Special Economic

Zone
Scheme

Swati Janardan
CONCEPT

• Delineated duty free enclave

• Deemed foreign territory for the purposes of trade

operations and duties and tariffs

• Goods and services going into the SEZ area from DTA
shall be treated as exports for the DTA Unit

• Goods coming from the SEZ area into DTA shall be

treated as imports for the DTA Unit
SPECIAL ECONOMIC ZONE ACT 2005 & RULES 2006

THE SEZ ACT HAS 8 CHAPTERS

• Chapter 1: Title, definition etc.

• Chapter 2: Establishment of SEZ.
• Chapter 3: Constitution of Board of Approvals
• Chapter 4: Development Commissioner
• Chapter 5: Single Window Clearance
• Chapter 6: Special Fiscal Provisions for SEZs
• Chapter 7: Special Economic Zone Authority
• Chapter 8: Miscellaneous
AND 3 SCHEDULES

• The First Schedule: List 21 Acts, Tax duties or Cess

under these enactments are not applicable to SEZs.

• The Second Schedule: Incorporates modification to

the Income Tax Act, 1961, as applicable to SEZs.

• The Third Schedule: Incorporates amendments to

Insurance act, 1938, Banking Regulations Act, 1949
and Indian Stamp Act, 1899
MINIMUM AREA REQUIREMENT

TYPE OF SEZ AREA % for

(Minimum Processing
) in Area
Multi Product Hectares
1000 35

Multi Product SEZ for Services 100 35

Multi-product SEZ in NE 200 35

States, HP, Uttaranchal,
Sikkim, J&K, Goa & Union
territories
Sector Specific SEZ in NE 50 50
States, HP, Uttaranchal,
Sikkim, J&K, Goa & Union
territories
TYPE OF SEZ AREA % for
(Minimum) Processin
in Hectares g Area

Electronic hardware & software 10 100

Bio-tech, non-conventional 10 45
energy

Gems & Jewellery units 10 50

•The area required shall be contiguous area

•Where the above minimum is not met by a Developer, the
Board may approve more than one developer for a zone
INSTITUTIONAL FRAMEWORK

Institutions involved in the functioning of a SEZ

•DEVELOPER

•CO-DEVELOPER
# Special Purpose Vehicle / Entity

•BOARD OF APPROVAL

•DEVELOPMENT COMMISSIONER

•APPROVAL COMMITTEE

•SEZ AUTHORITY

•TOWNSHIP AUTHORITY

•PROPER OFFICER
DEVELOPER

• May be Central Government/ State

Government
• Have of Letter of Approval for establishment
of a SEZ
Functions
• Planned development of the SEZ
• Prepare the Development Plan
• Demarcate and develop sites
• Allocate and transfer plots, buildings
• Regulate the erection of buildings in
accordance with the plan
• Develop, operate and maintain
infrastructure
CO-DEVELOPER

Requirements for Co-developer

• Agreement between the Developer and the Co-
Developer
• Letter of Approval for provision of specific
infrastructure facility
• Proposal of the same to the Board
• Provider of infrastructure facility
Note:
# Special Purpose Vehicle / Entity
• Developer/ Co-developer can establish Special Purpose
Vehicle (SPVs) for creation of business, residential or
recreational facilities in SEZ.
• The Developer / Co-Developer should own at least 26%
equity in any SPV / Entity to be created
BOARD OF APPROVAL

• Approving proposal to set up SEZs

• Approval of authorized operations

(permissible
activities) in SEZ

• FDI approvals to Developers & Units

• Approvals for infrastructure provision

(approval
to co- developers)
DEVELOPMENT COMMISSIONER

• Grant all local and state level clearances etc

delegated by the Central / State Government

• Monitor such approvals, licenses, registration,

etc.

• Make town planning regulation

APPROVAL COMMITTEE

• Approve imports of goods & services into the

SEZ

• Approve proposals for establishment of SEZ

units

• Allow foreign collaborations / FDI proposals

duly cleared by the Board

• Monitor compliance by SEZ Developer, units

OTHER AUTHORITIES

SEZ AUTHORITY

• Monitoring of infrastructure services

• Monitoring of export performance of the

SEZ

TOWNSHIP AUTHORITY

• May be appointed by the State

Government, with powers and functions as
may be prescribed

PROPER OFFICER

• Customs administration
PERMISSIBLE ACTIVITIES

By units

• Manufacturing
• Services
• Trading

By Developer

• authorized operations notified by central

government
 APPROVAL OF SEZ & SEZ UNITS
Proposal to concerned
State Government in
FORM-A
State Government forwards the
proposal to the Board with its
recommendations
Approval/ reject/
modify by Board
Issuance of Letter of
Approval in FORM-B /in-
principle approval in FORM-
B1 by the Central
Government
Developer to submit exact
particulars of the area to the
Central Government
Notify the area as
SEZ
Proposal may be made to Board of Approval,
after approval by the Board concurrence of the
State Government to be acquired within 6
months
State Government to ensure the requirement
of Minimum land area within 45 days and
ensure that Tax exemptions, delegation of
power to DC etc. are available to the
Developers/Units
Board may approve the proposal with / without
modification; or reject it. Board accords in-
principle approval pending land acquisition &
communicate to the Central Government
Central Government will issue LOA within 30
days with the terms & conditions, entitlement
& obligation as approved by the Board. Valid
for 3 years within which to implement proposal
Central Government will issue in-principle
approval within 30 days additional conditions if
any. This is valid for 1 year within which
suitable proposal for formal approval to be
provided
Central Govt may if it considers appropriate
subsequently notify additional area to be
included as part of the SEZ
 NOTIFICATION OF SEZ

After getting LOA the

Land may be Leasehold (min. 20 years)/
Developer completes
Freehold. Land to be contiguous, vacant
the land acquisition and no thoroughfare

Developer to submit exact

particulars of the area to the
Central Government

The Objectives of GOI:

1. Generation of additional economic activity
2. Export promotion
Notify the area 3. Promotion of investments
as SEZ 4. Creation of employment
5. Development of infrastructural facility

Approval Committee notification

GOI appoints DC, constitutes & within 6 months from the date of
notifies the Approval establishment (notifying the area) of
Committee the SEZ

DC demarcates the area

within the SEZ as Processing &
Non processing zone
 APPROVAL FOR AUTHORISED OPERATIONS

Developer submits to the

board details of operation to
be carried out in the SEZ
Details can be submitted at the time of
approval or after. Exemptions benefits
available on authorized operations only
after notification

Board may authorize the

developer for operations as
GOI may authorize

Developer applies to DC for

The list of goods to be certified by a
procurement of the goods
chartered engineer
duty- free.

The Approval Committee Benefits also available to contractor

approves the import/local appointed by the developer, however the
procurement for authorized responsibility of proper utilization of the
operations goods lies with developer

The developer undertakes various

preparatory steps:
-Execution of bond cum LUT
-Application for IEC number
-Excise registration
-CST exemption
BENEFITS FOR SEZ DEVELOPERS & UNITS

• Exemption from Central Excise Duty on all goods eligible for

procurement by the unit.

• Exemption from Customs (Import) Duty on all goods

eligible for procurement by the unit.

• Exemption from Central Sales Tax

• Exemption of Capital gains on transfer of shifting of

industrial undertaking from urban area to any SEZ

• Usance Bill for export transaction are fully exempt from

stamp duty

• Exemption from payment of taxes, duties or Cess under

all enactments specified in the First Schedule

• Exemption from Minimum Alternate Tax

EXEMPTION U/S 10AA OF THE INCOME TAX ACT, 1961

TO UNITS IN SEZ:

• Profit from Exports is not taxable (exempt under

Section 10AA of the Income Tax Act, 1961) for 15
consecutive Assessment years from the previous year
in which the undertaking begins to manufacture
(5+5+5)

• 1st Five years – 100% of Export profits

• next Five years – 50% of Export profits

• further Five years – upto 50% of Export profits

provided the same is credited to SEZ Re-investment
Allowance Reserve A/c
APPLICABILITY OF SECTION 10AA OF THE INCOME TAX ACT

• The Exemption under the said provision will be

available under the following conditions:

• Begins or has begun manufacture on after 1st

April 2005

• It is not formed by splitting up, or by

reconstruction of an existing undertaking

• It is not formed by transfer of machinery to new

business
EXEMPTION U/S 80I AB OF THE INCOME TAX ACT, 1961

To Developer of SEZ

Income tax exemption as per 80 IAB:

• For undertaking which develops SEZs,

• Notified on or after 1st April, 2005,

• 100% of the profits from this business,

• For 10 consecutive years.

FOREIGN EXCHANGE EARNING REQUIREMENTS

• Unit shall achieve Positive Net Foreign Exchange

(+NFE)

• NFE to be cumulatively for a period of Five years from

the commencement of commercial activity

• The following supplies shall also be counted for NFE:

• goods against Advance license / advance
authorization
• goods against DFRC
• capital goods against EPCG license
ACTIVITIES IN DTA

• PROCUREMENT FROM DTA

• A Unit or Developer may procure from DTA without
payment of duty, taxes or cess

• DTA Suppliers to SEZ units or Developers shall be

eligible for export benefits as per chapter 8 of the FTP

• SALE TO DTA
• Goods can be removed from SEZ to DTA.
• Shall be chargeable to duties of customs as applicable
on such goods when imported
• DTA sale of goods manufactured by SEZ unit shall be
on submission of Import License
• Rate of duty shall be rate as applicable as on the date
of removal from SEZ
The Status so far!!

Approval Stage>> Functional Stage>> Number of

SEZs

• In Principle Approval >> Approval for developing SEZs

but Land acquisition by the Developer is pending)
>>162

• Formal Approval >> Approval given to Developers after

the land acquisition process is completed >> 234

• Notified SEZs (as on 1-May-2007) >> Board of Approval

through notification declares an area as SEZ and
appoints a DC, Approval Committee and other
Government agencies for actual functioning of the SEZ)
>> 100
EOU v/s SEZ units

Sr. No. Points EOU SEZ Units

Foreign
1 No such status Deemed foreign territory
Territory

Investment Total investment in Plant and Machinery

2 No such minimum investment condition.
Criteria should be minimum Rs.1 Crore.
Stamp Duty and Registration charges of
3 Stamp Duty No stamp duty and registration charges.
Land-building applicable.

100% Income Tax Exemption upto 5 years

from start of commercial production,
for next 5 years 50% exemption and for
Income tax is not payable upto Assessment further 5 years 50% exemption provided
4 Income Tax
Year 2010. that profit is credited to SEZ Re-
investment Reserve A/c. (for units
which begins production any year after
1-4-2006)

At the time of bonding, bank guarantee is

At the time of bonding, no bank guarantee is
Bank required to be given over and
5 required to be given, n case, the
Guarantee aboveSurety/solvency for bond
turnover is more than 1 Crore.
furnished by unit.
 Wastage norms as required to fix as SION
6 Wastage Norms
Norms from Board.
7 Labour Laws All Labour laws are applicable
Only 50% of physical export (not deemed
Export), in value terms can be sold in
8 DTA sale
DTA paying duty @ 50% of customs
duty applicable.
Sale to EOU is not treated as Physical
Export. Therefore the supplier to
9 Physical Export EOUs cannot claim the benefits under
Duty Exemption & Remission
Scheme.
10 Sales Tax Local Sales Tax is applicable.
11 Service Tax Service tax is applicable.
No fixed wastage norms are required.
Labour laws are lighter as SEZ units have
“Public Utility” status. Strikes would
be illegal. PF and ESI are exempted for
10 Yrs.
Finished goods may be sold in DTA after
charging full customs duties without
any limit/restrictions subject to
achievement of positive NFE.
Sale to SEZ Unit is treated at par with
physical export, the suppliers can claim
the benefits under Duty Exemption &
Remission Scheme.
Local & Central Sales Tax is exempted.
No service tax.