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SPECIAL ECONOMIC ZONE POLICY - INDIA

OVERVIEW OF THE SEZ SCHEME


INTRODUCTION

Special Economic Zones (“SEZ”) are governed by the SEZ Act and the
SEZ Rules
• Comprehensive legislation encompassing various aspects relating to the
setting-up and operations of SEZs

• Provides for a single window clearance for obtaining licenses/permissions, etc


under certain Central Acts

SEZ law provides for tax and fiscal incentives for developers and units
that are superior to other similar schemes in force
Every SEZ shall be under the administrative control of a Development
Commissioner

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INTRODUCTION – EVOLUTION OF SEZ
EVOLUTION OF SEZ IN INDIA

A SEZ scheme initially introduced in April, 2000 as part of India’s Foreign Trade Policy

Objective of SEZ Scheme –promotion of export-led growth of the economy supported by


integrated infrastructure and package of incentives to attract foreign and domestic
investment

Scheme was unsuccessful and saw only public sector participation


(essentially Government bodies)

To popularize SEZs amongst private investors, comprehensive legislation introduced


SEZ Act, 2005 and SEZ Rules, 2006

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INTRODUCTION – SEZ: THE GENESES
Successful SEZ Regime

Fiscal SEZ Incentives Regulatory Freedom Supportive Infrastructure

 Tax concessions and  Single window  Single window


holidays to developers clearance mechanism clearance mechanism
and units
 Both foreign and  Both foreign and
 Exemption from central domestic investment up domestic investment up
and state government to 100% permitted, to 100% permitted,
duties and levies without any regulatory without any regulatory
(customs, stamp duty, approvals approvals
sales tax etc.)
Leading To

 Increased investment; both domestic and foreign


 Increased exports
 Large scale developments
 Low cost manufacturing hubs
 Employment generator for skilled and unskilled workforce

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SEZ - FISCAL BENEFITS
KEY INDIRECT TAX BENEFITS – DEVELOPERS AND UNITS

Central Levies State Levies


• Customs duty exemption on State levies vary across states
imports
• VAT exemption / refunds in key
• Excise duty exemption on local States
procurements
• Entry Tax exemption on entry of
• CST exemption on interstate goods into the local area in key
procurements States
• Service tax exemption for services
exclusively used for Authorised
Operations in the SEZ – Refund in
other cases
• Export entitlements for vendors like
EPCG, advance license, drawback,
etc
• Exemption from R&D Cess

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CORPORATE TAX BENEFITS - SEZ UNITS

For first five years 100% of the eligible profits or gains


Income tax Next five years 50% of the eligible profits or gains
holiday (Units in
SEZ) 50% of the eligible profits or gains subject to
Next five years
creation of specified reserve
However, MAT @ 18.5% (plus applicable surcharge and education
cess) would be payable on book profits – Credit for MAT would be
available for set-off against regular tax upto 10 years

Exemption from capital gains on transfer of specified assets in


Capital gains consequence to shifting of industrial undertaking from urban or other
areas to a SEZ subject to certain conditions (no significant impact)

With the Direct Tax Code yet to be enacted or notified as an Act, there is effectively no sunset clause
or deadline applicable for the profit linked tax holiday for SEZ units

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MIGRATION INTO SEZ
STPI TO SEZ – WHY MIGRATE?
Particulars SEZ STPI Advantage
Customs duty applicable on
Customs duty on
1 Upfront Exemption civil works, exempted on SEZ
imports
other procurements
Excise duty on Excise duty applicable on
2 indigenous Not applicable (export status) civil works, exempted on SEZ
purchases other procurements
No exemption (refund
3 Service Tax Upfront Exemption / Refunds SEZ
/CENVAT available
CST refundable but prone
4 CST Upfront Exemption SEZ
with practical difficulties
Upfront exemption / refunds in Payable - No exemption
5 VAT SEZ
key States Mostly a cost
Exempt - Profit linked MAT is
6 Corporate Tax Payable - No exemption SEZ
payable

Corporate tax Investment linked exemption,


7 Payable - No exemption SEZ
under DTC however MAT is payable

Proposed GST No exemption – credit


8 Mostly zero-rated SEZ
regime available
9 R&D Cess Exempt Payable SEZ
Cumbersome recurring
Compliance One time procedure - no major procedure – periodical
10 SEZ
procedures recurring compliance returns / maintenance of
records
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MIGRATION OF STPI TO SEZ
Existing STPI units can shift operation to SEZ for consolidation or otherwise
• No provisions preventing migration of STPI to SEZ
• Only deterrent - non-availability of corporate tax benefits when the value of goods
exceed 50% of the total capital goods installed by the Unit in a year
• Instructions No 11 and No 68 specifically permit for transfer/shift of assets from STP
units to SEZ
• Fresh license needs to be obtained for setting-up the SEZ unit
• Duty free goods can subsequently be transferred from the STPI unit to the SEZ unit –
without payment of duties

Options of multiple SEZ licenses can also be evaluated


• One SEZ unit for migration – no corporate tax benefits
• Other SEZ unit for growth – which can claim corporate tax benefits as well

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SETTING UP AN SEZ UNIT
BROAD PROCESS OF SETTING-UP A SEZ UNIT

1 Entrepreneur to file application for approval with the jurisdictional Development


Commissioner (“DC”)

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DC to forward the application to the Unit Approval Committee (“UAC”)

3 UAC to deliberate the information and merits of the application along with
credentials of the Entrepreneur proposing to set up a SEZ Unit

4 Upon deliberations, UAC will confer the Letter of Approval (“LOA”) on the Unit
after which the Unit can begin to operate in the SEZ

5 Pursuant to obtaining the LOA, the unit to fulfill formalities like seeking approval
of list of services, execution of the BLUT etc.

6 Unit begins to operate out of the SEZ and unit to submit the registered lease
deed within six months of having obtained the LOA

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LEGAL PROVISIONS – INCOME TAX REGULATIONS

 Under the income-tax regulations a SEZ unit is eligible for the tax relief if:
 Unit is not set up by using previously used plant and machinery (subject to a limit of 20% of total
plant and machinery) and
 The Unit is not formed by splitting up or reconstruction of an existing business.
 Setting up a SEZ unit with substantial number of existing employee, transfer of existing contracts
would be construed as a business set up by splitting up or reconstruction of an existing business.

 As per the latest circular, the setting up of a new unit in an SEZ will not be considered as splitting
up of or reconstruction of its existing business, if it complies with any one of the 2 conditions below
in the year of commencement of business:
 Transfer or redeployment of technical manpower from existing unit does not exceed 50% of
the total technical manpower actually engaged in the development of software or IT –enabled
products of the new SEZ unit as on the last day of the year ; or
 The net addition to new technical manpower in all units of the taxpayer at the enterprise level
is, at least, equal to the number that represents 50% of the total technical manpower of the
new SEZ unit during the year. For example -
New SEZ Unit (No. of technical Enterprise Level ( No. of technical Whether hit by condition of split /
manpower) manpower including new SEZ Unit) reconstruction
New Transfer from Total Existing Net addition of Total
Existing new recruits
100 40 140 500 300 800 No; as each of the conditions is satisfied

100 200 300 500 180 680 No; as condition at the enterprise level is
satisfied
100 200 300 500 130 630 Yes; none of the conditions is satisfied
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SEZ BENEFIT CYCLE

Procedural
nightmares done High quality infrastructure
away with available for Units
Reduced cost on account
of setting up for the Units

Reduced operating
costs of SEZ for the
Reduced input costs for Developer
the Units

Reduced cost of
Reduced costs resulting
setting up SEZ for the
in increased profits
Developer

Profits of Developer and


Units entitled to income
tax incentives Cumulative effect:
“ Competitive Export of SEZ
goods/services – REGIME
No export of taxes”

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TRANSACTION PROCESS : STEPS TO MOVE INTO
AN SEZ
Leasing Considerations :
Process and leasing considerations
Proposal • LOA (letter of agreement) to be submitted
Submission Submission of post the LOI signing
Shortlisting of space Proposal Approval
Development Lease Deed to DC
Commissioner (DC)
• SEZ Unit Approval – The approval could
1 2 3 4 be between 45- 60 days at the minimum,
dependent upon the meetings scheduled.
Submit proposal to
Lease Deed to be
Approach IT SEZ
DC in Form – F Approval of
executed between • The company signing the lease should be
along with the proposal in a foreign exchange earner (i.e. be dollar
Developer client “Unit” &
developer’s letter of committee meeting
consent
developer positive at the end of 5 years)

• The lease deed discussion and finalization


Developer Letter of approval of the lease can be done, while LOA is
Understand Space being approved
commissioner to issued to client Commencement of
Options and
scrutinize the “Unit” y DC in form fit-outs / Operations
Eligibility Criteria
proposal G • No Sub Lease / Assignment is possible in
an SEZ

Signing of MoU / Request for • The lock – in period in an SEZ will be


LOI between Client clarifications minimum 5 years (per SEZ mandate)
& Developer /
(Commercial Closure) modifications
• Any exit prior to 5 years from an SEZ
space, will entail payments and penalties
Proposal put up for Client “Unit” to
consideration with execute bond cum Furnish copy of • No rental differentiator in SEZ/ NON SEZ
Client to submit approval legal undertaking registered lease
letter of interest for committee with an “LUT” with custom The only cost benefit from an RE
deed to DC
the space take up average timespan zone officer for perspective is no service tax and reduced
of 25 – 20 days operations in SEZ CAPEX

DC’s to seek • Reduced power back up costs likely,


Developer to issue
letter of consent to client clarification dependent upon developer
client on the proposal if
any
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