SEZ Policies and Procedures
Salient features and procedure for setting up of SEZ Units, Benefits available
Government of India announced the Special Economic Zones (SEZs) Policy in April 2000 with a view to create world-class infrastructure and ease out multiplicity of controls and clearances and provide stable fiscal policy regime to attract larger foreign investments in India.
Subsequently, in order to instill confidence in investors and signal the Government's commitment to a stable SEZ policy regime and thereby generating greater economic activity and employment through the establishment of new SEZs, a comprehensive legislation i.e., the Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 and received Presidential assent on the 23rd of June, 2005. This act was followed by adoption of SEZ Rules, which came into effect on 10th February, 2006. The Act and Rules provided the basic framework of establishment and management of SEZs in India with drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.
The new legislative and policy framework aims at generation of additional economic activity by attracting investment from domestic and foreign sources and promote exports of goods and services from India leading to creation of employment opportunities and development of infrastructure facilities. The new SEZ Policy also envisages key role for the State Governments in Export Promotion and creation of related infrastructure.
The new SEZ framework provide for:
- Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs;
- Single window clearance for setting up of an SEZ;
- Single window clearance for setting up a unit in a Special Economic Zone;
- Single Window clearance on matters relating to Central as well as State Governments;
- Simplified compliance procedures and documentation with an emphasis on self-certification.
i. Permissible Activities in SEZ units
- SEZ Units can be set up for Manufacture of export goods, rendering Services & Trading of goods.
- Manufacture means: to make, produce, fabricate, assemble process or bring into existence by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, re-making, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture & mining.
- Services permitted in SEZ include: Trading, warehousing, research and development services, computer software services, including information enabled services such as back-office operations, call centers, content development or animation, data processing, engineering and design, graphic information system services, human resources services, insurance claim processing, legal data bases, medical transcription, payroll, remote maintenance, revenue accounting, support centers and web-site services, off-shore banking services, professional services (excluding legal services and accounting) rental/leasing services without operators, other business services, courier services, audio-visual services, construction and related services, distribution services (excluding retail services), educational services, environmental services, financial services, hospital services, other human health services, tourism and travel related services, recreational, cultural and sporting services, entertainment services, transport services, services auxiliary to all modes of transport, pipelines transport.
- “Trading”, for the purposes of the Second Schedule of the SEZ Act, shall mean import for the purposes of re-export.”
ii. Investment Limits
- No Minimum investment condition in Plant and Machinery for setting up units in SEZs.
iii. Easy Foreign Direct Investment Norms
- 100% FDI through automatic approval route for setting up units in SEZ, except for arms and ammunition, explosives, atomic substances, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes.
- Shifting of SEZ Unit from one SEZ to another SEZ allowed.
iv. Relaxed Labour Laws
- The Unit enjoy public utility status, which protects the interests of the units preventing sudden disruption of work (flash strikes) etc. Several States are amending labour laws by providing exemptions to SEZs from contract labour, industrial disputes Act and other Acts.
v. Export Performance and NFE conditions
- There is no condition for minimum export performance. However, the units will have to achieve positive Net Foreign Exchange, which shall be calculated cumulatively for a period of 5 years from the date of commencement of production. Following supplies are considered towards achievement of Net foreign exchange earnings:
- Direct Exports
- Exports through Third Parties
- Exports to Nepal & Bhutan against freely convertible currency.
- Following DTA Supplies are also be counted for fulfillment of positive NFE as amended from time to time through Foreign Trade Policy of the Govt. of India:
- Supplies effected in DTA to holders of Advance Authorization / DFIA under Duty Exemption / Remission Scheme / EPCG scheme.
- Supplies to Projects Financed by Multi-lateral or Bi-lateral Agencies or Funds as notified by the Department of Economic Affairs, Ministry of Finance, under ICB where Tender Evaluation is without Customs Duty.
- Supply of capital goods, including those in unassembled or disassembled condition as well as plants, machinery, accessories, tools, dies and such goods which are used for installation purposes till the stage of production and spares to the extent of ten per cent. of the free on rail value to Fertilizer Plants
- Supply of goods to any project or purpose in respect of which the Ministry of Finance, by a notification, permits the import of such goods at zero customs duty.
- Supply of goods to the power projects and refineries not covered in above.
- Supply to projects funded by United Nations Agencies
- Supply of goods to Nuclear Power Projects through competitive bidding as opposed to International Competitive Bidding.
- Supply made to Bonded Warehouses / Free Trade and Warehousing Zones (FTWZ), where payment is received in foreign exchange;
- Supply against Special Entitlements of duty free import of goods under the Foreign Trade Policy.
- Export of services by services units including services rendered within SEZ or services rendered in the DTA and paid for in free foreign exchange or such services rendered in Indian Rupees which are otherwise considered as having been paid for in free foreign exchange by the Reserve Bank of India;
- Supply of ITA Items and notified zero duty telecom or electronic items.
- Supplies to SEZ Unit / SEZ Developer / Co-developer / EOU / HTP / EHTP / STP / BTP.
- Supply of goods to Domestic Tariff Area against payment in foreign exchange from EEFC or Free Foreign Exchange received from overseas.
- Supply of goods against free foreign exchange by a Free Trade and Warehousing Zone Unit (FTWZ).
- NFE Calculation method
- Net Foreign Exchange Earning shall be calculated cumulatively for a period of 5 years from the commencement of production.
- Positive NFE = A – B >0, where
- NFE is Net Foreign Exchange Earning,
- A-is the FOB Value of Exports by the SEZ Unit; and
- B- is the sum total of the (i) CIF Value of all imported inputs, the CIF value of all imported capital goods, and the value of all payments made in foreign exchange by way of commission, royalty, fees, dividends, interest on external borrowings during the first five years period or any other charges (ii) value of goods procured from EOU / EHTP / HTP / STP / BTP / Bonded Warehouse / international exhibition held in India (iii) CIF value of goods & services imported duty free or on lease or free of cost or on loan basis.
- For annual calculation of NFE, the value of imported capital goods and lump-sum payment of foreign technical knowhow fee shall be amortised @ 10% for each of the 10 years.
Procedure for setting up a SEZ Unit
SEZ Act and Rules made thereunder provides the power of approval of units to be set up in the SEZ to the Unit Approval Committee (UAC) headed by the Development Commissioner of the Zone. The following steps are broadly involved in the approval process:
- Obtain the Consent Letter from the SEZ Developer for allotment of land in SEZ.
- Application to be made to the Development Commissioner of the Zone for approval in the prescribed formats & along with detailed project report and financial statements.
- Presentation before the Unit Approval Committee, if required.
- Obtaining the Letter of Approval from the Development Commissioner.
- Acceptance of Terms and Conditions of Letter of Approval.
- Execution of Legal Undertaking with the Development Commissioner
- Application for Approval of Services, if any, other than the Standard Approved List of Services.
- Online Registration at NSDL
- GST Registration.
- Execution of Bond with Specified Officer
Facilities/Benefits available to SEZ units at a glance
DTA Sales Facilities
- DTA sale allowed without any limit right from first year. However, such sales are subjected to applicable customs duty, safeguard duty and anti-dumping duty, as may be applicable. Further, NFE earning has to be positive within a period
- DTA Sale against exemption scheme / remission scheme is allowed subject to submission of licence / certificate.
- Surplus power can be transferred to DTA on payment of duty on consumables & raw material used for generation of power.
- Valuation of goods & services as per Customs Act & Customs Valuation Rules. Assessment to be done by authorised Officer.
- Clearance on Bill of Entry for home consumption has to be filed.
- Goods supplied to DTA may be brought back within 6 months for the purpose of repair & replacement.
- Goods procured from DTA & supplied back without processing shall be treated as re-imports & all export benefits will have to be refunded back, subject to establishment of identification of same goods.
- RBI to allow Bank to open branches in SEZs as OBUs. OBUs can conduct transactions in dollars for the SEZ units. Bank may enjoy greater freedom, lower their cost and pass on this benefit to the exports. No reserve requirement for banks in the SEZs, once the Off-shore Banking Services are available.
Plug and Play Facilities for IT & ITES Units
- A new, dynamic concept of Plug and Play facility is built in, where the entities can start their activities from day one, allowing them to focus on their core competencies.
Bonding and De-bonding facility
- Perpetual bonding without a need for periodic renewal requirement;
- De-bonding allowed and Unit/Developer may remove capital goods to Domestic Tariff Area after use in Special Economic Zone on payment of duty on depreciated value
Single window clearance facility
- All proposals for setting up of units in the SEZ are approved by the Approval Committee consisting of Development Commissioner, Customs Authorities and representatives of State Government. This acts as a single window for setting up of a unit in SEZ.
- Many State Governments have delegated their statutory powers under various State Laws such as environmental clearance, labour laws etc. to the Development Commissioner of the Zone as a single window for all such clearances.
Movement of goods and Services
- Zone to Zone Transfer- i.e., transfer of goods to other SEZ Units or Developer permitted;
- Intra SEZ transfer- i.e. transfer within same SEZ permitted;
- Temporary removal, removal for sub-contracting part of the production process, and removal of material procured on returnable basis allowed.
Fast Track Procedure
- SEZ is notified as a port and Customs examination is done at the SEZ itself. No Physical Control / No Cost Recovery or MOT charges.
- Removal of scrap to DTA for destruction allowed on payment of applicable customs duties on the transaction value.
- Removal of electronic Scrap through Authorized recyclers.
- SEZ Units may sub-contract part of their production or production process through Units in the DTA or through other EOU / SEZ Units, with prior permission of the Development Commissioner/Specified Officer. Value of sub-contracted production shall not exceed value of goods produced in preceding Financial Year. Sub-contracting in DTA by SEZ Unit engaged in Trading & Warehousing not allowed;
- SEZ Units may also sub-contract work from the DTA exporters with annual permission from Specified Officer, and export from the SEZ;
- Sub-contracting of part of the production process abroad or to provide manufacturing services to overseas entities, subject to certain conditions with permission from the Development Commissioner.
- The SEZ Unit may opt out of an SEZ with the approval of the Development Commissioner subject to the payment of applicable duties and taxes on the imported or indigenous capital goods, raw materials, components, consumables, spares and finished goods in stock.
- If the SEZ Unit has not achieved positive NFE, the exit shall be subject to penalty.
Duty Exemptions to SEZ units
- No Customs Duty on any imported capital goods (new or second hand, even on lease), raw materials, components, consumables etc., required for construction and erection of factory/plant, production of goods and services;
- No Excise Duty/GST on procurement of any indigenous capital goods (new or second hand, even on lease) raw materials, components, consumables etc., required for construction and erection of factory/plant, production of goods and services;
- Benefits of Advance Authorization, EPCG, Duty Draw-Back under the Foreign Trade Policy is available on the supplies to SEZ Units from DTA.
- Credit / Refund / Exemption of GST as per respective GST Acts & Rules.
- Exemption or Refund of GST on Services to the SEZ.
- Electricity Duty Exemption (varies from State to State)
Benefits/exemptions under FEMA
- 100% Foreign Direct Investment (FDI) through automatic route - barring few sectors.
- Facility to retain 100% foreign exchange receipts in EEFC Account.
- Facility to realize and repatriate export proceeds within 12 months.
- Overseas investment by SEZ units allowed from EEFC/FCA account through automatic route.
- Release of foreign exchange of DTA units allowed to buy goods to units in SEZ’s from FCA Account.
- Profits allowed to be repatriated freely without any dividend balancing requirement.
- Facility to setup branches of overseas banking units
- Off-shore Banking Unit can be set-up in SEZ
Direct Tax benefits to the Units in SEZ
- Income Tax Exemption under Section 10-AA for a period of 15 years on Export Income as follows:
- 100% IT exemption for first 5 years
- 50% IT exemption for next 5 years
- 50% IT exemption if export profit is ploughed back for next 5 years (the amount credited to Special Economic Zone Re-investment Reserve Account for business purpose)
- Subject to the following conditions:
- The unit has commenced manufacturing on or after 1st April 2006 in SEZ
- The unit is not formed by splitting-up or reconstruction of a business already in existence.
- The unit is not formed by transfer to a new business of machinery or plant previously used for any purpose (20:80) (Now relaxed up to 50%).
Exemption & Benefits to the Contractors of SEZ Unit
- Exemption of Customs Duty on Imported Goods.
- Exemption of Excise Duty/GST on Indigenous Goods.
- Exports Benefits of Advance Authorization / Duty Draw Back provided proper documentations are made & payment is made in Foreign Currency.
- Exemption of GST on services provided to SEZ Unit.
- EPCG benefit for Capital Goods imported.
- Duty Drawback benefit on supplies made, subject to payment being made in FCC from FCA (Rupee Payment for Developer / Co-developer).
- Advance Authorization / Duty Free Import Authorization benefit for raw materials and consumables.
- Merchandise Export from India Scrip benefit under FTP
Obligations of SEZ Units
- SEZ Units shall be required to achieve positive Net Foreign Exchange Earning. For this purpose, a legal undertaking is required to be executed by the Unit with the Development Commissioner.
- The Unit is required to provide periodic reports to the Development Commissioner and Zone Customs and submit such information as may be called for as and when required.
- The Unit is required to maintain proper accounts and furnish details regarding the value of imports, exports, etc. to the Development Commissioner on a quarterly basis
- The Unit is also required to execute a bond with the Zone Customs for its operations in the SEZ