Special Economic Zones SEZ Incentives.

• Introduction

• Customs and Excise

• Income Tax

• Foreign Direct Investments

• Off-Shore Banking Units (OBUs)

• Banking / External Commercial Borrowings (ECBs)

• Service Tax

• Sales to DTA

• Exemptions in Matters Related to Environment

• Company Act

• Drugs and Cosmetics

• Labour Laws

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 -
  • 1st – 2nd year: 5% each year.
  • 3rd – 5th year: 10% each year.
  • 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:
  • Purchase tax, Sales tax and Turnover tax
  • Specified sales (Lease tax) in respect of lease of goods
  • 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
  • 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
  • Land assessment tax
  • Electricity duty and tax (Only for sales to Units in processing area)
  • Water pollution cess
  • Works Contract tax
• State government shall –
  • Provide exemption from electricity duty or taxes on sale of self generated or purchased electric power for use in processing area of an SEZ.
  • 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.