Special Economic Zone (SEZ) – An Overview

by Isha Jagi Blogger

Special Economic Zone or SEZ are dedicated geographical regions present in a nation, giving businesses simpler tax and legal compliance. In a manner of saying, SEZ can be considered as a Trade Capacity Development tool, which has been established to help the economic growth of the country.

The SEZs are deemed as foreign territory for exchanging operations and taxation purposes, i.e. any goods or services supplied to the SEZ will be treated as Zero-Rated supply and pull in 0% GST. Conversely, any supply made from the SEZ will be treated as an ordinary supply and typical GST rates, as applicable, may apply on such exchanges.

In India, before the implementation of SEZ, Export Processing Zones (EPZ) were being established for comparative additions. However, because of the infrastructural and bureaucratic challenges faced by EPZ, SEZ was introduced in India on April 1, 2000.

[Trivia: India's EPZ at Kandla, Gujrat, was the primary EPZ to be established in Asia, in the year 1965.]

What is Special Economic Zone (SEZ) under GST?

"According to Section 2(19) of IGST Act, Special Economic Zone (SEZ) will have the same meaning as assigned to it in clause (za) of Section 2 of the Special Economic Zones Act, 2005.

The specific clause (za) of Section 2 provides that "Special Economic Zone in GST" means each Special Economic Zone (SEZ) notified under the stipulation to sub-section (4) of section 3 and sub-section (1) of section 4 (counting Free Trade and Warehousing Zone) and includes an existing Special Economic Zone (SEZ).

SEZ Unit versus SEZ Developer

According to the SPECIAL ECONOMIC ZONES ACT, 2005, SEZ Developer means a person who, or a State Government which, has been granted by the Central Government a letter of endorsement under sub-section (10) of section 3 and includes an Authority and a Co-Developer (the Developer or Co-Developer will have at any rate twenty-six percent of the equity in the entity) to create business, residential or recreational facilities in a Special Economic Zone in case such development is proposed to be carried out through a separate entity or a special purpose vehicle being an organization formed and registered under the Companies Act, 1956 (1 of 1956).

SEZ units are the units set up for the manufacture of goods or rendering of services.

Domestic Tariff Area (DTA):

It is pertinent to refer clause (I) of Section 2 which defines that "Domestic Tariff Area (DTA)" means the whole of India however does not include the areas of the Special Economic Zones (SEZ).

Exports under SEZ:

Exports defined under Section 2(m) of the SEZ Act as "Export" means-

Taking goods, or offering types of assistance, out of India, from a Special Economic Zone (SEZ), via land, sea or air or by whatever other mode, whether physical or otherwise; or

Supplying goods, or offering types of assistance, from the Domestic Tariff Area (DTA) to a SEZ Unit or SEZ Developer; or

Supplying goods, or offering types of assistance, starting with one SEZ Unit then onto the next SEZ Unit or SEZ Developer, in the same or different Special Economic Zone (SEZ).

What is the need for Special Economic Zone?

The Prime objective for the implementation of SEZ was to augment the foreign investment in the country while giving an internationally competitive and hassle-free environment for the exporters in India. The presence of SEZ in a country promotes export from a nation as well as ensures a level playing ground for domestic enterprises and manufacturers, for them to be able to scale to the worldwide competition.

Moreover, a well-located SEZ can help in adjusting the growth of the economy and enhance economic activities, for example,

· Rapid Economic Growth

· Better Employee Opportunities

· Improved Foreign Export

· Enhanced Brand value

· Better Revenue Collection, etc.,

Read here for E-Invoicing for SEZ.

What are the benefits of establishing SEZ?

The key benefits of a SEZ are as per the following:

· A SEZ unit does not require any license for imports

· SEZ Units are simply required to achieve Positive Net Foreign Exchange, which is calculated cumulatively for a 5 year period from the commencement of production

· They have full freedom for subcontracting

· No routine examination by customs authorities of export/import payload

· SEZ Developers/Co-Developers and SEZ Units enjoy Direct Tax and Indirect Tax benefits as prescribed in the SEZs Act, 2005.

What are the exemptions/entitlements to SEZ Developer?

The accompanying exemptions are available for SEZ Developers:-

1. Payment of Customs duty for goods or services imported into SEZ for its operations and goods exported or services provided from SEZ outside india.

2. Payment of Excise duty for goods brought from Domestic Tariff Area to SEZ for its authorized operations.

3. Provided the SEZ is operationalized by 31.03.2017, developers are exempted from payment from Income Tax under the Income Tax Act as per rules in force, as follows:-

Income Tax exemption for a square of 10 years in 15 years under Section 80-IAB of the Income Tax Act. Square of 10 years will be selected at the discretion of the developer

4. Payment of Central Sales Tax for its authorized operations.

5. Payment of Service Tax under Chapter V of the Finance Act 1994 on taxable services consumed for its authorized operation.

6. Payment of VAT for the purchases made inside the State of Tamil Nadu under TN VAT Act.

What are the exemptions/entitlements available for SEZ units?

1. Payment of customs duty for goods or services imported into SEZ for its operations and goods exported or services provided from SEZ outside India.

2. Payment of Excise duty for goods brought from Domestic Tariff Area to SEZ for its authorized operations.

3. Provided that the unit commences commercial operations by 31.03.2020, SEZ Units are exempted from payment from Income Tax and other taxes under the Income Tax Act according to rules in force, as follows: - 100% Income Tax exemption for SEZ units under Section 10AA of the Income Tax Act for initial 5 years, half for next 5 years thereafter and half of the plowed back export benefit for next 5 years. Income tax benefit as mentioned above is available on the benefits out of exports made out of India.

4. Payment of Central Sales Tax for its authorized operations.

5. Payment of Service Tax under Chapter V of the Finance Act 1994 on taxable services consumed for its authorized operation.

6. Payment of VAT for the purchases made inside the State of Tamil Nadu under TN VAT Act.

7. Units are likewise entitled for MEIS/SEIS scrips subject to fulfilment of eligibility criteria prescribed for the scrips.

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