Know About Sez in India

Know about SEZ in India

By Sunil Kumar N.S.Hyderabad, India

Mobile: [email protected]

© Sunil Kumar N.S.

Yester years EPZs (Export Processing Zones) are today's SEZsOne of the earliest & most famous SEZs were founded by China under Den Xiaoping in the early1980sToday the most prominent SEZs in China are Shenzhen & Pudong, a district of ShanghaiHowever, India’s first EPZ was set up in Kandla (Gujarat) in 1965 followed by Santacruz (Mumbai) in 1973

© Sunil Kumar N.S.

Four modernizations – Liberalization of Agriculture; Rural & Town Industrialization through Defense, Urban & Area Export-oriented enterprises through SEZs.

Importance of the last in faster economic growth, modernization of Industry & Trade and export growth

Policy of preferred regions – unequal growth – open-door policies

Hong Kong and East Asian factors Overriding approach based on Deng’s Observation:

“For us to establish SEZs and adopt open-door policies, we must have a clear guiding ideology: that is, “Not to constrain but to release”

© Sunil Kumar N.S.

Experience with EPZs

Starting with Kandla in 1965; SEEPZ in 1972, Based on reviews of working, Cochin, Falta, Madras (Chennai) and NOIDA in 1984 and Vizag in 1989

Very limited impactLess than 40% of approvals fructified, rest cancelled

or lapsedEmployed only 0.01% of labor forceFDI was less than 20% of total investmentAccounted for less than 4% of exports. Net export

much lower as imports were over 60% of exports

© Sunil Kumar N.S.

The concept of SEZ is expected to bring large dividends to the State in terms of economic and industrial development and the generation of new employment opportunities.The SEZs are expected to be engines for economic growth..

What is a SEZ ? Special Economic Zone (SEZ) is defined as "a specifically delineated duty

free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs".

Special Economic Zone is one or more areas of a country where the tariffs and quotas are eliminated and bureaucratic requirements are lowered so that more companies are attracted to the area. The companies establishing in the area also get extra incentives for doing business.

SEZs are an acknowledgement of the potential of export-led development strategy in accelerating economic growth.

Government of India have notified Special Economic Zones (SEZs) Act 2005 and notified Special Economic Zone Rules 2006 with a view to augmenting infrastructure facilities for export production.

Setting up of Special Economic Zones are permitted in the public, private, joint sector or by the State Governments.

© Sunil Kumar N.S.

Incentives and facilities offered to the SEZs

The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:-

Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units

100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.

Exemption from minimum alternate tax under section 115JB of the Income Tax Act.

External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.

Exemption from Central Sales Tax. Exemption from Service Tax. Single window clearance for Central and State level approvals. Exemption from State sales tax and other levies as extended by the

respective State Governments.

© Sunil Kumar N.S.

Evolution : from EPZs to SEZs

Deficiencies in EPZ policy were : Limited power of Zonal authorities Absence of single window facility within the

Zone Rigid custom procedure for bonding & bank

guarantees Restrictive FDI policy Procedural constraints & severe

infrastructural deficiencies During 1991-2000, wide-ranging measures

were initiated by the Goal for revamping and restructuring EPZs.

This phase was thus marked by progressive liberalisation of policy provisions and relaxation in the severity of controls and simplification of procedures.

© Sunil Kumar N.S.

Evolution : from EPZs to SEZsFocus had been on delegating powers to zone authorities, providing additional fiscal incentives, simplifying policy provisions and providing greater facilities.

The EXIM Policy (1997-2002) introduced a new scheme from April 1, 2000 for establishment of the Special Economic Zones (SEZs) in different parts of the country.

From November 1, 2000 the EPZs at Kandla, Santa Cruz (Mumbai), Cochin and Surat have been converted into SEZs.

In 2003, other existing EPZs namely, Noida, Falta, Chennai, Vizag were also converted into SEZs.

As on June 2005, 53 SEZs have been approved by the Government of India out of which 11 SEZs are functional and the rest 42 SEZs are under establishment.

© Sunil Kumar N.S.

Functional SEZs at present

At present there are eight functional SEZs located at:

SantaCruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal) & Nodia (Uttar Pradesh) in India.

Further a SEZ at Indore (Madhya Pradesh ) is now ready for operation.

© Sunil Kumar N.S.

Functional SEZs at presentContd……….

In addition 18 approvals have been given for setting up of SEZ at Positra (Gujarat), Navi Mumbai and Kopata (Maharashtra), Nanguneri (Tamil Nadu), Kulpi and Salt Lake (West Bengal), Paradeep and Gopalpur (Orissa), Bhadohi, Kanpur, Moradabad and Greater Noida (U.P), Vishakhapatnam and Kakinada (Andhra Pradesh), Vallarpadam/Puthuvypeen (Kerala) Hassan (Karnataka), Jaipur and Jodhpur (Rajasthan) on the basis of proposals received from the State Governments.

© Sunil Kumar N.S.

Agriculture: Its function in Indian economyAgriculture (a term which encompasses farming) is the process of producing food, feed, fiber and other goods by the systematic raising of plants and animals.

India has a labour force of 509.3 million.

60% of which is employed in agriculture and related industries.

agricultural crops include rice, wheat, oilseed, cotton, jute, tea, sugarcane, and potatoes.

The agricultural sector accounts for 28% of GDP.

Service and industrial sectors make up 54% and 18% respectively.

Agriculture accounts for 8.56 % of India’s exports. About 43 % of India's geographical area is used for agricultural activity.

Agriculture is still the largest economic sector and plays a significant role in the overall socio-economic development of India

© Sunil Kumar N.S.

SEZ: Independent force to boost Indian Economy

SEZ is a better proposition.

SEZ policy is nowhere in conflict with agriculture sector. In fact it’s a lucrative proposition. India will have to gear-up with its modernization and reformation of agriculture sector to make it competent and profitable globally.

Wal-Mart’s role in Indian agriculture would be one such step to make the farmers use modern technology to make them eligible for profit sharing partnership proposal.

That depends on the efforts that government of India and its population put in. The SEZ conflict with agriculture as of now seems more like a political war fought with the help of pawns for immediate political mileage.

© Sunil Kumar N.S.

Positive Impacts

To NationWorld class business environmentIncreased FDIHigher economic growthInfrastructural developmentExport growthEmployment OpportunitiesExposure to technology and global markets

© Sunil Kumar N.S.

Positive Impacts

TO Business housesHassle free operating environmentSingle window clearanceSimplified procedure for setting up business,

compliance proc with with self certificationDuty free importTax exemption- VAT, CST, ST, other leviesExternal commercial borrowings100% profit reptriation from export earnings

© Sunil Kumar N.S.

Positive Impacts

To PeopleEmployment opportunitiesImpact on lifestyle and standard of livingBusiness infrastructure combined with social

facilitiesBetter work culture , good education,

leadership vision

© Sunil Kumar N.S.

Hurdles

To BusinessLand acquisitionSingle window actually is notNo strategic planning for electricity, water

To NationLoss of revenue

To PeopleGrabbing of fertile landWater scarcity- Threat to accessFood scarcityExploitation of laborLandless farmers

© Sunil Kumar N.S.

Definitions in Special Economic Zones Act,2005

1) "Unit" means a Unit set up by an entrepreneur in a Special Economic Zone and includes an existing Unit, an Offshore Banking Unit and a Unit in an International Financial Services Centre, whether established before or established after commencement of this Act (Section 2(zc) of Special Economic Zones Act ,2005)

2) “Offshore Banking Unit” means a branch of a bank located in a Special Economic Zone and which has obtained the permission under clause (a) of sub-section (1) of section 23 of the Banking Regulation Act, 1949 (Section 2(u) of Special Economic Zones Act ,2005)

3) “International Financial Services Centre” means an International Financial Services Centre which has been approved by the Central Government under sub-section (1) of section 18 (Section 2(q) of Special Economic Zones Act ,2005)

© Sunil Kumar N.S.

DEFINITIONS contd..

4) “entrepreneur” means a person who has been granted a letter of approval by the Development Commissioner under sub-section (9) of section 15 (Section 2(j) of Special Economic Zones Act ,2005)

5) “existing Unit” means every Unit which has been set up on or before the commencement of this Act (Section 2(l) of Special Economic Zones Act ,2005)

© Sunil Kumar N.S.

New and Existing Unit

New Unit Any person, who intends to set up a Unit for carrying on the authorised operations in a Special Economic Zone, may submit a proposal to the Development Commissioner concerned

Existing Unit An existing Unit shall be deemed to have been set up in accordance with the provisions of SEZ Act,2005 and such Units shall not require approval under the SEZ Act, 2005 .

(Section 15(1) of SEZ Act,2005)

© Sunil Kumar N.S.

Procedure for establishment of Unit ( if proposal not related to Foreign collaboration and FDI)

Application to Development Commissioner with a copy to developer

Development Commissioner shall scrutinise proposal and place before approval committee

Approval Committee approve the proposal

Development Commissioner will issue a letter of approval in Form G for setting up the unit

© Sunil Kumar N.S.

Procedure for establishment of Unit ( if proposal relates to Foreign collaboration and FDI)

Application to Development Commissioner with a copy to developer

Development Commissioner shall scrutinise proposal and place before Board

Board shall approve the proposal

Development Commissioner will issue a letter of approval in Form G for setting up the unit

© Sunil Kumar N.S.

Letter of Approval to a Unit-Rule 19(2) and (3)What is a Letter

Validity of a Letter

The Letter of Approval shall be valid for one year within which period the Unit shall commence production or service or trading or Free Trade and Warehousing activity .(Rule 19(4) of SEZ Rules ,2006)

© Sunil Kumar N.S.

Foreign Companies in SEZ- Rule 19(7)

Foreign companies can also set up manufacturing units as their branch operations in the Special Economic Zones in accordance with the provisions of Foreign Exchange Management (Foreign exchange derivatives contracts) Regulations, 2000.

© Sunil Kumar N.S.

Some Contents of Project Report

Overview of the entire project Details of Activities proposed Direct and indirect employment likely to be

generated Project cost and means of finance Financial/Technical, etc. tie ups Details of Backward and Forward integrations Details of Past experience Infrastructure: About the Land, Factory premises,

Equipment, Office premises Risks associated with Project Implementation schedule

© Sunil Kumar N.S.

Matters that can be included in application- Rule 17(1)

(a) Setting up of unit in a SEZ(b) Annual permission for sub-contracting(c) Allotment of Importer-Exporter Code number(d) Allotment of land/industrial sheds in the SEZ(e) Water connection(f) Registration-cum-Membership Certificate(g) Small Scale Industries Registration

© Sunil Kumar N.S.

Matters that can be included in application Rule 17(1) contd..

(h) Registration with Central Pollution Control Board

(i) Power connection

(j) Building approval plan

(k) Sales tax registration

(l) Approval from inspectorate of factories

(m) Pollution control clearance, wherever required;

(n) Any other approval as may be required from the State Government

© Sunil Kumar N.S.

Guidelines for Central Government for notifying special Economic Zone –sec 5

a) generation of additional economic activityb) promotion of exports of goods and services;c) promotion of investment from domestic and foreign sources;d) creation of employment opportunities;e) development of infrastructure facilities; andf) maintenance of sovereignty and integrity of India, the security of the

State and friendly relations with foreign States.

© Sunil Kumar N.S.

Specific requirements for SEZ-Rule 5(5)

Before recommending any proposal for setting up of a SEZ, the State Government endeavor that following are made available in the State to the proposed SEZ and Developer

a. exemption from the State and local taxes, levies and duties

b. exemption from electricity duty or taxes on sale, of self generated or purchased electric power

c. allow generation, transmission and distribution of power within a SEZ

© Sunil Kumar N.S.

Specific requirements for SEZ – Rule 5(5) ….

d. providing water, electricity and such other services,

e. Delegation of power to the Development Commissioner under the Industrial Disputes Act, 1947 and other related Acts in relation to the Unit

f. Declaration of the Special Economic Zone as a Public Utility Service under the Industrial Disputes Act, 1947

g. Providing single point clearance system to the Developer and unit under the State Acts and rules

© Sunil Kumar N.S.

Forms used A Application for setting up SEZ

B Format for letter of approval for SEZ developers

C Format for Letter of approval for providing Infrastructure facilities in SEZ

D Bond-cum Legal Undertaking for developers

E Format for Quarterly and half-yearly report for SEZ developer/co-developer to be furnished to Development commissioner

© Sunil Kumar N.S.

Forms used Contd..

F Consolidated Application Form

G Format for letter of approval for Unit

H Bond-cum Legal Undertaking for SEZ unit

I Annual Performance report for units

J Form for Appeal

K Permanent Identity Card

© Sunil Kumar N.S.

Check list for the proposals to be taken up by BOA

1) Name of the Developer.2) Proposed area of the location of the SEZ.3) Status of recommendation of the proposal by the State

Government (if available). 4) Whether proposal is for formal or in-principle approval? (In case

land is in possession of the promoter, it is considered for formal approval)

5) Is it a multi-product SEZ?6) If it is a sector specific SEZ, the sector is.7) Whether it meets the area requirements.8) Area of the SEZ (in hectares)

© Sunil Kumar N.S.

Check list for the proposals to be taken up by BOA…

9) Whether Form- A has been filed?10) Whether undertaking and affidavit has been submitted?11) Whether project report has been submitted?12) Whether land is owned/leased and is in possession of the

Developer?13) Does the proposal meet the area requirements of the Rules?14) Whether the land has existing structures or is vacant?15) Whether the land is contiguous?16) Projected investment in the project.

© Sunil Kumar N.S.

Check list for the proposals to be taken up by BOA….

17) Projected exports from the project.

18) Projected employment from the project.

19) Share capital and Reserves of the Developer Company.

20) Source of funds for the project.

21) Audited Accounts of the Developer for last 3 years (for all the constituents in case the Developer is a SPV).

22) Extent of FDI

23) Source of FDI

24) Whether provisions contained in the Press Note No. 5 (2005 Series), issued by the Ministry of Commerce and Industry have been followed in respect of Telecom/IT SEZ development?

© Sunil Kumar N.S.

Processing and Non Processing area

The areas falling within the Special Economic Zones maybe demarcated by the Central Government as-(a) the processing area for setting up Units for activities,being the manufacture of goods, or rendering services; or(b) the area exclusively for trading or warehousingpurposes; or(c) the non-processing areas for activities other than thosespecified under clause (a) or clause (b) ( Section 6 of SEZ Act,2005)

The processing area and Free Trade and Warehousing Zone shall be fully secured by boundary wall with specified entry and exit points. – Rule 11(2) of SEZ Rules ,2006)

© Sunil Kumar N.S.

Usage of Land in SEZ-Rule 11

The developer holding land on lease basis shall assign lease hold right to the entrepreneur holding valid Letter of Approval.(Rule 11(6))

The lease period shall be co-terminus with the validity of the Letter of Approval.(Rule 11(5))

Developer may grant on lease land or built up space, for creating facilities such as canteen, public telephone booths, first aid centres, creche and such other facilities as may be required for the exclusive use of the Unit. .( Proviso to Rule 11(5))

© Sunil Kumar N.S.

Usage of Land in SEZ-Rule 11

The Developer may allot land in the processing area on lease basis to a person desiring to create infrastructure facilities for use by the prospective Units. (Rule 11(8))

The Developer shall not sell the land in a Special Economic Zone. (Rule 11(9))

© Sunil Kumar N.S.

New Rule11(10)

No vacant land in the non-processing area shall be leased for

business and social purposes such as educational institutions,

hospitals, hotels, recreation and entertainment facilities,

residential and business complexes, to any person except a co-

developer approved by the Board :

Provided that the developer or co-developer may lease the

completed infrastructure along with the vacant land appurtenant

thereto for such purposes

Provided further that infrastructure for business or social

purposes in the Special Economic Zone, as may be approved

by the Board, shall be eligible for exemptions, concessions and

drawback.”.

© Sunil Kumar N.S.

Procedure for setting up SEZ-Sec 15

Any person, who intends to set up a Special Economic Zone, may, after identifying the area make a proposal in Form A to either of the following

a)State Government concerned b) Board of Approval

25 Copies of Form A are to be given along with Project report outlining the economic and commercial viability of the project

No application fees

© Sunil Kumar N.S.

Suo moto set up of SEZ

Central Government may:-

(a) after consulting the State Government

concerned;

(b) without referring the proposal for setting up the

Special Economic Zone to the Board; and

(c) after identifying the area;

suo moto set up and notify the Special Economic Zone

(Proviso to sub section 4 of section 3 of SEZ Act ,2005)

© Sunil Kumar N.S.

Flow Chart for Setting up SEZ

SEZ can be formed in two ways

By Applying to SG

By applying to Board of Approval

SG forward the Proposal to BOA

Obtain the concurrence

of SG

BOA approves the

proposal

SG=Sate Government

© Sunil Kumar N.S.

Flow Chart for Setting up SEZ contd..

Central Government shall issue letter of Approval to developer

Developer shall furnish to Central Government information about area

Central Government will notify the area as SEZ

© Sunil Kumar N.S.

Kinds of SEZ

Kinds of SEZ

SEZ for multi-product

SEZ for specific sector

SEZ in a port orairport

© Sunil Kumar N.S.

Minimum Contiguous Area Requirement

Type Area for specific states/UT

Min.Processing Area

Multi-product 1000 hectares 200 hectares 25 % (old)35% (new)( may be relaxed to 25% by CG on Board recommendation)

Multi -services 100 hectares 100 hectares 25%

Sector specific 100 hectares 50 hectares 50%

Electronic Hardware and software

10 hectares( and min. built up area of 1 lakh sq.mtrs)

10 hectares and min. built up area of 1 lakh sq.mtrs)

50%

© Sunil Kumar N.S.



Min.Processing Area

Bio- technology/ Non- conventional energy

10 hectares (old)10 hectares( with a min. built up area of 40000 sq.m) (new)


50 %

Gems and jewellery sector

10 hectares (old) 10 hectares( with a min. built up area of 50000 sq.m) (new)


50 %

© Sunil Kumar N.S.



Min.Processing Area

Free Trade and Warehousing Zone- Stand alone

40 hectares (with 1 Lac square meter built up area)

40 hectares(with 1 Lac square meter built up area)

50 %(new)

Free Trade and Warehousing Zone- SEZ for a specific sector

No minimum area requirement but subject to max area not exceeding 20% of the processing area

No minimum area requirement but subject to max area not exceeding 20% of the processing area

© Sunil Kumar N.S.

21. The Research and Development Cess Act, 1986

An Act to provide for the levy and collection of a cess on all payments made for the import of technology for the purposes of encouraging the commercial application of indigenously developed technology and for adapting imported technology to wider domestic application

a cess is levied at such rate not exceeding five per cent, on all payments made towards the import of technology (Sec 3)

The proceeds of the cess levied and collected shall first be credited to the Consolidated Fund of India and the Central Government may pay to the Technology Development Board constituted under the Technology Development Board Act, 1995 for the purposes of the Board(Sec 4)

© Sunil Kumar N.S.

Terms and conditions for availing exemptions, drawbacks and concessions (Rule 22(1) )

(i) The Unit shall execute a Bond-cum-Legal Undertaking in Form H, with regard

to its obligations regarding proper utilization and accountable of goods and

regarding achievement of positive net foreign exchange earning;

(ii) The Developer and Co-Developer shall execute the Bond-cum- Legal

Undertaking in Form D with regard to their obligations regarding proper

utilization and accountable of goods

(iii) The Bond-cum-Legal Undertaking shall be jointly accepted by Development

Commissioner and by the Specified Officer:

© Sunil Kumar N.S.

Activities covered in Bond-cum-Legal Undertaking (Rule 22(1)(iii) )

(a) the movement of goods between port of import or export and the Special Economic Zone;

(b) the authorized operations, as applicable to Unit or Developer;

(c) temporary removal of goods or goods manufactured in Unit for the purposes of repairs or testing or calibration or display or processing or sub-contracting of production process or production or other temporary removals into Domestic Tariff Area without payment of duty

(d) re-import of exported goods.

© Sunil Kumar N.S.

Responsibility for Execution of Bond cum-Legal Undertaking (Rule 22(1)(iv))

Status of entrepreneur or Developer

Responsibility

company Managing Director of the company or any other authorized person

partnership firm all the partners or authorized partner(s);

Hindu Undivided Family Karta

proprietorship concern proprietor

© Sunil Kumar N.S.

Value of Bond-cum-Legal Undertaking Rule 22(1)(iv))

Equal to the amount of effective duties livable on import or

procurement from the Domestic Tariff Area of the projected

requirement of capital goods, raw materials, spares,

consumables, intermediates, components, parts, packing

materials for three months

The Bond-cum-Legal Undertaking

amount shall be monitored quarterly

or yearly on the basis of Quarterly

Progress Report or Annual Progress Report

© Sunil Kumar N.S.

An Exception- Rule 27(3)

Any goods for the personal use of or consumption by officials,

workmen, staff, owners or any other person in relation to a Unit

or Developer, shall not be eligible for exemptions, drawbacks

and concessions or any other benefit

© Sunil Kumar N.S.

Income Tax Benefits

© Sunil Kumar N.S.

Relevant Sections in Income Tax Act,1961S.No Section Description 1 10(15)(viii) Interest received on deposit with Offshore

Banking Unit is exempt

2 10AA Exemption to newly established Units in SEZ

3 54GA Exemption of Capital gain on transfer of asset in case of shifting of Industrial Undertaking from Urban Area to SEZ

4 80-IAB Deduction is respect of profits and gains in development of SEZ

5 80LA Deduction from income of OBU and IFSC

6 115JB(6) Non applicability of MAT to SEZ

© Sunil Kumar N.S.

Relevant Sections in Income Tax Act,1961

S.No Section Description 7 115-O Exemption from dividend distribution

tax in respect of income of SEZ

8 197A No TDS on interest on deposits made with OBU by Non-resident or person not ordinary resident in India

Changes in the Income Tax Act 1961 relating to SEZ made by

Special Economic Zones Act 2005 w.e.f 10/02/2006

© Sunil Kumar N.S.

Exemption to newly established

Units in SEZ

- Section 10AA

© Sunil Kumar N.S.

Exemption to Unit who begins to manufacture or produce

articles or things or provide any services during the PY

relevant to any AY commencing on or after 01.04.2006

Deduction – Total 15 Years

100% of Profits from export

for 5 consecutive years

50% of Profits from exports

for further 5 assessment years

50% of Profits for as credited to “Special Economic Zone Re-

investment Reserve Account” for next 5years Absence of restrictive proviso in new Sec. 10AA dealing with

Reconstruction, reconstitution of business in existence

© Sunil Kumar N.S.

Use of Special Economic Zone Re-investment Reserve Account ( S 10AA(2(a))

Acquiring machinery or plant

Until the acquisition of the machinery or plant for the purposes

of the business of the undertaking other than

for distribution by way of dividends or profits or

for remittance outside India as profits or

for the creation of any asset outside India;

© Sunil Kumar N.S.

Mis-use of Special Reserve Account( S 10AA(3))

If the Special Reserve Account is misutilised, then the

deduction would be taken back in the year in which the Special

Reserve Account is misutilised.

If the Special Reserve Account is not utilised for acquiring new

plant and machinery within three years as stated above then

the deduction would be taken back in the year immediately

following the period of three years.

© Sunil Kumar N.S.

Consequences for merger and demerger ( S 10AA(5))

Where an undertaking is transferred to another company

under a scheme of amalgamation or demerger, the

deduction under section 10AA shall be allowable in the

hands of the amalgamated or the resulting company.

However, no deduction shall be admissible under this

section to the amalgamating company or the demerged

company for the previous year in which amalgamation or

demerger takes place.

© Sunil Kumar N.S.

Exemption of Capital Gain

on Shifting to SEZ

-Sec 54GA

© Sunil Kumar N.S.

Exemption of capital gains on transfer of assets in cases of

shifting of industrial undertaking from urban area to any

Special Economic Zone.

The exemption is available to all categories of assesses

on capital gain arising on the transfer of certain capital

asset of industrial undertaking from urban area to SEZ.

(whether developed in an urban area or not)

The Asset transferred should be machinery or plant or

building or land or any rights in building or land

The capital gain should be utilized within one year before

or three years after the date of transfer for the specified

purpose.

© Sunil Kumar N.S.

Specified Purpose- 54GA contd..

(i) purchased machinery or plant

(ii) acquired building or land or constructed building

(iii) shifted the original asset and transferred the

establishment of such undertaking to the Special

Economic Zone; and

(iv) incurred expenses on such other purposes as may be

specified in a scheme framed by the Central

Government for the purposes of this section.

The amount of capital gain which is not so utilised for

the specific purposes should be deposited in an account

with any specified bank or institution and utilised in

accordance with the scheme notified by the Central

Government© Sunil Kumar N.S.

Quantum Of Deduction-Sec 54GA contd..

Situation Result

Amount of Capital Gain < = Cost and expenses incurred for specified Purposes

Entire Capital Gain exempt

Amount of Capital Gain > Cost and expenses incurred for specified Purposes.

Exemption: to the extent of cost and expenses incurred

© Sunil Kumar N.S.

Definition of Urban area

Urban area means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-section.

© Sunil Kumar N.S.

Deduction in respect

of profits

by SEZ Developer

-Sec 80 IAB

© Sunil Kumar N.S.

Deductions in respect of profits and gains from

industrial undertakings or enterprises engaged in

development of Special Economic Zone.

An undertaking which develops a special Economic

Zone notified on or after 1.4.2005 will not be eligible to

claim deduction under section 80-IA.but will now be

claiming deduction under new section 80 – IAB.

Available to an assessee , being a Developer whose

gross total income, includes any profit and gains

derived by an undertaking or an enterprise from any

business of developing a special Economic Zone ,

notified on or after 1.4.2005 under Special Economic

Zones Act,2005

© Sunil Kumar N.S.

QUANTUM OF DEDUCTION- Sec 80 IAB contd..

A deduction of an amount equal to 100% of the profits and

gains derived from such business for 10 consecutive

assessment years.

The assessee has the option of claiming the said deduction for

any 10 consecutive assessment years out of 15 years

beginning from the year in which a SEZ has been notified by

the Central Government

© Sunil Kumar N.S.

Transfer of Undertaking

If a taxpayer who develops a special economic zone on or after

April 1, 2005 (“transferor”) transfers the operation/maintenance

of such zone to another developer (“transferee”), then

deduction shall be allowed to the transferee for the remaining

period of 10 years as if the operation and maintenance were

not so transferred.

Similar rule will be applicable in the case of amalgamation of an

Indian company which has developed a special economic zone

with another Indian company.

© Sunil Kumar N.S.

No Tax

on Distributed Profits

-Sec 115O(6)

© Sunil Kumar N.S.

No tax on dividends would be chargeable in respect of the

total income of an undertaking or enterprise engaged in

(a) developing a SEZ or

(b) developing and operating a SEZ or

( c) developing, operating and maintaining a SEZ

IF such dividend (whether interim or otherwise) is

declared, distributed or paid by such Developer or

enterprise, on or after the 1st day of April, 2005 out of its

current income

No tax either in the hands of the Developer or enterprise or

person receiving such dividend

© Sunil Kumar N.S.

OTHER RELATED

INCOME TAX

PROVISIONS

© Sunil Kumar N.S.

Industrial park scheme The Central Government framed the scheme for industrial parks,-

Industrial Park Scheme, 2002 in exercise of the powers conferred by clause (iii) of sub-section (4) of section 80 IA of the Income-tax Act, 1961

scheme was applicable for any undertaking which develops, develops and operates or maintains and operates an Industrial Park for the period beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2006

this has been extended up to 31.03.2009 by the Finance Act,2006 Eligibility- deduction of 100 % profits derived from such business for

ten consecutive years. Assessee can claim deduction for any ten consecutive years out of

fifteen years beginning from the year in which the undertaking develops/operates/maintains the Industrial park.

© Sunil Kumar N.S.

Investors in SEZ

Exemption is provided to investors in special economic Zones under Sec 10 (23G) of the Income Tax Act, 1961.

© Sunil Kumar N.S.

Undertaking developing a building housing projects Sec 80- IB (10) - Deduction in respect of profits and gains from

certain industrial undertakings other than infrastructure development undertakings

Deduction: For projects approved before the 31st day of March, 2007 by a local authority shall be hundred per cent of the profits derived in the previous year relevant to any assessment year from such housing project

Conditions:

(a) Such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998 and completes such construction,

(i) In a case where a housing project has been approved by the local authority before the 1st day of April, 2004, on or before the 31st day of March, 2008;

© Sunil Kumar N.S.

(ii) in a case where a housing project has been, or, is approved by the

local authority on or after the 1st day of April, 2004, within four years

from the end of the financial year in which the housing project is

approved by the local authority.

(b) The project is on the size of a plot of land which has a minimum area

of one acre:

(c) the residential unit has a maximum built-up area of one thousand

square feet where such residential unit is situated within the city of

Delhi or Mumbai or within twenty-five kilometers from the municipal

limits of these cities and one thousand and five hundred square feet at

any other place; and

(d) The built-up area of the shops and other commercial establishments

included in the housing project does not exceed five per cent of the

aggregate built-up area of the housing project or two thousand square

feet, whichever is less.]

© Sunil Kumar N.S.

Interest Income from OBU is exempt

In computing the total income of previous year of any person any

income by way of interest received by

1. Non resident or

2. a person who is not ordinarily resident in India

on a deposit made on or after the 1st day of April, 2005, in

an Offshore Banking Unit

shall not be included (Section 10(15)(viii))

Benefits to OBU

© Sunil Kumar N.S.

Deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre 80LA

Assesses covered

(i) Scheduled bank, or, any bank incorporated by or under the laws of a country outside India; and having an Offshore Banking Unit in a Special Economic Zone;

or

(ii) Unit of an International Financial Services Centre,

© Sunil Kumar N.S.

Amount of deduction-Sec 80LA(1)

(a) 100% of such income for 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which

the permission, under 23(1)(a) of the Banking

Regulation Act, 1949 or

permission or registration under the Securities and

Exchange Board of India Act, 1992 (15 of 1992) or

any other relevant law was obtained, and thereafter;

(b) 50% of such income for next 5 consecutive

assessment years.

© Sunil Kumar N.S.

Income Exempted-Sec 80LA(2)

Income refers to income :

(a) from an Offshore Banking Unit in a Special Economic

Zone; or

(b) from the business referred to in Section 6(1) the

Banking Regulation Act, 1949 with an undertaking

located in a Special Economic Zone or any other

undertaking which develops, develops and operates or

develops, operates and maintains a Special Economic

Zone; or

(c) from any Unit of the International Financial Services

Centre from its business for which it has been approved

for setting up in such a Centre in a Special Economic

Zone.

© Sunil Kumar N.S.

80LA….

A report from a Chartered Accountant in Form No. 10CCF

certifying that the deduction has been correctly claimed in

accordance with the provisions of this section should be

submitted along with the return of income.

A copy of permission obtained under section 23(1)(a) of

Banking Regulation Act should be submitted along with the

return of income.

© Sunil Kumar N.S.

Case Laws

Courts and Tribunals have held that the requirement to file the

report along with the return of Income is directory and not

mandatory

Citation: 251 ITR 693- Commissioner of Income-tax vs.

Hemsons Industries (Andhra Pradesh High Court)

“ The mere fact that the assessee failed to enclose the audit

report along with the return itself would not disentitle him to

claim the benefit, and, on the other hand, if he files the audit

report before the assessment order is passed, he will be

entitled to the deduction “

© Sunil Kumar N.S.

No deduction of Tax –197A(1C)

No deduction of tax shall be made by the Offshore Banking Unit

from the interest paid

(a) on deposit made on or after the 1st day of April, 2005, by a

non-resident or a person not ordinarily resident in India; or

(b) on borrowing, on or after the 1st day of April, 2005, from a

non-resident or a person not ordinarily resident in India.

© Sunil Kumar N.S.

Exemption from service tax

The exemption from payment of service tax on taxable services rendered to a Developer or a Unit

(including a Unit under construction)

by any service provider

shall be available for the authorized operations in a Special Economic Zone. – Section 26(1)(e) and rule 31

Other Benefits

© Sunil Kumar N.S.

Exemption from Central Sales tax Every Developer and the entrepreneur is entitled exemption

from the levy of taxes on the sale or purchase of goods other than newspapers under the Central Sales Tax Act, 1956 if such goods are meant to carry on the authorized operations by the Developer or entrepreneur. – Sec 26(1)(g)

This is subject to the condition that the dealer selling goods in the course of inter state trade or commerce to a registered dealer under the Central Sale Tax Act, 1956 shall furnish a declaration in Form – I prescribed under the Central Sales Tax (Registration and Turnover) Rules, 1957.- Proviso to Rule 32

© Sunil Kumar N.S.

Changes made in Central Sales tax,1956 No CST shall be payable by any dealer in respect of sale of any

goods made by such dealer, in the course of inter-State trade or commerce, to a registered dealer( developer of SEZ or SEZ Unit as the case may

be) for the purpose of manufacture, production, processing, assembling,

repairing, reconditioning, re-engineering, packaging or for use as trading or packing material or packing accessories in an unit located in any special economic zone,

if such registered dealer has been authorised to establish such unit by the authority specified by the Central Government in this behalf. (Development Commissioner is of SEZ is authorized to permit a person to set up unit in SEZ)(Section 8(6) of Central Sales Tax Act, 1956)

© Sunil Kumar N.S.

Securities Transaction Tax

Every Developer and the entrepreneur shall be entitled to exemption from the securities transaction tax livable under section 98 of the Finance (No. 2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre. Sec 26(1)(f)

© Sunil Kumar N.S.

Exemption from Stamp Duty under Indian Stamp Act,1899

Exemption from stamp duty on any instrument executed, by, or,

on behalf of, or, in favor of the Developer, or Unit or in

connection with the carrying out of purposes of the Special

Economic Zone.( Section 3 Third Proviso of Indian Stamp

Act,1899)

Effected by Change in Indian Stamp Act,1899 by Special

Economic Zones Act ,2005 Third Schedule ,Part III

© Sunil Kumar N.S.

FEMA Provisions relating to SEZ

© Sunil Kumar N.S.

Foreign Direct investment FDI is allowed through automatic route for all manufacturing

activities in SEZ except 1) Arms and ammunition , Explosives and allied items of

defence equipments, Defence aircrafts and warships,2) Atomic substances, Narcotics and Psychotropic Substances

and hazardous Chemicals,3) Distillation and brewing of Alcoholic drinks and4) Cigarette/cigars and manufactured tobacco substitutes. Item 20 of Annexure B of Schedule I of Foreign Exchange

Management( Transfer or Issue of Security by a person Resident outside India) Regulations, 2000,

© Sunil Kumar N.S.

Foreign Direct investment contd..

100% FDI in trading activity will not be permitted

SEZ Unit can manufacture articles reserved for SSI even if

foreign equity exceeds 24%.No License is required

(Department of Industrial License Press Note No 5 dated 29-

03-2000 Notification 7(11)/2000-IP dated 04-12-2000)

© Sunil Kumar N.S.

Other Provisions for SEZ

No Time Limit for export of export proceeds which is normally 6

months for others (Foreign Exchange Management (Export of

Goods and Services) Regulation 2000)

Branch office may be set up in SEZ to undertake manufacturing

and service activities without permission of RBI in those sectors

where 100% FDI is permitted (Foreign Exchange Management

(Establishment in India of Branch or other place of businesses)

Regulation 2000)

© Sunil Kumar N.S.


DTA units can pay for goods in Foreign Exchange for which

goods are supplied by SEZ to DTA – RBI Circular 8/2005-06

dated 01/07/2005

A Unit Located in SEZ can open ,hold and maintain Foreign

currency account with authorized dealer in India (Foreign

Exchange Management (Foreign currency accounts by a

person resident in India),Regulations, 2000

© Sunil Kumar N.S.


A Unit in SEZ can enter into contract in commodity exchange or

market outside India to hedge the price risk in the commodity

on export/import without prior approval of RBI ( Foreign

Exchange Derivative Contracts) Regulation ,2000

SEZ can raise ECB for its own requirements and borrowed

funds shall not be transferred to its sister concern or any other

Unit in DTA (RBI Circular 2/2005-06 dated 01/07/2005)

© Sunil Kumar N.S.

Direct Dispatch of documents to Foreign buyer SEZ Units can dispatch export documents direct to consignee

outside India.

These need not be routed through authorized dealer

Remittance should be obtained and GR/SDF form should be

submitted to authorized dealer with in 21 days for monitoring

RBI Circular 8/2005-06 dated 01/07/2005

© Sunil Kumar N.S.

Job Work abroad and direct dispatch

SEZ Units can undertake Job work abroad and export goods from that country itself

Exporter has to make satisfactory arrangement for realisation of full exports proceeds

(RBI Circular 8/2005-06 dated 01/07/2005)

© Sunil Kumar N.S.

SEZ . . . .the Context Post WTO

The world after 1990sThe world after 1990s

What will make FZs relevant

now?

What will make FZs relevant

now?

Today’s ChoiceToday’s Choice

Industry - international production focus

Multilateral ‘equal-opportunity’ MFN trade

All countries are lowering barriers to compete for foreign trade and investment

Regions are forming closed economic groups

Policy: national treatment of free zone goods

Concept of V i.e facilitation- Velocity Volume and therefore Value

Capital: private ownership (service standards)

zone vs. zonenot

nation vs. nation

© Sunil Kumar N.S.

SEZ offer……..INFRASTRUCTURE Air Cargo Terminal Multi-Purpose Terminals Cross Docking & Consolidation

Centres Central Distribution Centres Distriparks Cold Storage Leasing of Warehouses & Yard

Space Transit back up & Warehouses

SERVICE PROVIDERS Transporters - Inbound & Outbound 3PL Providers Freight Forwarders Consignees Trade custom agencies Hauliers

SERVICES Warehousing Transport & Distribution Bar Coding, Fumigation,

Quality Assurance & Control Inspection & Surveying Pick & Pack and repackaging Inventory Management Single Point Custom

Clearance

TECHNOLOGY Electronic Data Interchange

(EDI) Computer Integrated Terminal

Operations System Track & Trace Systems Vehicle Scheduling &

Transportation Systems Inventory & Warehouse

Management Systems © Sunil Kumar N.S.

What is Special Economic Zone?

EOUCluster of EOUs &

Bonded Area

TradingDry Port & Duty

Free Enclave

ICD

EPZ FTZFree Port

Model Industrial Township

Excellent Infrastructure

Superior Governance

Facilitative Environment

Integrated Infrastructure

Special Economic Zone

“Specifically delineated, duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties & tariffs”© Sunil Kumar N.S.

Warehousing Hub

Special Economic Zone

Trading HUB

Strategic Location and Connectivity

Trading HUB

Cross-docking & Consolidation Centers

Real Time Bar coding

Inventory Manage-

ment

Value-Added

Services

Material Handling

Facility Management

ICD

Model Industrial Township

Excellent Infrastructure

Superior Governance

Facilitative Environment

© Sunil Kumar N.S.

SEZ offer……..The various components of the Hub, seamlessly integrate the

different elements of the supply chain

Raw Material Suppliers

Inbound Transportation

Manu- facturing

Inventory Deployment

Outbound Transportation

Customer’s Customers

Integrated Information Systems© Sunil Kumar N.S.

Proposed SEZ in India

Positra ( 880 hectare)Navu Mumbai ( 30 sq km)Bhadoi KupriParadeepKakinadaNanguneri (1,012 hectare)

© Sunil Kumar N.S.

Present status of SEZ

150 SEZ are already approved and another 240 SEZ application

85 are in for IT and ITES14 for pharma and Biotechnology9 for textile and apparels10 for multi product SEZ’s

© Sunil Kumar N.S.

Union commerce ministry claims that their an additional investment 100000 Crore mainly through FDI.

500000 additional jobs will be created through SEZ

© Sunil Kumar N.S.

Area conversion factors

1 Acre = 0.404686 Hectare

1 Hectare = 2.47109 Acres

1 Sq. Km. = 0.38610 Sq. Mile

1 Sq. Km. = 100 Hectares

1 Sq. Mile = 2.58999 Sq. Kms

© Sunil Kumar N.S.

Large Multi –product SEZ’s

Developer Area (Hectare)

Kakinanada, Andra 1134

Gujrat Adani port 2658

Gujrat Industrial Dev. Corp

1768

Mundra SEZ,Gujrat 1082

Essar Hazaria,SEZ 1100

Maharastra Industrial Dev. Corporation

1010

© Sunil Kumar N.S.

Large Scale Specific SEZS

Developer Type Area

Reliance Infrastructure

Petro & petrochem

440

Claridges Multi service 210

CPL,Infra,TN Pharma 200

MIDC-5 Agro + Auto +Textile +Pharma

383 +200 +210 +208

© Sunil Kumar N.S.

SEZs can be categorized on basis of sector, function or location and required to have processing as well as non-processing area

Types of SEZ

Sector – Specific SEZ Multi – Product SEZ SEZ in a port or airport

• Manufacture one or more goods in a particular sector

• Render one or more services in a particular sector

• Manufacture multiple goods in one sector or across multiple sectors

– Trading and warehousing– Render two or more services

in a sector or multiple sectors

• SEZ in an existing port or airport for manufacture of goods falling in two or more sectors or for trading and warehousing or rendering of services

SEZ Layout

• Processing area is the demarcated area in SEZ where units can be located for manufacture of goods or rendering of services

• Minimum processing area has been uniformly fixed at

x% for Multiproduct SEZs y% for product specific SEZs

• Non-processing area is intended to provide support facilities to SEZ processing area and may include:

Educational institutions Hospitals Hotels Recreation and entertainment facilities Residential and business complexes

Processing Area Non - Processing Area

© Sunil Kumar N.S

THANK YOU

© Sunil Kumar N.S.

News & Politics

Know About Sez in India