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Complete Understanding Special Economic Zones in India

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Complete Understanding Special Economic Zones (SEZs) in India

  • Special Economic Zones (SEZs) are designated duty-free areas that operate as liberalized economic hubs to promote foreign investments and exports. These zones are governed under the Special Economic Zone Act, 2005, and provide enterprises with significant benefits and exemptions from various economic, tax, and corporate laws.
  • A Special Economic Zone (SEZ) is a designated area offering liberalized trade and business laws to attract investment and create jobs. These zones are duty-free and governed by distinct commercial and trade regulations, fostering a favorable environment for business operations.
  • India introduced its SEZ policy in 2000 to address administrative challenges and later passed the Special Economic Zones Act, 2005 (“SEZ Act”), which streamlined procedures for SEZ development and operation.
  • The SEZ Act provides tax exemptions, simplified compliance procedures, and single-window clearance for setting up SEZ units.
  • It also ensures minimal land requirements and self-certification mechanisms, encouraging business growth and trade.
  • Under this blog we provide outlines key aspects of Special Economic Zones (SEZs) in India, including their salient features, incentives for SEZ developers, and benefits for SEZ units. If you need the content transcribed, explained, or summarized further,

Salient Features of the SEZ Scheme

  • Treated as foreign territories for tax and tariff purposes. Designated as duty-free enclaves, SEZs are treated as territories outside India’s customs boundaries for authorized operations.
  • Operate with minimal government interference and streamlined compliance.
  • Support economic growth through incentives like tax exemptions and foreign investments.
  • No import licenses are required.
  • Allows manufacturing and service activities.
  • Units must achieve Positive Net Foreign Exchange (NFE) over five years.
  • Domestic sales are subject to full customs duties and import policies.
  • Full subcontracting freedom.
  • No routine customs examinations for import/export cargo.
  • SEZ Developers/Co-Developers and Units enjoy Direct Tax and Indirect Tax benefits under the SEZ Act, 2005.

Sector-Specific and Restricted Activities

  • Sector-Specific Considerations (Rule 18(3)):
    • Export of high-grade iron ore (above 63%) requires special approval.
    • Subcontracting polyester yarn in Domestic Tariff Areas (DTA) is restricted.
  • Prohibited Activities (Rule 18(4)):
    • Recycling of plastic or textile waste.
    • Import/recycling of used goods (subject to certain conditions).

Purposes for SEZ Establishment:

  • Manufacturing or services.
  • Free Trade Zones.
  • Warehousing sectors.
  • Export of goods and services.
  • Offshore banking.

Types of SEZ Management:

  • Government-owned.
  • Privately owned.
  • Joint management by government and private entities.

Process of Establishing or Registering SEZ Units

  1. Establishment of SEZ:
    • Can be set up by individuals, companies, or government entities within the customs boundary notified by the government.
  2. Registration of SEZ Unit:
    • Submit an application to the Development Commissioner.
    • Reviewed by the State Approval Committee.
    • Approval or rejection is based on recommendations.

Incentives and Facilities for SEZ Developers

  • Customs/Excise Duty Exemptions: For development of SEZ-approved operations.
  • Income Tax Exemption: For SEZ developers, under Section 80-IAB of the Income Tax Act, for 10 out of 15 years (Sunset Clause effective from 01.04.2017).
  • Central Sales Tax (CST) Exemption.
  • Service Tax Exemption: Under SEZ Act sections.
  • Zero-rated Supplies under IGST Act, 2017.

Incentives for SEZ Units

  • Duty-free import/domestic procurement of goods for SEZ activities.
  • No Income Tax Exemption:However earler following are avilable :
    • 100% for the first 5 years.
    • 50% for the next 5 years.
    • 50% of ploughed-back export profits for another 5 years (Sunset Clause effective 01.04.2020).
  • Exemptions from CST, Service Tax, and State Sales Taxes (replaced by IGST zero-rating).
  • Single-window approval for Central and State-level clearances.
  • Other state-imposed levies are exempted.

Business & Operations of Units in Special Economic Zones (SEZ)-

Key Compliance Requirements for SEZ Units: 

The SEZ setup process in India, governed by the Special Economic Zone Act, 2005, and SEZ Rules, 2006, is designed to be transparent and investor-friendly. With the support of single-window clearance mechanisms and detailed procedural guidelines, businesses are encouraged to invest and operate efficiently. For further clarity, entrepreneurs can refer to SEZ-specific.

Under this blog contains a detailed list of major compliances for existing SEZ units after receiving the Letter of Approval (LOA) from the Development Commissioner. This list is not exhaustive; refer to relevant SEZ rules, notifications, and amendments. Units are responsible for ensuring all applicable compliances are met in a timely manner. Setting up a business unit in a Special Economic Zone (SEZ) involves adhering to a comprehensive list of compliance requirements laid out by the Central and State governments. Below is a summary of the document’s key components, including compliance areas, timelines, and references:

  1. Setting Up and Establishing Units in SEZs:

    • Approval Process:
      • Proposals for SEZ units must be submitted to the respective State Government or directly to the Board of Approval (BoA), which evaluates the proposal’s merits.
      • The Board of Approval, a 19-member body chaired by the Secretary of the Department of Commerce, makes decisions based on consensus.
      • After approval, the Central Government notifies the SEZ area, and the Development Commissioner grants final approval for unit establishment.
    • Leasehold Basis:
      • Units in SEZs operate on a leasehold basis, requiring lease or sub-lease agreements to be executed between the parties.
    • Exemptions and Registration:
      • State Governments endeavor to exempt SEZ units from state and local taxes, levies, and duties, including stamp duty.

However, while stamp duty is exempt under the SEZ Act, registration fees and formal registration of documents remain mandatory for legal enforcement under the Registration Act, 1908.

  1. Steps for Setting Up a Unit in an SEZ- Registration in SEZ Online Portal

    • Mandatory for all SEZ transactions.
    • Frequency: Initial registration and annual renewal required for SEZ.
    • Timeline: Registration within 20 days of LOA issuance; annual renewal required.

Application Submission

    • Form F Submission: Submit a consolidated proposal in Form F (in five copies) to the Development Commissioner of the SEZ jurisdiction.
    • Documents to Attach:
      • Letter of willingness to allot space issued by the SEZ Developer.
      • Demand Draft (Rs. 10,000) favoring “The Pay & Accounts Officer, Cochin Special Economic Zone.”
      • Affidavit on a Rs. 100/- stamp paper as per Form F.
      • Detailed project report, including:
        • List of capital goods (imported/procured).
        • Description of raw materials and imports.
        • Technical/marketing collaborations.
      • Company registration documents (Certificate of Incorporation, Memorandum, and Articles of Association).
      • Last three years’ ITRs or audited balance sheets (for companies).
      • Proof of identity and residence of promoters (PAN, Voter ID, etc.).

Approval by the Development Commissioner

    • Single-Window Clearance:
      • Scrutiny of the proposal by the Approval Committee based on:
        • Positive Net Foreign Exchange Earning (NFE) criteria (Rule 53 of SEZ Rules).
        • Infrastructure availability.
        • Compliance with pollution and environmental norms.
      • Approval is granted or rejected with an opportunity to address modifications if required.
      • Letter of Approval (Form G): Issued upon approval, valid for:
        • 1 year (extendable by up to 3 years with valid reasons).
        • Renewable every 5 years upon satisfactory compliance.

  1. Letter of Approval (LOA) and Cancellation:

  • LOA Validity:
    • Issued by the Development Commissioner, an LOA outlines entitlements and facilities for SEZ units.
    • Letter of Approval (LOA) Acceptance (Form G).
    • Units must confirm acceptance of LOA terms within 45 days.
    • Frequency: One-time compliance.
    • Timeline: Within 30 days of LOA issuance.
    • Validity:
      • Initially valid for 1 year, extendable by up to 2 years.
      • Once operational, it remains valid for 5 years from the first export date and can be renewed subsequently.
    • Cancellation:
      • If a unit persistently violates terms or obligations of the LOA, the Approval Committee can cancel the LOA after due hearing.
      • Post-cancellation consequences:
        • The unit loses its SEZ-related benefits, exemptions, and concessions.
        • It must remit the value of exemptions availed for goods, raw materials, and finished stock.
        • Appeals against cancellation can be filed before the Board of Approval.
      • Rule 77 of the SEZ Rules, 2006, prescribes detailed consequences for cancellation, including removal of goods from the SEZ.
  1. Bond-cum-Legal Undertaking (Form H)
    • Needed to operate and avail SEZ benefits like tax exemptions.
    • Frequency: Submit anytime projected duty-free transaction volume increases.
    • Timeline: Within 30 days of LOA issuance.
  2. Eligibility Certificate for State Fiscal Benefits
    • Apply for exemptions under state laws like stamp duty.
    • Frequency: One-time compliance (per premises).
    • Timeline: Immediately after BLUT submission.
    • State-Specific Requirements : States like Karnataka may impose additional conditions, such as:
      • Employment opportunities for local residents (80% of jobs for locals).
      • Vendor development and entrepreneurship training.
      • Sharing of non-processing area amenities (schools, hospitals) with the local community.

  1. Key Approvals/Registrations Required for SEZ 

  • Infrastructure and Operational Approvals:
    • Lease agreement with SEZ developer post-approval.
    • Allotment of land/industrial sheds.
    • Power and water connections.
    • Building plan approvals.
  • Tax and Trade Registrations:
    • Registration cum Membership Certificate (RCMC)
      • Issued by EPCES for SEZ-related exemptions.
      • Frequency: Annual renewal.
      • Timeline: Within 20 days of LOA issuance; renew by April 1 every year.
    • Import Export Code (IEC)
      • Mandatory for import/export activities.
      • Frequency: One-time.
      • Timeline: Within 20 days of LOA issuance.
    • Labor and Factory Approvals:
      • Annual subcontracting permissions.
      • Factory inspections and labor approvals.
    • GST Registration
      • Required for SEZ operations.
      • Frequency: One-time.
      • Timeline: Within 20 days of LOA issuance.
    • Pollution control clearance (if applicable)

Other Important Compliances Related to SEZ 

  1. LUT (Letter of Undertaking under GST)
    • Required for zero-rated exports under IGST.
    • Frequency: Annual compliance.
    • Timeline: Before exports, renewed yearly.
  2. Recruitment of Employees for Income Tax Exemption
    • Mandatory for new SEZ units.
    • Frequency: Once before operations commence.
  3. Employee Identity Cards
    • Issued by Customs for employees working in SEZ.
    • Validity: 3 years (on-roll employees); 6 months (off-roll employees).
  4. Purchase of Assets
    • New assets like computers must be purchased in the SEZ unit’s name.
    • Frequency: Before commencement of operations.
  5. Commencement of Operations (COO)
    • Ensure all pre-operational compliances are completed.
    • Frequency: One-time.
    • Timeline: Notify COO to Development Commissioner immediately upon starting exports.
  6. Registered Lease Deed Submission
    • Submit within 6 months of LOA issuance.
    • Frequency: Depends on lease deed period.
  7. Extension of LOA Validity
    • Required if COO is not initiated within one year.
    • Frequency: Annual if COO is delayed.
    • Timeline: Apply 2 months before LOA expiry.
  8. Monthly Service Export Reporting Form (SERF)
    • Report export details to SEZ online portal.
    • Frequency: Monthly.
    • Timeline: Before the 5th of every month.
  9. Monthly Investment and Employment Report
    • Report to Customs Preventive Officer.
    • Frequency: Monthly.
    • Timeline: Before the 5th of every month.
  10. Annual Performance Report (APR)
    • Submit Form I certified by a Chartered Accountant.
    • Frequency: Annual.
    • Timeline: By June 30 of the following financial year.
  • Change in Constitution, Exit, and Transfer:
    • Change in Constitution:
      • Changes in shareholding, mergers, demergers, and reorganization require approval under Government Instruction No. 109 (October 2021).
      • Key conditions:
        • The unit must continue operations as a going concern.
        • All liabilities remain unchanged post-reorganization.
      • Failure to obtain approval for such changes could result in LOA cancellation.
    • Exit from SEZ:
      • Units can exit SEZ operations with Development Commissioner approval, subject to:
        • Payment of applicable duties on imported/domestic goods.
        • Penalties under the Foreign Trade (Development and Regulation) Act, 1992, if positive net foreign exchange has not been achieved.
    • Transfer of Ownership:
      • SEZ units can transfer their assets and liabilities to another party under Rule 75A, provided:
        • The unit has held a valid LOA and lease for at least 5 years.
        • Operations have continued for a minimum of 2 years post-production commencement.
        • Transfer meets all SEZ eligibility criteria and receives approval from the Unit Approval Committee and Development Commissioner.
      • The new owner assumes all duties, liabilities, and export obligations of the transferor unit.
      • If transferring an SEZ unit to another zone, the entrepreneur must seek approval from the Department of Commerce, along with a detailed proposal.

Benefits of SEZ Registration

SEZs offer significant benefits, particularly for sectors like IT and ITES, due to their tax exemptions, simplified processes, and business incentives. However, the SEZ Act, SEZ Rules, and Government Instructions must be strictly adhered to for transactions, reorganizations, exits, or transfers to avoid severe consequences such as cancellation of LOA and repayment of availed benefits. Proper compliance ensures the sustainable and uninterrupted operation of SEZ units. SEZ units enjoy a wide range of fiscal and operational benefits, such as:

  • Tax Incentives: Income tax, GST, export duties, and customs charges exemptions.
  • Subsidies and Budget Benefits: Consistent performance benefits, duty drawbacks, and developer schemes.
  • Regulatory Approvals: Simplified processes for FDI, land acquisition, banking, insurance, and borrowings.
  • Ease of Operations: Hassle-free compliance with licensing and legal registration.

Free Trade and Warehousing Zone (FTWZ) Units

  • Units can engage in warehousing, trading, labeling, and re-export activities.
  • Must ensure all activities are in convertible foreign currency.
  • Specialized services like refrigeration and assembly of kits are allowed.

India Financial Consultancy Corporation Pvt Ltd. – SEZ Compliance Services

India Financial Consultancy Corporation Pvt Ltd. offers a comprehensive package for SEZ-related compliance, ensuring seamless formation and operation of SEZ units. Services include:

  1. SEZ Formation:
    • Assistance with setting up new SEZs or registering units.
    • Handling closures, mergers, demergers, and restructuring.
  2. Approvals and Compliance:
    • Central and state ministerial approvals.
    • Filing declarations, trade agreements, project reports.
  3. Tax and Financial Compliance:
    • Tax return filing.
    • Compliance with FDI, FEMA, RBI regulations.
  4. Legal and Operational Support:
    • Licensing and arbitration services.
    • Export/import regulations.
    • Land and project approvals.
  5. Ongoing Compliance:
    • Corporate governance.
    • Performance-linked subsidies and benefits.

Why Choose India Financial Consultancy Corporation Pvt LTd ?

With their expertise in SEZ regulations, India Financial Consultancy Corporation Pvt LTd simplifies complex regulatory frameworks, ensuring timely approvals, compliance, and dispute resolution. Their services are designed to maximize the benefits for enterprises under SEZ schemes while mitigating compliance risks. If you need further clarification or wish to explore India Financial Consultancy Corporation Pvt LTd  Services, feel free to reach out for personalized assistance.

Disclaimer

This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.

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The information / articles & any relies to the comments on this blog are provided purely for informational and educational purposes only & are purely based on my understanding / knowledge. They do noy constitute legal advice or legal opinions. The information / articles and any replies to the comments are intended but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as a legal advice or an indication of future results. Therefore, i can not take any responsibility for the results or consequences of any attempt to use or adopt any of the information presented on this blog. You are advised not to act or rely on any information / articles contained without first seeking the advice of a practicing professional.