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Special Economic Zones

Special Economic Zone (SEZ) is a specifically delineated duty free enclave with all required infrastructure provided under single administrative umbrella primarily meant for locating industries which manufacture and export goods and services . These enclaves shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs.

Under section 3, a Special Economic Zone can be established either by Central Government, State Government or its agencies, private / public / joint sector or any person for manufacture of goods or rendering services or for both or as a free trade and warehousing zone .

Foreign companies can also set up SEZs in India.

Process involved in establishment of an SEZ

A Developer /An Entrepreneur who is willing to start SEZ needs to locate the area with the minimum land requirement as per SEZ -2006 Rule 5(2) i.e. Minimum (10 Hectares)for IT/ITES SEZ, Minimum (40 hectares) for Free Trade & Warehousing Zone and for Multi Services (100 hectares ) & for Multi product (1000 hectares)
After identifying the area an applicant needs to be submitted in Form A to the State Government (Rule 3) indicating name and address of the applicant, status of the promoter along with a project report covering the following particulars
Location of the proposed Zone with details of existing infrastructure and that proposed to be established
Its area, distance from the nearest sea port / airport / rail / road head etc
Financial details, including investment proposed mode of financing and viability of the project
Details of foreign equity and repatriation of dividends etc., if any
Whether the Zone will allow only certain specific industries or will be a multi-product Zone
The State Government while recommending the proposal shall commit to provide the facilities and incentives such as exemption from state and local levies, exemption from electricity duty, Single Window Clearance under the state laws , etc. as provided in sub-rule (5) of Rule 5 of the SEZ Rules 2006
The State Government has to forward the proposal with its recommendations within 45 days from the date of receipt of such proposal from the developer to the Board of Approval (BoA) addressed to Director(SEZ)/Deputy Secretary, Department of Commerce, Udyog Bhavan, New Delhi
The Developer also has the option to submit the proposal in Form A directly to the Board of Approval via Director(SEZ)/Deputy Secretary, Department of Commerce, Udyog Bhavan, New Delhi., in such cases the applicant (Developer/Entrepreneur) shall have to obtain the concurrence of the State Government within 6 months from the date of such approval
After approval by the Board , the Department of Commerce issues Letter of Approval (LoA) to the applicant (Developer/Entrepreneur) for establishment of SEZ (Rule 6)
After receipt of the Letter of Approval (LoA) and on submission of details of the land with proof of ownership /leasehold rights of the land, possession certificate and non encumbrance certificate duly certified by the district revenue authorities and on inspection by the jurisdictional DC, Department of Commerce, shall notify the area as an SEZ (Rule 7 and 8)
The applicant is required to submit details of the authorized operations proposed to be undertaken in the SEZ so as to obtain authorization for the same from the Board of Approval (BoA).Exemptions of duties and taxes are extended only for the authorized operations
Procurement of goods for development of SEZ (for developer only) for authorized operations shall be approved by the Approval Committee at the Zone Level on the basis which goods can be procured without payment of customs duty and excise duty by the developer

Definition of processing and non-processing area

A processing area is that area of an SEZ where units can be located for manufacture of goods or rendering of services .Atleast 50% of the area shall be earmarked for developing the processing
The non-processing area is the area which is intended to provide support facilities to the SEZ processing area activities and may include commercial and social amenities/infrastructure

Co-developer

The infrastructure facilities of the SEZ’s are normally to be developed by the developer. The developer if desires , that certain facilities or portion of the SEZ to be developed by another person , then the developer can ask the person to file an application with Board of Approval to be considered as a Co-developer . For this the consent of the developer is must. There has to be MoU between Developer and Co-developer and the copy of the same has to be submitted to BoA along with the application of the Co-developer.

Facilities Incentive/ Facilities to SEZ Developer

100% FDI allowed for :
(a) Townships with residential, educational and recreational facilities on a case to case basis,
(b) franchise for basic telephone service in SEZ.
Income Tax benefit under ( 80 IA ) to developers for any block of 10 years in 15 years
Duty free import/domestic procurement of goods for development, operation and maintenance of SEZs.
Exemption from Service Tax /CST.
Income of infrastructure capital fund/co. from investment in SEZ exempt from Income Tax
Investment made by individuals etc in a SEZ co also eligible for exemption u/s 88 of IT Act
Developer permitted to transfer infrastructure facility for operation and maintenance.
Generation, transmission and distribution of power in SEZs allowed
Full freedom in allocation of space and built up area to approved SEZ units on commercial basis.
Authorized to provide and maintain service like water, electricity, security, restaurants and recreation centers on commercial lines.

Setting up a unit in SEZ

For setting up a manufacturing, trading or service units in SEZ, 3 copies of project proposal in the format prescribed at Appendix 14-IA of the Handbook of Procedures, Vol.1 to be submitted to the Development Commissioner of the SEZ.

Number of units can be allowed in a SEZ

There is no restriction on the number of units in the SEZ Act. The space availability depends on the floor space index (FSI) available on that area and Developers capacity to construct.

Approval mechanism for the units

All approvals to be given by the Unit Approval Committee headed by the Development Commissioner. Clearance from the Department of Policy and Promotion/Board of Approvals, wherever required will be obtained by the Development Commissioner, before the Letter of Intent is issued.

Incentive/facilities available for SEZ units

Following incentive/ facilities to SEZ enterprises :

Customs and Excise:

SEZ units may import or procure from the domestic sources, duty free, all their requirements of capital goods, raw materials, consumables, spares, packing materials, office equipment, DG sets etc. for implementation of their project in the Zone without any licence or specific approval.
Duty free import/domestic procurement of goods for setting up of SEZ units.
Goods imported/procured locally duty free could be utilized over the approval period of 5 years.
Domestic sales by SEZ units will now be exempt from SAD.
Domestic sale of finished products, by-products on payment of applicable Custom duty.
Domestic sale rejects and waste and scrap on payment of applicable Custom duty on the transaction value.

Income tax

Physical export benefit
100% IT exemption (10A) for first 5 years and 50% for 2 years thereafter.
Reinvestment allowance to the extend of 50% of ploughed back profits
Carry forward of losses

Foreign Direct Investment

100% foreign direct investment is under the automatic route is allowed in manufacturing sector in SEZ units except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes , cigars and manufactured tobacco substitutes.
No cap on foreign investments for SSI reserved items.

Banking / Insurance/External Commercial Borrowings

Setting up Off-shore Banking Units allowed in SEZs. OBU's allowed 100% Income Tax exemption on profit for 3 years and 50 % for next two years.
External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions.
Freedom to bring in export proceeds without any time limit.
Flexibility to keep 100% of export proceeds in EEFC account. Freedom to make overseas investment from it.
Commodity hedging permitted.
Exemption from interest rate surcharge on import finance.
SEZ units allowed to 'write-off' unrealised export bills.

Central Sales Tax Act

Exemption to sales made from Domestic Tariff Area to SEZ units. Income Tax Act.

Service Tax

Exemption from Service Tax to SEZ units

Environment

SEZs permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels and non-polluting service industries in the Coastal Regulation Zone area
Exemption from public hearing under Environment Impact Assessment Notification

Companies Act

Enhanced limit of Rs. 2.4 crore per annum allowed for managerial remuneration
Agreement to opening of Regional office of Registrar of Companies in SEZs.
Exemption from requirement of domicile in India for 12 months prior to appointment as Director

Drugs and Cosmetics

Exemption from port restriction under Drugs & Cosmetics Rules

Sub-Contracting/Contract Farming

SEZ units may sub-contract part of production or production process through units in the Domestic Tariff Area or through other EOU/SEZ units
SEZ units may also sub-contract part of their production process abroad.
Agriculture/Horticulture processing SEZ units allowed to provide inputs and equipments to contract farmers in DTA to promote production of goods as per the requirement of importing countries.

Labour laws in SEZs

Normal Labour Laws are applicable to SEZs, which are enforced by the respective state Governments. The states Government have been requested to simplify the procedures/returns and for introduction of a single window clearance mechanism by delegating appropriate powers to Development Commissioners of SEZs.

Facilities for Domestic suppliers to Special Economic Zone

Supplies from Domestic Tariff Area (DTA) to SEZ to be treated as physical export. DTA supplier would be entitled to:
Drawback/DEPB
CST Exemption
Exemption from State Levies
Discharge of EP if any on the suppliers
Income Tax benefits as applicable to physical export under section 80 HHC of the Income Tax Act.

Monitoring the functioning of the units in SEZ

Performance of the SEZ units monitored by a Unit Approval Committee consisting of Development Commissioner, Custom and representative of State Govt. on annual basis.
In all SEZ’s, the statutory functions are controlled by the Government. Government also controls the operation and maintenance function in the 7 Central Government controlled SEZs. In rest of the units, operation and maintenance are privatised.

Special feature of SEZs

The units would be entitled for a package of Incentives and a simplified operating environment

Licenses for Imports

No License is required for imports, including second hand machineries.

Role of Development Commissioner

Development Commissioner is the nodal officer for SEZs and help in resolution of problem, if any, faced by the units / developer.

Customs examination of goods by customs

Customs examination is to the bear minimum. SEZ units function on self certification basis.

Supplying to other units in SEZ

Inter Unit Sales are permitted as per the Policy. Buyer procuring from another unit pays in Foreign Exchange.