... 10 Copyright Gopal Chopra & Associates 2
1.0 INTRODUCTION India s Foreign Trade Policy 2015-2020, which is currently in force, aims at boosting India s exports. The Government has given in the past and is still providing various export promotion measures, and the schemes and initiatives related to various centers of export-oriented production are one of them. Units undertaking to export their entire production of goods and services (except permissible sales in Domestic Tariff Area), may be set up under the Export Oriented Unit (EOU) scheme, Electronic Hardware Technology Parks (EHTP), Software Technology Parks (STP) or Bio-Technology Parks (BTP) Scheme for manufacture of goods, including repair, re-making, reconditioning, re-engineering and rendering of services, development of software, agriculture including agro-processing, aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisciculture, viticulture, poultry and sericulture. Trading units are not covered under these schemes. These units are entitled to certain privileges and exemptions. Similarly, the Special Economic Zone (SEZ) - specifically delineated duty-free enclaves and policy related to them first came into inception in the year 2000. The prime objective was to enhance foreign investment and provide an internationally competitive and hassle free environment for exports. The idea behind the SEZ scheme was to promote exports from the country and create equal opportunities for the domestic enterprises and manufacturers to be competitive globally. 2.0 SPECIAL ECONOMIC ZONES (SEZ) A SEZ is a region that has economic laws that are more liberal than the country s typical economic laws and where all the units therein have specific privileges. SEZs are specific enclaves and are exempt from most restrictive laws regarding taxes, quotas, FDI-bans, labour laws etc to make them globally competitive. SEZ is a special demarcated area in a State and the rest of the state where the SEZ is located is legally referred to as the Domestic Tariff Area (DTA). Through setting up a SEZ in any state, the state can earn increased export earnings, benefit from increased employment opportunities etc. To enable this, foreign investors are offered incentives such as tax exemptions, duty free imports, exemptions from import quotas, capital mobility to remit profits, export allowances and subsidised interest rates within the SEZ. The SEZ Policy was announced in April 2000 with the purpose of making the Special Economic Zones an engine for economic growth which would give a boost to exports, employment and investment generation, and would be supported by quality infrastructure and an attractive fiscal package both at the Central and State level with a single window clearance. Copyright Gopal Chopra & Associates 3
With effect from 10th February, 2006 the activities relating to Special Economic Zones are guided by the provisions contained in the Special Economic Zones Act, 2005 and the Special Economic Zones Rules, 2006. Before the enactment of the SEZ Act, the SEZs in India were governed by Chapter 7 and 7A of Foreign Trade Policy. 3.0 FREE TRADE AND WAREHOUSING ZONES (FTWZ) The FTWZ is a special category of SEZ wherein mainly trading and warehousing and other activities related thereto are carried on. The policy relating to Free Trade and Warehousing Zones is governed by SEZ Act 2005, and the Rules framed thereunder, however before the Act came into force it was covered under Chapter 7A of the Foreign Trade Policy (2004-2009). 4.0 ADMINISTRATION FRAMEWORK OF SEZ The Government of India has delegated control of different aspects of the SEZ to three different Ministries. The Ministry of Commerce and Industry formulates the regulatory provisions pertaining to the Special Economic Zones and EXIM Policy in India. The Ministry of Environment & Forests is concerned with the environmental clearances for the SEZ units. The Ministry of Finance is concerned with the financial and taxation aspects of the SEZ. Since the Special Economic Zones Act, 2005 is the governing legislation for SEZ in India, the functioning of the SEZ is administered by the Board of Approval (BOA) set up under the Act as the apex body to administer SEZ 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. 5.0 SETTING UP A SEZ A SEZ may be first established as any business entity viz. Public Limited Company, Private Limited Company, Proprietorship, Partnership or any other form of business organization permissible as per the law. Thereafter it can seek to be established as a SEZ by submitting the application form, the relevant documents and following the prescribed procedure. It could be set up as SEZ for a Specific Sector, a Multi Product SEZ or a Free Trade and Warehousing Zone (FTWZ). In case the applicant is a company or partnership firm, the Copy of certificate of incorporation alongwith Article of Association and Memorandum in case of companies and partnership deed in case of partnership firms have to be attached with the application form. Copyright Gopal Chopra & Associates 4
An application in Form A under Rule 3 of the SEZ Rules 2006 has to made to the concerned Development Commissioner of the State where the SEZ is proposed to be set up, who, within a period of 15 days, shall forward it to the Board of Approval (BOA) with his inspection report, State Government s recommendation and other details to be furnished for issue of notification for declaration of an area as Special Economic Zone. However the application would be considered by the BOA only when the State Government recommendation is received. The developer submits the proposal for establishment of SEZ to the concerned State Government. The State Government has to forward the proposal along 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. However, in such case after that he has to obtain the concurrence of Sate Government with in six months. Checklist for Application for SEZ 1. Name of the Developer. 2. Proposed area of the location of the SEZ. 3. Status of recommendation of the proposal by the State Government (if available). 4. Whether proposal is for formal or in-principle approval? (In case land is in possession of the promoter, it is considered for formal approval) 5. Is it a multi-product SEZ? 6. If it is a sector specific SEZ, the sector is. 7. Whether it meets the area requirements. 8. Area of the SEZ (in hectares) 9. Whether Form- A has been filed? 10. Whether undertaking and affidavit has been submitted? 11. Whether project report has been submitted? 12. Whether land is owned/leased and is in possession of the Developer? 13. Does the proposal meet the area requirements of the Rules? 14. Whether the land has existing structures or is vacant? 15. Whether the land is contiguous? 16. Projected investment in the project. 17. Projected exports from the project. 18. Projected employment from the project. 19. Share capital and Reserves of the Developer Company. 20. Source of funds for the project. 21. Net worth of the Applicant (including Group companies) duly supported by Audited Accounts of the Developer for last 3 Years (for all the constituents in case the Developer is a SPV). If the company is a new company, audited accounts of Flagship Company/promoters may be provided. 22. Extent of FDI (if any) in million U.S. Dollars 23. Source of FDI (Country and Company details may be provided) 24. Whether provisions contained in the Press Note No. 5 (2005 Series), issued by the Ministry of Commerce and Industry have been followed in respect of Telecom/IT SEZ development? Copyright Gopal Chopra & Associates 5
Once the BOA gives formal approval and the concerned Development Commissioner gives an inspection report certifying the contiguity and vacancy of the area, the area is notified as SEZ. 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 performance 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, 1976 in case of violation of the conditions of the approval. 6.0 MINIMUM AREA REQUIREMENTS FOR SETTING UP A SEZ Rule 5(2) of the SEZ Rules, 2006 lays down the minimum area requirement for development of SEZ. However, as per the Ministry of Commerce and Industry notification dated 12 th August 2013, the Government made the SEZ (Amendment) Rules 2013 which introduced a reduction in the minimum land area requirements for multiproduct and sector-specific SEZs and removed the minimum area requirement for Information Technology/Information Technology Enabled Services SEZs (IT/ITeS SEZs) and also grades the scale for minimum land area criteria. Minimum Land Area Requirements for SEZs is as follows: Type of SEZ Minimum Land Area Requirement 1. Multi-Product SEZ Multi-product SEZ should have a contiguous area of 500 hectares or more but not exceeding 5000 hectares atleast 50% of the area should be built-up area for multi-product SEZ proposed to be set up in Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir, Goa or in a Union Territory, the area shall be 100 hectares or more 2. SEZ for a Specific Sector or for one or more services or in a port or airport Should have a contiguous area of 50 hectares or more For each contiguous 50 hectare land in a SEZ or which is added to the Copyright Gopal Chopra & Associates 6
SEZ an additional sector may be allowed With respect to these types of SEZ operating in specified States and UTs the land area requirement is 25 hectares 3. IT/ITeS SEZs No minimum land area requirement However, Minimum Built-up processing area requirement shall be applicable based on the category of cities as listed in Annexure IVA to the SEZ Rules 2006 4. SEZ exclusively for Electronics Area requirement is 10 hectares or Hardware and Software (Including ITeS) more Minimum Built-up processing area requirement shall be applicable based on the category of cities as listed in Annexure IVA to the SEZ Rules 2006 5. SEZ exclusively for Handicrafts Area requirement is 10 hectares or more 6. SEZ exclusively for bio-technology, Area shall be 10 hectares or more non-conventional energy, including solar Certain specifications are there for energy equipments or cell, or gems and the minimum built-up area jewellery sectors, agro-based food processing 7.0 EXIT POLICY OF SEZ Vide the Ministry of Commerce and Industry notification dated 12 th August 2013, the Government made the SEZ (Amendment) Rules 2013 wherein an option has been introduced for the SEZ whereby the unit can exit from the SEZ by transferring its assets and liabilities to another person by way of transfer of ownership including sale of SEZ units subject to the following conditions: The SEZ unit has held a valid Letter of Approval as well as lease of land for not less than a period of 5 years on the date of transfer The SEZ unit has been operational for a minimum period of 2 years after the commencement of production as on the date of transfer The sale of such SEZ unit / transfer of SEZ unit shall be subject to the prior approval of the Approval Committee The transferee fulfills all eligibility criteria applicable to a SEZ unit. The applicable duties and liabilities if any and any export obligations of the transferor unit shall stand transferred to the transferee unit which shall be under obligation to discharge the same on the same terms and conditions as the transferor unit Copyright Gopal Chopra & Associates 7
8.0 TAX AND DUTY EXEMPTIONS TO SEZ UNITS As specified under section 7 of the Special Economic Zones Act, 2005, Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by, - (i) A Unit in a Special Economic Zone; or (ii) A Developer; shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule to the Special Economic Zones Act, 2005. The provisions of the Income-tax Act, 1961, shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorised operations in a Special Economic Zone or SEZ Unit subject to the modifications specified in the Second Schedule to the Special Economic Zones Act, 2005. Privileges for Units operating from SEZ and SEZ Developers are as follows: Single window clearance for central and state level approvals Exemption from any duty of customs on goods imported into, or service provided in a Special Economic Zone. Exemption from any duty of customs on goods exported from, or services provided, from a Special Economic Zone to any place outside India. Exemption from any duty of excise on goods brought from Domestic Tariff Area to a special Economic Zone. Drawback on goods brought or services provided from the Domestic Tariff Area into a SEZ or Unit or services provided in a Special Economic Zone or Unit by the service providers located outside India to carry on the authorised operations by the Developer or entrepreneur; Exemption from the securities transaction tax leviable under section 98 of the Finance (No. 2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the international financial services centre 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 Exemption from the State Sales tax and other state levies Income tax exemption for a block of 10 years in 15 years under section 80-I AB of the Income Tax Act 1961 if the specified activity started upto 31 st March, 2017. Exemption from minimum alternate tax under section 115 JB of the Income tax Act 1961 Exemption from dividend distribution tax under section 115 O of the Income Tax Act 1961 Copyright Gopal Chopra & Associates 8
Deduction in respect of certain incomes allowed under section 80LA of Income Tax Act 1961, to scheduled banks or foreign banks having an Offshore Banking unit in SEZ or to a unit of International Financial Services Centre (IFSC). Capital gains arising on transfer of assets (machinery, plant, building, land or any rights in buildings or land) on shifting of the industrial undertaking from an urban area to any SEZ would be exempt from capital gains tax, subject to certain conditions. Exemption from service tax under Chapter-V of the Finance Act, 1994 on taxable services provided to a Developer or Unit to carry on the authorised operations in a Special Economic Zone Vide Service Tax Notification 7/2014 dated July 11, 2014 the Central Government has expanded the scope of available exemption as well as refund eligible to SEZ Developers and SEZ Units. The SEZ Developers and SEZ Units are entitled to a refund of service tax in general and upfront exemption under specified circumstances. The New Notification envisages the following benefits to SEZ Developers and SEZ Units, in respect of service tax leviable on taxable services received and used for authorized operations: i. Refund of service tax paid on specified services received by the SEZ Developer/ SEZ Unit and used for authorized operations; and ii. Option of upfront or ab initio exemption where specified services are received by the SEZ Developer/ SEZ Unit and used exclusively for authorized operations. The ab-initio exemption on the specified services received by the SEZ Unit or the Developer and used exclusively for the authorised operation shall be allowed subject to the following procedure and conditions, namely:- (a) the SEZ Unit or the Developer shall furnish a declaration in Form A-1, verified by the Specified Officer of the SEZ, along with the list of specified services as are required for the authorised operations (b) on the basis of declaration made in Form A-1, an authorisation shall be issued by the jurisdictional Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise, as the case may be to the SEZ Unit or the Developer, in Form A-2 within fifteen working days from the date of submission of Form A-1 The authorisation referred above shall be valid from the date of verification of Form A-1 by the Specified Officer of the SEZ. Provided that if the Form A-1 is not submitted by the SEZ Unit or the Developer to the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise having jurisdiction, as the case may be, within fifteen days of its verification by the Specified Officer of the SEZ, the authorisation shall be valid from the date on which it is submitted (c) the SEZ Unit or the Developer shall provide a copy of the said authorisation to the provider of specified services, where such provider is the person liable to pay service tax and on the basis of the said authorisation, the service provider may provide specified services to the SEZ Unit or the Developer without payment of service tax. Provided that pending issuance of said authorisation, the provider of specified services may, on the basis of Form A-1, provide such specified services, without payment of service tax, and the SEZ Unit or the Developer shall provide a copy of authorisation to the service provider immediately on receipt of such authorization. Provided further that if the SEZ Unit or the Developer does not provide a copy of the said authorisation to the Copyright Gopal Chopra & Associates 9
provider of specified services within a period of three months from the date when such specified services were deemed to have been provided in terms of the Point of Taxation Rules, 2011, the service provider shall pay service tax on specified services so provided in terms of the first proviso (d) the SEZ Unit or the Developer shall furnish to the jurisdictional Superintendent of Central Excise a quarterly statement, in Form A-3, furnishing the details of specified services received by it without payment of service tax; (e) the SEZ Unit or the Developer shall furnish an undertaking, in Form A-1, that in case the specified services on which exemption has been claimed are not exclusively used for authorised operation or were found not to have been used exclusively for authorised operation, it shall pay to the government an amount that is claimed by way of exemption from service tax and cesses along with interest as applicable on delayed payment of service tax under the provisions of the said Act read with the rules made thereunder. For the purposes of this notification, a service shall be treated as used exclusively for the authorised operations if the service is received by the SEZ Unit or the Developer under an invoice in the name of such Unit or the Developer and the service is used only for furtherance of authorised operations in the SEZ The SEZ Unit or Developer, who intends to avail exemption or refund under this notification, shall maintain proper account of receipt and use of the specified services, on which exemption or refund is claimed, for authorised operations in the SEZ. 9.0 FOREIGN DIRECT INVESTMENTS IN SEZ 100% FDI is 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. There is also no cap of foreign investments for SSI reserved items. Also since FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors, the same applies for units in SEZ: i) Atomic Energy ii) Lottery Business iii) Gambling and Betting iv) Business of Chit Fund v) Nidhi Company vi) Agricultural (excluding Floriculture, Horticulture, Apiculture, Development of seeds and planting material, Animal Husbandry, Pisciculture, Aquaculture and cultivation of vegetables, mushrooms, etc. under controlled Copyright Gopal Chopra & Associates 10
conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (Notification No. FEMA 94/2003-RB dated June 18, 2003). vii) Housing and Real Estate business (except development of townships, construction of residen-tial/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005- RB dated July 19, 2005). viii) Trading in Transferable Development Rights (TDRs). ix) Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. Off-Shore Banking Units (OBUs) Setting up of OBUs allowed in SEZs OBUS are entitled for 100% income tax exemption for 3 years and 50% for next 2 years. Banking / External Commercial Borrowings (ECBs) ECBs by units up to US$ 500 million a year allowed without any maturity restrictions. Freedom to bring in export proceeds without any time limit. Exemption from interest rate surcharge on import finance SEZ units allowed to write-off unrealized export bills. Copyright Gopal Chopra & Associates 11