SPECIAL ECONOMIC ZONES (SEZ) An Indian Perspective Page 1
Contents Contents Page no. Overview of SEZ 3 Incentives of SEZ 4 Types of SEZ 6 Process of setting up an SEZ 8 Disclaimer: This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional consultation. Without prior permission of, this publication may not be quoted in whole or in part or otherwise referred to in any documents. Page 2
Overview of SEZ India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. 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. SEZ is a geographical region that has economic laws which are more liberal than a country's typical economic laws. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure. The main objectives for setting up a SEZ are: Generation of additional economic activity Promotion of exports of goods and services Promotion of investment from domestic and foreign sources Creation of employment opportunities Development of infrastructural facilities SEZ can be developed and managed privately by any person (i.e. individual, NRIs, Indian or foreign companies, firms, HUF etc.) or by Central Government/State Government and their agencies. A SEZ can also be setup in the joint sector by both Central/State Governments and their agencies and a private person. Page 3
Incentives of SEZ Income Tax Holiday for Units in SEZ U/s 10AA Income Tax Holiday for Developer of SEZ U/s 80IAB Capital Gains Dividend Distribution Tax U/s 115O Minimum Alternate Tax U/s 115JB Customs Duties Service Tax For first 5 years: 100 % of eligible Profits or Gains For next 5 years: 50% of eligible Profits or Gains For next 5 years: 50% of eligible Profits or Gains subject to creation of specified reserve Deduction of 100% of profits derived from developing a SEZ for a Period of 10 consecutive assessment years out of the first 15 years from the year in which the SEZ is notified by the Central Government Exemption from capital gains or transfer or specified assets arising on shifting of industrial undertaking from urban or other areas to SEZ subject to certain conditions. Exemption from Dividend Distribution Tax declared or paid after 1st April, 2005 by an enterprise engaged in developing or developing and operating or developing, operating and maintaining a SEZ. Exemption from the provisions of Minimum Alternate Tax for developer as well as SEZ unit. Exemption from customs duties for development of SEZ for authorized operation approved by Board of Approval for SEZ. Exemption from Service Tax under chapter VI of the Finance Act 1994 on taxable services provided to a developer or unit to carry on authorized Operation in an SEZ. Securities Transaction Tax 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 situated in SEZ. Import Duty Excise Duty Central Sales Tax/ VAT Duty free Import, domestic procurement of goods for development, operation & maintenance of SEZ units. Exemption from any duty or excise, under the Central Excise Act, 1944 or the Central Excise Tariff Act, 1985 or any other law for the time being in force, on goods brought from Domestic Tariff Area to a Special Economic Zone or Unit, to carry on the authorized operations by the Developer or enterprise. Exemption from Central Sales Tax/VAT on purchase of goods by the Developer or Unit in SEZ. Cont. Page 4
Incentives of SEZ Cont. Environment Protection Act Companies Act Employees Provident Fund Drugs and Cosmetics Act Information Technology SEZs do not require environment clearance for development of SEZs. Public hearing is not exempted and process of Environment impact assessment (EIA) as laid in the notification of the ministry of Environment would have to adhered to Enhanced limit of Rs. 2.4 crores p.a. allowed for Managerial remuneration. Agreement to opening of regional office of register of Companies in SEZs. Exemption from requirement of domicile in India for 12 months prior to appointment as Director. As per Ministry of labour, the state government may apply for exemption to the Central Government under section 16(2) of the Employees Provident Fund & Miscellaneous Provision Act 1952 from the applicability of the provision of the said Act for 5 years. Exemption from Port Restriction under Drugs and Cosmetic Rules Other incentives Single Window clearance for Central and State level approvals. External commercial borrowing by SEZ unit s upto US $ 500 million in a year without any maturity restriction through recognized banking channels. Page 5
Types of SEZ Free Trading & Warehousing Zones Multi Product Zones (Rule 2(a) of SEZ Rules 2006) Sector Specific Zones (Rule 2(b) of SEZ Rules 2006) Port or Airport Zones (Rule 2(c) of SEZ Rules 2006) Focus on Trading & Warehousing Manufacturing Units may be set for 2 or more goods/services from 1 sector Goods/services falling in 2 or more sector Exclusively for One or more Goods / Services in a sector Manufacturing Units may be set in existing Port or Airport for 2 or more goods/services from 1 sector Goods/services falling in 2 or more sector Facilitate Import & Export transactions in free currency At least 50% of the Area shall be earmarked for Developing & processing area Units may be set for trading and warehousing Units may be set for trading and warehousing in existing Port or Airport Page 6
Minimum area requirement for SEZ As per Rule 5(2) of SEZ Rules, 2006 Type For states other than special category states/union Territories Total contiguous area requirement Minimum Processing area requirement For special category states /Union Territories Total contiguous area requirement Minimum Processing area requirement Multi product 1000 Hectares 50% 200 hectares 50% not exceeding 5000 Hectares One/more services 100 hectares 50% 100 hectares 50% Sector specific/port/airport 100 hectares 50% 50 hectares 50% Electronic hardware & software or information technology enabled services 10 hectares (refer note 4) 50% 10 hectares (refer note 4) 50% Free trade warehousing zone 40 hectares 50% 40 hectares 50% (refer note 4) (refer note 4) Bio tech/non conventional energy including solar energy equipments/cells 10 hectares (refer note 5) 50% 10 hectares (refer note 5) 50% Gems & Jewellery 10 hectares 50% 10 hectares 50% (refer note 6) (refer note 6) Notes: 1. 1 hectare = 2.421 acres = 10,000 sq.mts. 2. Processing Area: The processing area is that area in an SEZ where units can be located for the manufacture of goods or rendering of services. The processing area shall have specified entry and exit points and be fully secured by taking such measures approved by the Board. 3. Non Processing Area: The non processing area is the area which is intended to provide support facilities to the SEZ processing area activities. 4. Along with a minimum built up area of 1,00,000 sq.mts. 5. Along with a minimum built up area of 40,000 sq. mts. (except for non conventional energy production and manufacturing.) 6. Along with a minimum built up area of 50,000 sq. mts. 7. Special Category of States/ UT shall include Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir and Goa. Page 7
PROCESS FOR SETTING UP OF SEZ Presentation of proposal To State Govt. or to the Board of Approval (BOA) in Form A If directly made to the Board, after Board' 's approval, the person will have to obtain State Govt.'s concurrence within a period of 6 months Forwarding by State Govt. with recommendations To Board of Approval within a period of 45 days of receipt of proposal( Approval by the Board with/without modificat tions BOA shall examine the proposal and after approval, it shall make recommendations to Central Government under Sec.3(9) of SEZ Act,2005). If approval is made with modifications, it shall be conveyed only if modifications are accepted by the developer. No rejection without stating and conveying valid reasons. Granting of Letter Of Approval (LOA) Central Government Under section 3(10) of SEZ Act'05 and Rule 6 of SEZ Rules'06 shall grant LOA to developer within 30 days of receipt of communication from BOA in; Form B if proposal is to set up a SEZ and land is in posession. Form C if proposal is for providing infrastructural facilities in SEZ. Valid for 3 Years, Extendable by BOA for 2 Years. Form B 1 if land is not in possession (In Principal Approval) Valid for 1 year, Extendable by BOA for 2 years. Supply of Details and Demaraction of Areas Developer shall supply exact details of identified area of SEZ and details regarding the ownership and title of the land to Central Government ( U/S 4 of SEZ Act'05 and Rule 7 of SEZ Rules'06.) Development Commissioner shall demarcate areas i.e. Processing Area, Trading Area etc. (U/S 6 of SEZ Act'05 and Rule 11 of SEZ Rules'06) Notifying the SEZ After approval of the proposal to set up a SEZ, LOA for the same is issued and thus it is notified. (note1) NRS ADVISORS Page 8
Notes forming part of Process of setting up of SEZ: 1. The application will be supported by a Project Report detailing the economic and commercial viability of the proposal. It shall contain the following details amongst others: (1) Location of the proposed SEZ (2) Financial details incl. proposed investment, mode of financing and viability of the project (3) Proof of ownership of land free from all encumbrances or a lease for a period of not less than 20 years. (4) Details of foreign equity and repatriation of dividend etc. 2. When the proposal is from a State Government then it will be made direct to the BOA. Sometimes, Central Government may consult the State Government and set up the SEZ without reference to the BOA. 3. The Developer or Co Developer shall hold at least 26% of the equity in the entity proposed to develop the business, residential or recreational facilities in a SEZ in case such an entity or SPV is set up, the latter being a company established under Companies Act, 1956. NRS Advisors NRS House, B/4 Himatlal Park, Opp.Azad Municipal Garden, Off 132 ft. Ring Road, Satellite, Ahmedabad 380015. Gujarat. India Phone: +91 79 66092200 Fax: +91 79 66092290 URL: www.nrsadvisors.com Email: info@nrsadvisors.com Page 9