Special Economic Zones (SEZ) - Introduction.

A Special Economic Zone in short SEZ is a geographically bound zone where the economic
laws in matters related to export and import are more broadminded and liberal as compared to
rest parts of the country. SEZs are projected as duty free area for the purpose of trade,
operations, duty and tariffs. SEZ units are self-contained and integrated having their own
infrastructure and support services.

Within SEZs, units may be set-up for the manufacture of goods and other activities including
processing, assembling, trading, repairing, reconditioning, making of gold/silver, platinum
jewellery etc.

as per law, SEZ units are deemed to be outside the customs territory of India. Goods and
services coming into SEZs from the domestic tariff area or DTA are treated as exports from
India and goods and services rendered from the SEZ to the DTA are treated as imports into
India.

Benefits of SEZ

Apart from providing state-of-the-art infrastructure and access to a large well-trained and
skilled work force, the SEZ also provides enterprises and developers with a favourable and
attractive framework of incentives which include 100% income tax exemption for a period of
five years and an additional 50% tax exemption for two years thereafter. Similarly, 100% FDI
is also provided in the manufacturing sector. Exemption from industrial licensing
requirements and no import license requirements is also given to the SEZ units.

The area under 'SEZ' covers a wide range of zones, including Export Processing Zones
(EPZ), Free Zones (FZ), Industrial Estates (IE), Free Trade Zones (FTZ), Free Ports, Urban
Enterprise Zones and others. Usually the goal of an SEZ structure is to increase foreign
investment in the country.

At present there are fourteen functional SEZs located at Santa Cruz (Maharashtra), Cochin
(Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra
Pradesh), Falta and Salt Lake (West Bengal), Nodia (Uttar Pradesh), Indore (Madhya
Pradesh), Jaipur (Rajasthan), etc.

Attractive incentive and great investment opportunities have attractive many business tycoons
to step into the SEZ all over the country. The first step was taken by the Mahindra World
City at Chennai. The SEZ was promoted by Mahindra & Mahindra Ltd and later on by the
Tamil Nadu Industrial Development Corporation. Mahindra & Mahindra Ltd holds 89%
equity in the same. Later on, Reliance Industries also signed a pact with the Haryana
government for setting up of the Rs. 25,000 crore multi products SEZ near Gurgaon in 2006.

Obligations under SEZ Unit

It is compulsory for every SEZ units in India to achieve positive net foreign exchange
earnings. For this particular purpose, a legal undertaking is required which has to be executed
by a separate unit of the Development Commissioner. he is responsible for providing periodic
reports to the Development Commissioner and Zone Customs.
Role of State Government in Establishment of SEZ Units

State Governments play a very active role to play in the establishment of SEZ unit. Any
proposal for setting up of SEZ unit in the Private / Joint / State Sector is routed through the
concerned State government who in turn forwards the same to the Department of Commerce
with its recommendations for consideration. Before recommending any proposals to the
Ministry of Commerce & Industry (Department of Commerce), the States Government
properly checks all the necessary inputs such as water, electricity, etc required for the
establishment of SEZ units. The State Government has to forward the proposal with its
recommendation within 45 days from the date of receipt of such proposal to the Board of
Approval. The applicant also has the option to submit the proposal directly to the Board of
Approval. Representative of the State Government, who is a member of the Inter-Ministerial
Committee on private SEZ, is also consulted while considering the proposal.

History of Special Economic Zones SEZ.

The world first known instance of SEZ have been found in an industrial park set up in Puerto
Rico in 1947. In the 1960s, Ireland and Taiwan followed suit, but in the 1980s China made
the SEZs gain global currency with its largest SEZ being the metropolis of Shenzhen.

From 1965 onwards, India experimented with the concept of such units in the form of Export
Processing Zones (EPZ). But a revolution came in 2000, when Murlisone Maran, then
Commerce Minister, made a tour to the southern provinces of China. After returning from the
visit, he incorporated the SEZs into the Exim Policy of India. Five year later, SEZ Act (2005)
was also introduced and in 2006 SEZ Rules were formulated.

Special Economic Zones Terms and

Conditions.
Only units approved under SEZ scheme would be permitted to be located in SEZ.

1. The SEZ units shall abide by local laws, rules, regulations or laws in regard to area
planning, sewerage disposal, pollution control and the like. They shall also comply
with industrial and labour laws as may be locally applicable.
2. Such SEZ shall make security arrangements to fulfil all the requirements of the laws,
rules and procedures applicable to such SEZ.
3. The SEZ should have a minimum area of 1000 hectares and at least 35 % of the area
is to be earmarked for developing industrial area for setting up of processing units.
4. Minimum area of 1000 hectares will not be applicable to product specific and
port/airport based SEZs.
5. Wherever the SEZs are landlocked, an Inland Container Depot (ICD) will be an
integral part of SEZs.
Advantages and Disadvantages of SEZ.
Introduction

A SEZ unit which has been set up for carrying on manufacturing, trading or service activity
has both advantages as well as disadvantages. SEZ advantages are quite far more as
compared to its disadvantages which are almost negligible.

 Advantages

 15 year corporate tax holiday on export profit – 100% for initial 5 years, 50% for the
next 5 years and up to 50% for the balance 5 years equivalent to profits ploughed back
for investment.
 Allowed to carry forward losses.
 No licence required for import made under SEZ units.
 Duty free import  or domestic procurement of goods for setting up of the SEZ units.
 Goods imported/procured locally are duty free and could be utilized over the approval
period of 5 years.
 Exemption from customs duty on import of capital goods, raw materials,
consumables, spares, etc.
 Exemption from Central Excise duty on the procurement of capital goods, raw
materials, and consumable spares, etc. from the domestic market.
 Exemption from payment of Central Sales Tax on the sale or purchase of goods,
provided that, the goods are meant for undertaking authorized operations.
 Exemption from payment of Service Tax.
 The sale of goods or merchandise that is manufactured outside the SEZ (i.e, in DTA)
and which is purchased by the Unit (situated in the SEZ) is eligible for deduction and
such sale would be deemed to be exports.
 The SEZ unit is permitted to realize and repatriate to India the full export value of
goods or software within a period of twelve months from the date of export.
 “Write-off” of unrealized export bills is permitted up to an annual limit of 5% of their
average annual realization.
 No routine examination by Customs officials of export and import cargo.
 Setting up Off-shore Banking Units (OBU) allowed in SEZs.
 OBU's allowed 100% income tax exemption on profit earned for three years and 50 %
for next two years.
 Exemption from requirement of domicile in India for 12 months prior to appointment
as Director.
 Since SEZ units are considered as ‘public utility services’, no strikes would be
allowed in such companies without giving the employer 6 weeks prior notice in
addition to the other conditions mentioned in the Industrial Disputes Act, 1947.
 The Government has exempted SEZ Units from the payment of stamp duty and
registration fees on the lease/license of plots.
 External Commercial Borrowings up to $ 500 million a year allowed without any
maturity restrictions.
 Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration.
Disadvantages

 Revenue losses because of the various tax exemptions and incentives.

 Many traders are interested in SEZ, so that they can acquire at cheap rates and create
a land bank for themselves.
 The number of units applying for setting up EOU's is not commensurate to the
number of applications for setting up SEZ's leading to a belief that this project may
not match up to expectations.

Administrative set up for Special Economic

Zones.
Introduction

The functioning of SEZs is governed by a three-tier administrative set-up. The Board of

Approval is the apex body and is headed by the Secretary, Department of Commerce. The
Approval Committee at the Zone level deals with approval of units in the SEZs and other
related issues.

Board of Approval

The Board of Approval has been constituted by the Central Government in exercise of the powers
conferred under the SEZ Act. All the major decisions are taken by the Board of Approval. The Board
of Approval has 19 Members which are as follows:

Table-Board of Members - SEZ units

1. Secretary, Department of Commerce Chairman

2. Member, CBEC Member

3. Member, IT, CBDT Member

4. Joint Secretary (SEZ), Department of Commerce Member

5. Joint Secretary, DIPP Member

6. Joint Secretary, Ministry of Science and Technology Member

Joint Secretary, Ministry of Small Scale Industries and Agro and Rural
7. Member
Industries

8 . Joint Secretary, Ministry of Home Affairs Member

9. Joint Secretary, Ministry of Defence Member

10. Joint Secretary, Ministry of Environment and Forests Member

11. Joint Secretary, Ministry of Law and Justice Member

12. Joint Secretary, Ministry of Overseas Indian Affairs Member

13. Joint Secretary, Ministry of Urban Development Member

14. A nominee of the State Government concerned Member

15. Director General of Foreign Trade or his nominee Member

16. Development Commissioner concerned Member

A professor in the Indian Institute of Management or the Indian Institute of

17. Member
Foreign Trade

Director or Deputy Sectary, Ministry of Commerce and Industry, Department Member

18.
of Commerce Secretary

Unit Approval Committee

All the request for setting up of units in the SEZ are approved at the Zone level by the
Approval Committee consisting of Development Commissioner after a discussion with the
Customs Authorities and representatives of State Government. All post approval clearances
in matters related to importer-exporter code number, change in the name of the company or
implementing agency; broad banding diversification, etc. are given at the zonal level by the
Development Commissioner. A separate units is also there who monitor the performance of
the SEZ units on a periodic basis and is governed by the Approval Committee. SEZ units are
liable for penal action under the provision of Foreign Trade (Development and Regulation)
Act, in case of any violation in the rules formulated by the Approval Committee.

Development Commissioner

SEZs / EOUs, each zone are headed by a Development Commissioner, who is also heading
the Unit Approval Committee. Development Commissioner is the nodal officer for SEZs and
help in resolution of problem, if any, faced by the units or developer. In all SEZ’s, the
statutory functions are controlled by the Government while the rest of the operations are
privatized.

Special Economic Zones SEZ

Establishment Procedure.
Introduction

A SEZ unit can be set up anywhere in India after fulfilling the following requirements.
Step by Step Procedure

1. According to SEZ Act 2005, a Special Economic Zone can be established either
jointly or severally by the Central Government, State Government, or any other
person involve in the manufacturing of goods. Even a foreign company can also set
up SEZ in India.
2. After identifying the proper area a person wishing to establish a SEZ unit may make a
proposal to the State Government
3. Notwithstanding anything contained in sub-section (2), any person, who intends to set
up a Special Economic Zone, may, after identifying the area, at his option, make a
proposal directly to the Board for the purpose of setting up the Special Economic
Zone:
4. In case, a State Government intends to set up a Special Economic Zone, it may after
choosing the area, forward the proposal directly to the Board of Approval for the
purpose of setting up the Special Economic Zone:
5. Every proposal under sub-sections (2) to (4) shall be made in such form and manner
containing such particulars as may be prescribed.
6. The State Government may, on receipt of the proposal made under sub-section (2),
forward the same together with its recommendations to the Board within a fix period
as may be prescribed.
7. Without prejudice to the provisions contained in subsection (8), the Board may, after
receipt of the proposal under sub-section (2) to (4), approve the proposal subject to
such terms and conditions as it may deem fit to impose, or modify or reject the
proposal.
8. The Central Government may prescribe the following requirement for establishment
of a Special Economic Zone, namely:-
o The minimum area of land and other terms and conditions subject to which the
Board shall approve, modify or reject any proposal received by it under sub-
section (2) to (4) ; and
o The terms and conditions, subject to which the Developer shall undertake the
authorised operations and his obligations and entitlements.

Provided that different minimum are of land and other terms and conditions referred to in
clause (a) may be prescribed by the Central Government for a class or classes of Special
Economic Zones.

9. If the Board,-

 Approves without any modification, the proposal received under sub-section (2) to
(4), it shall communicate the same to the Central Government;
 Approves with modifications the proposal received under sub-section (2) to (4), it
shall, communicate such modifications to the person or the State Government
concerned and if such modifications have been accepted by such person or the State
Government, the Board shall communicate the approval to the Central Government;
 Rejects the proposal, received under sub-section (2) to (4), it shall record the reasons
therefore and communicate the rejection to the Central Government which shall
intimate to the State Government or the person concerned.

10. The Central Government shall, on receipt of communication under clause (a) or
clause (b) of sub-section (9), grant, within such time as may be prescribed, a letter of
 approval on such terms and conditions and obligations and entitlements as may be
approved by the Board, to the Developer, being the person or the State Government
concerned:

Provided that the Central Government may, on the basis of approval of the Board,
approve more than one Developer in a Special Economic Zone in cases where one
Developer does not have in his possession the minimum area of contiguous land, as
may be prescribed, for setting up a Special Economic Zone and in such cases, each
Developer shall be considered as a Developer in respect of the land in his possession.

11. Any person who, or a State Government which, intends to provide any infrastructure
facilities in the identified area referred to in sub-section (2) to (4), or undertake any
authorised operation may, after entering into an agreement with the Developer
referred to in sub-section (10), make a proposal for the same to the Board for its
approval and the provisions of sub-section (5) and sub-sections (7) to (10) shall, as far
as may be, apply to the said proposal made by such person or State Government.
12. Every person or a State Government referred to in subsection (11), whose proposal
has been approved by the Board and who, or which, has been granted letter of
approval by the Central Government, shall be considered as a Co-Developer of the
Special Economic Zone.
13. Subject to the provisions of this section and the letter of approval granted to a
Developer, the Developer may allocate space or built up area or provide infrastructure
services to the approved units in accordance with the agreement entered into by him
with the entrepreneurs of such Units.

Documents Submission

Following necessary document are required before making the final proposal for the SEZ
units-

1. 15 copies of the application shall be submitted to the Chief Secretary of the State,
which shall indicate:
2. Name and address of the applicant
3. Status of the promoter (whether private/public or joint sector/ NRIs or state
government)
4. Project report

The documents for establishment of SEZ shall be submitted with the following details: -

1. Location of the proposed Zone with details of existing infrastructure and that
proposed to be established,
2. Area of the proposed SEZ and its distance from the nearest Sea
Port/Airport/Rail/Road head etc.
3. Financial details and mode of financing the project and viability of the project.
4. Details of foreign equity, if any
5. Whether the zone will allow only certain specific industries or will be a multi-product
zone.

State Government Approval

The State Government shall, forward it along with their commitment to the following to the
Department of Commerce, Government of India:

 That the area proposed under Special Economic Zone shall be free from any
environmental restrictions;
 Water, electricity and other services would be provided as required;
 Full exemption shall be given in electricity duty and tax on sale of electricity for self
generated and purchased power;
 Exemption from State Sales Tax, octroi, mandi tax, turnover tax and taxes, duty, Cess,
levies on supply of goods from Domestic Tariff Area to SEZ units;
 That single point clearances system and minimum inspections requirement under
State Laws/Rules would be provided.
 Generation, transmission and distribution of power shall be allowed within the SEZ;
 The Zone will be declared as a Public Utility Service under the Industrial Disputes
Act;
 All powers under Industrial Dispute Act, 1947 shall be delegated to Development
Commissioner.
o Section 11(1) of Special Economic Zones Act, 2005 provides that "the Central
Government may appoint any of its officers not below the rank of Deputy
Secretary to the Government of India as the Development Commissioner of
one or more Special Economic Zones"

Government of India after considering the above proposals may grant in-principle approval
for setting up of SEZs. The in-principle approval shall be valid for a period of one year.
However, this validity period may be extended by the Department of Commerce, as it may
thinks fit.

According to Section 3(7) of Special economic Zones Act, 2005, the Board of Approval may
accept, modify or reject the proposal depending upon various circumstances. In case of
acceptance, approval is valid for a period of 3 years within which time effective steps shall be
taken by the developer to implement the project. Although, this time period can be extended
the Department of Commerce depending upon various circumstances.

Special Economic Zones SEZ Act 2005.

Introduction

The policy relating to SEZs was earlier contained in Foreign Trade Policy. However, to give
a long term and stable policy framework with minimal regulation, the SEZ Act was enacted.
In 2005, a comprehensive Special Economic Zones Act 2005 was passed by Parliament in
May 2005. The SEZ Act 2005 and the rules of the SEZ Act came into force from February
10, 2006. Investment of the order of Rs 100,000 crore over the next three years with an
employment potential of over 500,000 was also expected from the new SEZs, apart from
indirect employment during construction period of the SEZs.

SEZ Act 2005

The SEZ Act 2005 is mainly divided into 7 different chapters and 3 schedules.

Chapter I Preliminary
Chapter II Establishment Of Special Economic Zone
Chapter III Constitution Of Board Of Approval
Chapter IV Development Commissioner
Chapter V Single Window Clearance
Chapter VI Special Fiscal Provisions For Special Economic Zones
Chapter VII Special Economic Zone Authority
Chapter VIII Miscellaneous
Schedule I Enactments (See Sections 7 And 54)
Schedule II Modifications To The Income-Tax Act, 1961.
Schedule III Amendment To Certain Enactments (See Section 56)

Key Issues

The SEZ Act deals primarily with the following matters:

 Establishment of the SEZ and the various authorities constituted in this connection.
 Appointment of the Developer, Co-developers and approval for units to be located in
the notified area.
 Exemptions, drawbacks and concessions including exemptions from customs duty (on
goods brought into or exported from the SEZ), excise, service tax, securities
transaction tax, sales tax and income tax.
 Offshore Banking Unit & International Financial Services Centre. Setting up of
offshore banking units / International Financial Services Centre in SEZs.
 Notified Offences & Civil Suits. A single enforcement agency/officer for certain
notified offences as well as the designation of courts by the state governments for
such offences committed in and for civil suits arising in SEZs.

Salient Features of the SEZ Act

Governance: An important feature of the Act is that it provides a comprehensive SEZ policy
framework to satisfy the requirements of all principal stakeholders in an SEZ – the developer
and operator, occupant enterprise, out zone supplier and residents. Earlier, the policy relating
to the EPZs/ SEZs was contained in the Foreign Trade Policy while incentives and other
facilities offered to the SEZ developer and units were implemented through various
notifications and circulars issued by the concerned ministries/departments. This system did
not give confidence to investors to commit substantial funds for development of
infrastructure and for setting up units.
Another major feature of the Act is that it claims to provide expeditious and single window
clearance mechanisms. The responsibility for promoting and ensuring orderly development of
SEZs is assigned to the board of approval. It is to be constituted by the central government.
While the central government may suo motu set up a zone, proposals of the state
governments and private developers are to be screened and approved by the board. At the
zone level, approval committees are constituted to approve/reject/modify proposals for
setting up SEZ units.

In addition, the Development Commissioner (DC) and his/her office is responsible for
exercising administrative control over a zone. The labour commissioner’s powers are also
delegated to the DC. Finally, clause 23 requires that designated courts will be set up by the
state governments to try all suits of a civil nature and notified offences committed in the
SEZs. Affected parties may appeal to high courts against the orders of the designated courts.

Incentives: The Act offers a highly attractive fiscal incentive package, which ensures

1. Exemption from custom duties, central excise duties, service tax, central sales taxes
and securities transaction tax to both the developers and the units;
2. Tax holidays for 15 years (currently the units enjoy a seven year tax holiday), i e, 100
per cent tax exemption for 5 years, 50 per cent for the next five years, and 50 per cent
of the ploughed back export profits for the next five years1; and
3. 100 per cent income tax exemption for 10 years in a block period of 15 years for SEZ
developers.

Infrastructure: Provisions have been made for:

1. The establishment of free trade and warehousing zones to create world class trade-
related infrastructure to facilitate import and export of goods aimed at making India a
global trading hub.
2. The setting up of offshore banking units and units in an international financial service
centre in SEZs.
3. The public private participation in infrastructure development.
4. The setting up of a “SEZ authority” in each central government SEZ for developing
new infrastructure and strengthening the existing one.

There has been a tremendous rush to set up SEZs since the Act came into effect in February
2006. The total number of approvals and in-principle approvals across 21 states as on
October 27, 2006, was 212 and 152, respectively. As on date, 34 SEZs out of these approvals
have been notified. Table 1 shows the current status of the upcoming SEZs.

Special Economic Zones SEZ Rule 2006

with Forms and Annexure.
Introduction
SEZ Rules 2006 are the rules which lay down the complete procedure which an individual is
required to follow if one intends to develop the SEZ or one intends to establish a unit in SEZ.
The benefits of various taxes available to a developer or a unit are also given in the SEZ rule.
GSR 54 (E) In exercise of the powers conferred by section 55 of the Special Economic Zones
Act, 2005 (28 of 2005), the Central Government hereby makes the following rules, namely:-

SEZ Rules
Preliminary
Chapter I (Rule 1,2)
Procedure for
establishment of
Chapter II (Rule 3 to16)
special
economic zone
Procedure for
Chapter III (Rule 17 to 21) establishment of
a unit
Terms and
conditions
subject to which
entrepreneur
Chapter IV (Rule 22 to 46) and developer
shall be entitled
to exemptions,
drawbacks and
concessions
Conditions
subject to which
goods may be
removed from a
Chapter V (Rule 47 to 52)
special
economic zone
to the domestic
tariff area
Foreign
exchange
Chapter VI (Rule 53, 54) earning –
requirements
and monitoring
Chapter VII (Rule 55 to 69) Appeal
Chapter VIII (Rule 70 To 77) Miscellaneous

SEZ Forms

Application for setting up of

Form A
Special Economic Zone
Format for letter of approval
Form B
for SEZ developer
Form C Format for letter of approval
for providing infrastructure
 facilities in SEZ.
Bond-cum-legal
Form D
undertaking for developer
Format for quarterly and
half-yearly report for SEZ
Form E developer/co-developer to
be furnished to the
development commissioner
Consolidated application
Form F
form
Format for letter of approval
Form G
for unit
Bond-cum-legal
Form H undertaking for special
economic zone unit
Annual performance report
Form I
for units
Form J Form for appeal
Form K Permanent identity card

SEZ Annexure

Guidelines
for annual
monitoring
of
Annexure I (See Rule 54)
performance
of units in
special
economic
Minimum
Annexure II (See Sub-Rule 3 of area for
Rule 5) product
specific SEZ

Special Economic Zones SEZ Incentives.

Introduction

Considering the need to enhance foreign investment and promote exports from the country,
the Government of India has introduced various types of special incentives and benefits to
SEZ units which are as follows-

Customs and Excise

 SEZ Units are free to import from the domestic sources without paying any duty on
capital goods, raw materials, consumables, spare, packing materials, office
 equipment, DG sets, etc. for implementation of their project in the zone without any
license or specific approval. Good which are imported duty free could be utilized over
the approval period of 5 years.

 Sales to DTA (Domestic Tariff Area) by SEZ units is always regarded as import and
is subject to all normal import duties, including Countervailing Duty, SAD, etc.

 SEZ Units are free from the periodic examination by Customs of export and import
cargo.

 SEZ units may sub-contract a part of their production through units in

DTA/SEZ/EOU/EPZ with the permission of the customs authorities. Sub-contracting
may also be permitted for processing abroad with the permission of the board of
approval.

Income Tax

Part-1 Income Tax incentives for SEZ units

 Tax exemption for SEZ units engaged in manufacture or providing services- A new
section 10AA has been introduced in the IT Act by SEZ Act, 2005 which provides
that the units in SEZ which start manufacturing or producing articles/ things or which
start providing services on or after April 1, 2005 will be eligible for a deduction of
100 percent of export profits for the first five years from the year in which such
manufacture/ provision of services commences and 50 percent of the export profits for
the next five years. Further, for the next five years a deduction shall be allowed of
upto 50 percent of the profit as is debited to the profit and loss account and credited to
the Special Economic Zone Reinvestment Reserve Account (subject to conditions).

 Tax exemption for Offshore Banking units in SEZ- A deduction in respect of certain
incomes would be allowed under the new section 80LA, to scheduled banks or foreign
banks having an Offshore Banking unit in SEZ or to a unit of IFSC. The deduction
shall be for 100 percent of income for five consecutive years beginning from the year
in which permission/ registration has been obtained under the Banking Regulation Act
or the SEBI Act or any other relevant law and 50 percent of income for next five
years.

 Interest received by non-residents and not ordinary residents on deposits made with an
Offshore Banking Unit on or after April 1, 2005 shall be exempt from tax.

 Exemption from Minimum Alternate Tax ("MAT")- Income arising or accruing on or

after April 1, 2005 from any business carried on, or services rendered by SEZ unit
would be exempt from MAT under section 115JB.

 Exemption from Capital Gains- Capital gains arising on transfer of assets (machinery,
plant, building, land or any rights in buildings or land) on shifting of the industrial
undertaking from an urban area to any SEZ would be exempt from capital gains tax.
 The exemption would be allowable if within one year before or three years after such
transfer:

 Machinery or plant is purchased for the purposes of business of industrial undertaking

in SEZ by the assessee.

 Assessee has acquired land or building or has constructed building for the purposes of
business in SEZ.

 The original assets are shifted and establishment of the industrial undertaking is
transferred to SEZ; and other specified expenses are incurred.

 The amount of exemption for capital gains would be restricted to the costs and
expenses incurred in relation to all or any of the purposes mentioned above.

Part-2 Income Tax incentives for SEZ Developer

 Tax holiday for SEZ developers- A new section 80-IAB has been introduced in the IT Act vide
SEZ Act, 2005 whereby a deduction of 100 percent of profits derived from the business of
developing SEZ (notified on or after April 1, 2005) would be available to developer of SEZ for
any 10 consecutive years out of 15 years beginning from the year in which SEZ has been
notified.
 Exemption under section 10(23G) that was available to infrastructure capital fund or a
cooperative bank on interest and long term capital gains investment had been extended to
investment made by SEZ developers qualifying for tax holiday under section 80-IAB of the IT
Act. However, this exemption has been withdrawn with effect from assessment year 2007-
08.
 Exemption from Dividend Distribution Tax ("DDT")- No DDT would be payable by a developer
of SEZ on dividend declared, distributed or paid on or after April 1, 2005 out of current
income.
 Exemption from MAT- Any income earned on or after April 1, 2005 by a SEZ developer would
be exempt from MAT under section 115JB of the Act.
from Domestic Tariff Area (DTA) to SEZ.

Foreign Direct Investments

 100% FDI is freely allowed in manufacturing sector in SEZ units under automatic route,
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 of foreign investments for SSI reserved items.

Off-Shore Banking Units (OBUs)

 Setting up of OBUs allowed in SEZs.

 OBUS are entitled for 100% income tax exemption for 3 years and 50% for next 2 years.
Banking / External Commercial Borrowings (ECBs)

 ECBs by units up to US$ 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 and freedom to make
overseas payment from such account.

 Exemption from interest rate surcharge on import finance.

 SEZ units allowed to write-off unrealized export bills.

 Exemption from interest rate surcharge on import finance.

Service Tax

 Exemption from service tax to SEZ units.

Sales to DTA

 DTA sales can be undertaken subject to achievement of positive NFE. Net Foreign Exchange
(NFE) shall be calculated cumulatively for a period of 5 years from the commencement of
commercial production.
 For the purpose of calculation, the value of imported capital goods shall be amortized as
follows -
o 1st – 2nd year: 5% each year.
o 3rd – 5th year: 10% each year.
o 6th – 8th year: 20% each year
 Exemption from capital gains on transfer of an industrial unit from urban area to a SEZ.
 Drawback or such other benefit as may be admissible from time to time on goods and
services admitted from the DTA for setting up, operation and maintenance of units.
 All exports from the DTA to the Zone shall be exempt from state and local body taxes or
levies as (In some states, exports made to educational institutions, hospitals, hotels,
residential and / or commercial complexes, leisure and entertainment facilities or any other
facilities as may be notified by the state government are not exempt).
 Developers of SEZs may import or procure goods from DTA without payment of duty for
development, operation or maintenance of SEZ.
 Exemption from Central Sales Tax (CST) on supply of goods from the DTA for development,
operation and maintenance of SEZs.
 Income tax exemption for a block of 10 years in the first 15 years of operation.
 Drawback or such other benefits as may be admissible from time to time on supply of goods
from DTA for development, operation and maintenance of SEZs.
 Investment income in the form of dividends, interest or long term capital gains, of an
infrastructure capital company from investments made in an enterprise engaged in the
development, operation or maintenance of a SEZ are exempt from tax.
 Foreign investment permitted.
 Service tax exemption on services provided to a developer or to a unit located in the SEZ
region.
  Any activity or transaction in the Zone, which is liable for entertainment duty under the
Bombay Entertainments Duty Act, 1923 and Luxury Tax under the Maharashtra Tax on
Luxuries Act, 1987 shall not be liable to such tax The fiscal benefits shall be applicable for a
period of 25 years from the date of notification of the zone by the Government of India or
such extended period as may be decided by the State Government
 With respect to each Special Economic Zone all such transactions between the Zones or
within the Zone or both, including the transactions of land acquisition for development of
the Zone between the developer or co-developer and land owners and land transactions
between the developers or co-developers and the units, carried out after declaration of the
Zone by the Government of India, shall be exempt from the following State taxes, cess and
levies namely:
o Purchase tax, Sales tax and Turnover tax
o Specified sales (Lease tax) in respect of lease of goods
o Stamp duty for the first transaction between the Developer or co-developer and the
land-owner and the first transaction between the Developer or co-developer and
the Units
o Registration fee for the first transaction between the Developer or co-developer and
the land-owner and the first transaction between the Developer or co-developer
and the Units
o Land assessment tax
o Electricity duty and tax (Only for sales to Units in processing area)
o Water pollution cess
o Works Contract tax
 State government shall –
o Provide exemption from electricity duty or taxes on sale of self generated or
purchased electric power for use in processing area of an SEZ.
o Allow generation, transmission, distribution of power within a SEZ subject to the
provisions of the electricity act

Exemptions in Matters Related to 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.

 SEZ units are exempted from public hearing under Environment Impact Assessment
Notification.

Company Act

 Enhanced limit of INR 2.4 crores per annum is allowed for managerial remuneration.
 Agreement to opening of Regional office of Registrar of Companies in SEZ.
 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.

Labour Laws

 Normal Labour Laws are applicable to SEZs, which are enforced by the respective State
Governments. However, State Governments 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 SEZ.
Comparision of EOUs and SEZ on Factors
Establishment Import Procedures with
Green Channel Custom Clearance.
The Export Oriented Units (EOUs) scheme introduced in early 1981 is complementary to the
SEZ scheme. It adopts the same production regime but offers a wide option in locations with
reference to factors like source of raw materials, ports of export, hinterland facilities,
availability of technological skills, existence of an industrial base and the need for a larger
area of land for the project. 1764 units are in operation under the EOU scheme as on March,
2004.

Special Economic Zone

Factors Export Oriented Units (EOU)
(SEZ)
Establishment
The unit can import capital goods, raw
materials, consumables, packing material,
spares etc. without payment of customs
Import Procedures duty. Similarly, these can be procured
indigenously without payment of excise
duty. Second hand capital goods can also
be imported.
Minimum investment in plant and
machinery and building is Rs 100 lakhs
There is no such limit for
for EOU. This should be before
SEZ.
commencement of commercial
production.
Procedure
There is no physical
supervision of customs /
There is no physical supervision of
excise authorities over
customs / excise authorities over
Green Channel production and
production and clearances, but prescribed
clearances, but prescribed
records are required to be maintained.
records are
required to be maintained.
In case of SEZ units,
Fast Track Clearance Scheme (FTCS) for customs clearance for
Custom Clearance clearances of imported consignments for export and import is
EOU. obtained within the zone
itself.
Export of final Generally, all final production should be Generally, all final
production exported, except rejects upto prescribed production should be
 exported, except rejects
limit.
upto prescribed limit.
In case of SEZ unit,
Central Sales Tax Central Sales Tax (CST) paid on
supplier does not have to
(CST) purchases is refundable (but not local tax).
pay CST
Supplies made by Supplies made to EOU by Indian supplier Supplies to SEZ are
Indian Suppliers are ‘deemed exports’ and supplier is ‘exports’ and all export
Infrastructure entitled to benefits of ‘deemed export’. benefits are available.
General infrastructure
General infrastructure available to EOU
available to SEZ unit are
Infrastructure unit are not as better as available to SEZ
much better as available to
units
SEZ units
Special Economic Zones SEZ Controversy.
Introduction

Land, especially agricultural land is a very sensitive issue in India. There are millions of
people whose livelihood depends on agricultural land. But the introduction of SEZ in India
has resulted in the dispossession of agricultural land and has affected the livelihood of farmer
at large. In against of this, farmers first protested to safeguard their interests through litigation
and court cases challenging the establishment of SEZs. But later on, the resistance against
SEZ in India became massive when political parties also joined the farmers.

Jamnagar Incidence

In November 2006, farmers from the Jamnagar District in Gujarat moved the High Court of
Gujarat and later to the Supreme Court in order to challenge the setting-up of a 10,000-acre
(approx. 4,000-ha) SEZ by Reliance Infrastructure. They claimed that the acquisition of large
tracts of agricultural land in the villages of the district not only violated the Land Acquisition
Act of 1894, but was also in breach of the public interest. This led the Government to
“consider” putting a ceiling on the maximum land area that can be acquired for multi-product
zones and decide to “go slow” in approving SEZs.

Nandigram Violence

The Nandigram violence is another famous incidence related to SEZ controversy. Nandigram
is a rural area in Purba Medinipur district of the Indian state of West Bengal. It is located
about 70 km south-west of Kolkata, on the south bank of the Haldi River, opposite the
industrial city of Haldia.

In 2007 the West Bengal government decided to allow Salim Group to set up a chemical hub
at Nandigram under the SEZ policy. Farmers of that village were against it. So, on the order
of the Left Front government on 14 March, 2007, more than 3,000 heavily armed police
stormed the Nandigram area. The main objective was to remove the protestors in order to
expropriate 10,000 acres of land for a Special Economic Zone (SEZ) to be developed by the
Indonesian-based Salim Group. During this incidence, police shot dead at least 14 villagers
and wounded 70 more including children and women.

The above given examples show the controversies associated with SEZs. No doubts that these
commercial hubs started with a lot of premature praise and have now became a bone of
contention which is readily exploited by the political forces to the detriment of the peasants,
who fear losing their means of livelihood.

With a view to enable the entrepreneurs to compete in the world market, by

receiving various tax benefits, the Central Government has decided to set up Special
Economic Zones.
The minimum area of the Special Economic Zone of different categories shall be
as follows :-
Sr.No. Type Minimum Area of SEZ
1. Multi product SEZ 1000 Ha.
2. Multi Services SEZ 100 Ha.
3. Sector Specific SEZ 100 Ha.
4. Port Based 100 Ha.
5. Airport Based 100 Ha.
6. Electronic Hardware and Software
including IT enabled services SEZ
10 Ha. (and min. built- up area of 1 Lakh
sq.mt. for IT)
7. Bio Technology 10 Ha. ( and min. built – up area of 40,000
Sq.mtr.)
8. Gems & Jewellery / Handicraft 10 Ha. ( and min. built- up area of 50,000
sq.mt.)
9. Non – Conventional energy including
solar energy equipment cell..
10 Ha. ( and min. built- up area of 40,000
sq. mtrs. for non – conventional energy
sector, including solar energy equipment/
cells but excluding a SEZ set up for non –
conventional energy production and
manufacturing
10. Free Trade warehousing Zone 40 Ha. (min. built- up area of 1 Lakh Sq.mtr.

WHO CAN ESTABLISH SPECIAL ECONOMIC ZONE.

1. A Special Economic Zone may be established either jointly or severally by the
Central Government, State Government or any person for manufacture of goods
or rendering services or for both or as a Free Trade and Ware housing Zone.
2. The obligatory requirement of minimum investment for establishing sector
specific zone is Rs.250 Cr. or Rs.50 Cr. Net Worth Criteria.
3. The obligatory requirement of minimum investment for establishment Multi –
Product SEZ is Rs.1000 Cr. or Rs.250 Cr. Net Worth Criteria.

APPLICATION PROCEDURE
1. The Person/ organization intending to establish SEZ has to submit an
application in prescribed format to State Government with all relevant
documents. It should include details of land for proposed SEZ, distances
from nearest Port/ Airport / Railway Station/ Roads, Investment details,
Source of funding, Details of Foreign Investment (if any), etc.
2. The State Government shall forward the proposal received by them to the
Board of Approval (Deputy Secretary, Ministry of Commerce and Industry,
Department of Commerce, Udyog Bhavan, New Delhi- 110 011) along with
its recommendations .
The State Government at the time of recommending the proposal shall
undertake to provide the facilities and incentives related to environmental
issues, water, electricity and other essential infrastructure facilities. The State
Government shall also express its readiness to delegate the powers to the
Development Commissioner, under the Industrial Disputes Act 1947, in
relation to the workmen employed by the developer. Also the state should
undertake to provide exemption from the state and local taxes, levies and
duties as per SEZ Rules 2006. State Government should provide single
window clearance mechanism under the State Acts and Rules.
PROCEDURE OF BOARD OF APPROVAL FOR SPECIAL ECONOMIC ZONE.
While approving Special Economic Zone, the Board of Approval accord
sanction in following three steps.
1) In- Principle Approval
Board of Approval grants In- Principle approval in cases where the SEZ
Developer is not having the land in its possession either by ownership or lease.
2) Formal Approval
Once the SEZ Developer is in possession of the land either by ownership or
lease, and submits the details of the land to State Govt. and to the BoA and the
State Government recommends the case, BoA grants Formal Approval.
3) Notification of SEZ
After Formal Approval by BoA , the details of the land (with Survey Nos. and
Map) with a certificate from the concerned State Government or its authorized
agency stating that the developer have legal possession and irrevocable rights
to develop the said area as SEZ and the said area is free from all encumbrances
and inspection report of Development Commissioner SEZ, as given in the SEZ
Rules are to be submitted to the Department of Commerce & Industry. Thereafter
the BoA notifies the SEZ by way of issuance of a notification. No further
notification from Ministry of Finance is required.

TERMS AND CONDITIONS APPLICABLE TO DEVELOPER OF SEZ

1. It is obligatory for the Developer, to allot plots in Special Economic Zone to
those units only which receives Letter of Approval (LoA) from the
Development Commissioner.
2. Special Economic Zone can be divided in two parts i.e. Processing Zone and
Non- Processing Zone. The Processing area is to be used for setting up units
for activities, being the manufacture of goods or rendering services or
exclusively for trading or ware housing purpose. Whereas Non- Processing
Zone can be used to construct residential accommodation/ School / Hospital/
Shopping center for the workers employed in Processing Zone. However the
area of Processing Zone should not be less than 50% of total SEZ area.
Further it is necessary to secure processing Zone by constructing compound
wall.
3. For establishing IT related SEZ it is binding to provide 24 hours uninterrupted
power supply internet facilities and centrally air conditioned system.
4. For developing Special Economic Zone it is necessary that the land to
acquired should be as far as possible, barren and non – irrigated. However,
in avoidable circumstances, single crop land can be acquired to a possible.
minimum extent. Where as if it is essential to acquire double cropping land ,
the area so acquired should not be more than 10% of total area of SEZ.

BENEFITS AND EXEMPTIONS AVAILABLE TO DEVELOPER IN SPECIAL

ECONOMIC ZONE.
1. For establishing SEZ, 100% foreign direct investment is permissible.
2. SEZ developers are entitled for income tax exemption for a block of 10 years
out of First 15 years after notification date under section 80- 1 (AB) of the
Income Tax Act 1961.
3. Developer of SEZ may import/ procure goods without payment of import /
excise duty / state taxes including Central Sale Tax for the development of
SEZ and for, operation and maintenance in only Processing Area.
4. Services provided to the developers / units of Special Economic Zone are
exempted from paying service tax subject to fulfillment of certain conditions.
5. Exemption in Minimum Alternate Tax (MAT), only for SEZ units and
Dividend Distribution Tax only for SEZ Developer.
6. Supply made to SEZ unit/ Developer is treated as Physical Export as per
Custom Act and all the export incentives are eligible to Supplier or Developer
/ Unit holder subject to fulfillment of certain conditions.
7. All the relevant permissions related to Central/ State Government will be
available by Single Window Mechanism.

Hemantsankhe