Special Economic Zones

A unit Perspective

VIKRAM BAPAT
Executive Director
PricewaterhouseCoopers
vikram.bapat@in.pwc.com

National Summit – Special Economic Zones

December 02, 2008 1

Contents
SEZ Legislation – Overview
The Zone - Overview
SEZ units – An overview
SEZ units- NFE Requirement
The Approval Process
The Tax Benefits
Transition strategy
The Grey Areas

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 SEZ Legislation –
Overview
The Zone - Overview
SEZ units – An
overview
SEZ units- NFE
Requirement
The Approval
Process
The Tax Benefits
Transition strategy
The Grey Areas

SEZ - Objectives

Engine for economic growth

Infrastructure development

Economic development - exports and backward integration

Employment generation

Up-gradation of managerial/ technical skills

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SEZ - Salient Features

Deemed outside customs territory

Private Sector / Government / jointly

Multi-product / Sector specific / Service SEZs

Unrestricted Domestic Tariff Area (DTA) sales on full customs duty

Unit - No export commitments. Net Foreign Exchange (NFE) +ve at

end of 5th year

Certain DTA sales deemed eligible for NFE +v

SEZ Legislation –
Overview
The Zone - Overview
SEZ units – An
overview
SEZ units- NFE
Requirement
The Approval
Process
The Tax Benefits
Transition strategy
The Grey Areas

3
The Zone – Minimum area requirement

Multi Product
1000 Hectares (200 Hectares in specified areas*)

Services SEZs; Port / Airport based SEZs

(Can be of multiple sectors)
100 Hectares
Sector Specific
(50 Hectares in specified areas*)

Free Trade & Warehousing Zone

40 Hectares (100,000 sq. mt. built-up area)

Electronic Hardware, IT/ITES

(100,000 sq. mt. “built-up processing area”)

10 Hectares Bio-Tech
Non-Conventional Energy
Gems & Jewellery
(40,000 sq. mt. built-up area)

•specified areas are Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram,

Tripura, Himachal Pradesh, Uttranchal, Sikkim, J&K, Goa and UTs

The Zone – Processing and non-processing area

Hotel
50%
Processing Area
Manufacturing & Services Units Hospital
Infrastructure for Units

Housing

Shopping
Fencing & Restricted Entry

Entertainment

Non Processing Area

Business & Social Purposes School

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 SEZ Legislation –
Overview
The Zone - Overview
SEZ units – An
overview
SEZ units- NFE
Requirement
The Approval
Process
The Tax Benefits
Transition strategy
The Grey Areas

SEZ Unit – An Overview

Units can be set up for manufacture / services

Consolidated application to Unit Approval Committee

Developer to have representation in the Unit Approval Committee

No Export commitment

To be NFE + at the end of 5 year

Major simplification of assessment / examination of import and

export consignment, reporting requirements eased

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SEZ Unit - Examples of Authorized Activity

Manufacturing Services

• Making, producing, fabricating • Trading (for re-export)

assembling, processing by hand or • Warehousing
machine etc. • R&D
• Refrigeration • Computer software services including
• Cutting ITES such as (Back Office Operations,
• Polishing Call Centres etc.)
• Blending • Offshore banking services
• Repair • Professional services (excluding
• Remaking & re-engineering Accounting & Legal)
• Agriculture • Rental / leasing services
• Aquaculture • Educational services
• Animal husbandry • Financials services
• Floriculture • Hospital services
• Poultry • Distribution services (excluding Retail
• Mining services)
• Transport services
• Others as in Rule 76

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SEZ Legislation –
Overview
The Zone - Overview
SEZ units – An
overview
SEZ units- NFE
Requirement
The Approval
Process
The Tax Benefits
Transition strategy
The Grey Areas

12

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SEZ Unit – NFE Requirement

Cumulative for 5 years (and block of every 5 years thereafter)

Prescribed formula : Positive Net Foreign Exchange = A – B > 0

A B
Free on Board (FOB) value of
exports
Exports to Nepal & Bhutan
against freely convertible
currency
Value of eligible DTA supplies
CIF value of all imported inputs
Raw materials, intermediaries, capital goods, etc.
All payments made in foreign exchange
Export commission, royalty, fees, dividends,
interest on ECBs, etc.
Procurements from another SEZ unit,
EOU, bonded warehouses, etc.

CIF value of goods and services (pro-

rata for capital goods) which are –
Imported duty free / Obtained on lease /
Received free of cost / on loan or transfer basis

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SEZ Unit – NFE Requirement

Domestic sales deemed as NFE +ve

Supplies against foreign currency payment

ITA-1 items (IT hardware/ software)

Notified zero duty telecom or electronic items

Supplies to -
Power projects & refineries
EPCG license holders or against Advance Licenses etc.
Projects financed by international funding agencies
Projects notified for zero customs duty
Other SEZ/ EOU/ EHTP/ STP Units

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 SEZ Legislation –
Overview
The Zone - Overview
SEZ units – An
overview
SEZ units- NFE
Requirement
The Approval
Process
The Tax Benefits
Transition strategy
The Grey Areas

15

SEZ Unit – Approval Process

1 Proposal

Development
Entrepreneur Commissioner
Approval Letter
6

5 2
4 Final Decision Referral
Appeal

3 Decision
Approval
Decision Committee (AC)

Board of 1A 1B
Approval
Referral to BOA in cases where FDI through
automatic route not permitted/ Industrial
Licensing needed

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 SEZ Legislation –
Overview
The Zone - Overview
SEZ units – An
overview
SEZ units- NFE
Requirement
The Approval
Process
The Tax Benefits
Transition strategy
The Grey Areas

17

SEZ Unit – Tax Benefits

Income-tax Holiday for up to 15 years

First 5 years 100%,
Next 5 yrs 50%
Next 5 yrs upto 50% (subject to creation of reserves)

Deduction only on “export” profits – formula driven computation

Exemption from Minimum Alternate Tax

Indirect-tax benefits
Excise duties
Customs
Input Service tax on authorised operations
Output Service Tax on export of services
VAT (refunds/exemptions)

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 SEZ Unit – Tax Benefits- Goods Supply Chain
Distribution
Procurement

Overseas Supplies Overseas Buyers

Outside India Outside India

Within India Within India

customs
Supplies Supplies

s
Inter State Intra State

port
Ex
Customers
Inter State Sales

Unit - 1 Within SEZ Unit - 2

Intra State Sales

Customers

VAT Credit / Refund

Exempt / No Tax

VAT / Central Sales Tax payable

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SEZ Unit – Tax Benefits- Services Supply Chain

Input Service Service

Provider Recipient

Outside India Outside India

Within India Within India

Import

s
ce
rvi
Se
IT

SEZ Unit Domestic Service

Recipient
Within SEZ

There is controversy on whether input Service Tax

Domestic Service for services provided to an SEZ unit is chargeable
Provider to Service Tax or not.

The Services rendered within the SEZ

are clearly not chargeable to Service Tax
SEZ
Unit
Exempt / No Tax

Taxable

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 SEZ Legislation –
Overview
The Zone - Overview
SEZ units – An
overview
SEZ units- NFE
Requirement
The Approval
Process
The Tax Benefits
Transition strategy
The Grey Areas

21

SEZ Unit – Transition strategy

Impact on SEZ Regulations Income Tax Regulations

Assets 80% of the total investment in the SEZ unit The 80/20 Rule has to be adhered to.
has to be “new”. This is informally referred
to as the 80/20 Rule. A relaxation is
available in respect of machinery previously
used outside India on which no depreciation
has been claimed in India.

People The regulations do not bar movement of
people from the STP unit to the SEZ unit.
However, the decision to permit such a
migration of employees to the SEZ unit may
lie at the discretion of the Development
Commissioner (‘DC’)
Contracts Regulations are silent on transition of
existing contracts to the SEZ.
Transfer of existing employees from the STP
unit to the SEZ unit may trigger the risk of
“reconstruction” leading to a denial of
corporate tax benefits However, a ratio similar
to the 80/20 rule may mitigate the risk.
It is preferable to have separate contracts for
the SEZ unit.

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 SEZ Legislation –
Overview
The Zone - Overview
SEZ units – An
overview
SEZ units- NFE
Requirement
The Approval
Process
The Tax Benefits
Transition strategy
The Grey Areas

23

Will down - sizing operations post

Can a SEZ unit provide corporate unit approval amount to violation
shared service functions to other of the terms of approval?
units/ group companies ?

Can a unit sub-lease surplus space that it has leased out?

If a unit does not desire to claim tax holiday

Does SEZ Regulations can it be formed by relocation of existing
recognize deemed export? unit?

Is a link between SEZ unit and a non SEZ unit permitted?

Can a SEZ unit claim Service

Where the SEZ unit is transferred to a new
Tax exemption on all
entrepreneur will the new entrepreneur be
authorized operation even
required to obtain fresh approval?
those consumed outside the
zone?

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 Thank You

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