Comprehensive presentation on

Special Economic Zone

Compiled by :Shubhra Gulati

Presentation at a glance1- What is a Special Economic Zone.2- What are the different categories of SEZs?3- Services covered under the Act and Rules4- Administrative Set-up5- Statutory filings at a glance6- Some aspects in detail7- Foreign Exchange Earning—requirements and monitoring 8- Incentives and facilities offered to the SEZs 9- SEZ act benefits are available only to Exporter and not a unit in DTA10- SEZ Act and Finance Act 199411- SEZ unit claiming refund of Service Tax paid12- Exemptions from payment of VAT/CST/ED/ID13- Other exemptions for SEZ units and developers14- Statutory records to be maintained for assets15- Compliances related to employees16- SEZ developer and unit in U.P.17- Checklist for application for setting up of Special Economic Zone ,Form-A, Rule-3 SEZ Rules,200618- Checklist for filing consolidated application form for setting up unit in Special Economic Zone

, form F-rule 17 SEZ rules 200619- Documents required for IMPORT EXPORT CODE20- Summary of Forms

End of presentation

What is a Special Economic Zone?

Special Economic Zone (SEZ) is a specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs. It is a geographical region that has economic laws different from a country's typical economic laws usually with the goal to enhance foreign investments.

As per SEZ Act 2005, Special Economic Zone" means each Special Economic Zone notified under the provison to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone;

Statutory Acts and Rules governing SEZs are• SEZ Act 2005• SEZ Rules 2006

What are the different categories of SEZs?SEZs are broadly classified into four categories namely:-

1. Multi Sector SEZ may be set up for – manufacture of two or more goods in a sector or goods falling in two or more sectors ; trading and warehousing; rendering of two or more services in a sector or services falling in two or more sectors

2. Sector Specific SEZ-SEZ-units may be set up for – manufacturing of one or more goods in a sector –rendering of one or more services in a section

3. Free Trade and Warehousing Zone

4. IT/ITES/handicrafts SEZ Bio-technology/ non-conventional energy/gems and jewelry Sector

4

Services covered under the Act & RulesServices have been defined in sub-section (z) of section 2 of the SEZ Act, 2005 to mean such tradeable services which:(i) are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organization concluded at Marrakeshon 15.4.1994;(ii) may be prescribed by the Central Government for the purposes of this Act; and(iii) earn foreign exchange.

The Central Government has defined and prescribed what is meant by ‘services’ in clause 76 of the SEZRules. Accordingly, the “services” for the purposes of sub-clause (z) of section 2 shall be the following,namely, trading, warehousing, research and development services, computer software services,including information enabled services such as back-office operations, call centers, contentdevelopment or animation, data processing, engineering and design, graphic information systemservices, 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 andrelated services, distribution services (excluding retail services), educational services, environmentalservices, financial services, hospital services, other human health services, tourism and travel relatedservices, recreational, cultural and sporting services, entertainment services, transport services, servicesauxiliary to all modes of transport, pipelines transport.

Administrative Set-up• The functioning of the SEZs is governed by a three tier administrative set up. • The Board of Approval is the apex body and is headed by the Secretary, Department of

Commerce. • The Approval Committee at the Zone level deals with approval of units in the SEZs and

other related issues. • Each Zone is headed by a Development Commissioner, who is ex-officio chairperson of the Approval

Committee.

Statutory filings at a glanceParticulars Form Given to Approved by Time limit

Consolidated application seeking permission for setting up of a Unit

Form F as per Rule 17 (Refer Slide “Checklist for Form F”)

Development Commissioner

Approval Committee Within fifteen days of its receipt

Letter of Approval (LOA)issued on acceptance of terms and conditions SEZ

Form G as per Rule 19

Unit Approval Committee Valid for 1 year within which period the unit should start functioning

Confirmation of acceptance of terms and conditions of SEZ as per Letter of Approval (LOA)

Intimation Development Commissioner

- Within 45 days of issue of LOA

Execute Bond-cum-LUT –by units

by Developer and Co-developer

Form H as per Rule 22

Form D as per Rule 22

Development Commissioner

Approval Committee

Submission of registered lease deed

Copy of deed as per Rule 18

DevelopmentCommissioner

- Within 6 months of receipt of LOA

Statutory filings at a glanceParticulars Form Given to Approved by Time Limit

Submission of letter ofcommencement of operations

Letter as per Rule 18 DevelopmentCommissioner

- Within 1 month fromactual commencementof activities

Annual Performance Report byUnit

Form I as per Rule 22 (duly certified by an Independent Chartered Accountant)

Development Commissioner

ApprovalCommittee

Before the end of firstquarter of the followingfinancial year

Quarterly Performance Reportby Developer

Form E as per Rule 22

Jointly byDevelopmentCommissionerand SpecialOfficer

ApprovalCommittee

-

DC has instructed all the SEZunits to also file a MonthlyPerformance Report andreport on unit’s progress withrespect to imports, exportsand employment on a monthlybasis

- DevelopmentCommissioner

- By the 5th of followingmonth

SOFTEX Form - DevelopmentCommissioner

- Within 30 days from thedate of invoice / dateof last invoice raised inthe month (whereinvoices are raisedperiodically)

Some aspects in detail• The Letter of Approval shall be valid for five years from the date of commencement of

production or service activity and it shall be construed as a license for all purposes related toauthorized operations,

• If an enterprise is operating both as a Domestic Tariff Area unit as well as a SEZ Unit, it shall havetwo distinct identities with separate books of accounts, but it shall not benecessary for the SEZ unit to be a separate legal entity.

• The unit and developers shall maintain such records for a period of seven years from the end ofrelevant financial year.

• The unit engaged in both trading and manufacturing activities shall maintain separaterecords for trading and manufacturing activities.

• The Bond-cum-Legal Undertaking, where the entrepreneur or Developer is a companyshall be executed by the Director in case of a company and partner in case of a partnership/LLP orany authorized person.

• The value of the Bond-cum-LUT shall be equal to the amount of effective duties leviable on importor procurement from the DTA of the projected requirements.

• Units are liable for penal action under the provision of Foreign Trade (Development and Regulation)Act 1992, in case of violation of the conditions of the approval.

Some aspects in detail (contd..)

• Foreign companies can also set up manufacturing units as their branch operations in the SpecialEconomic Zones in accordance with the provisions of Foreign Exchange Management (Establishment inIndia of branch or office or other place of business) Regulations, 2000.

• As per Rule 23, SEZ Rules 2006, supplies from the Domestic Tariff Area to a Unit or Developer for theirauthorized operations shall be eligible for export benefits as admissible under the Foreign Trade Policy.

• The Unit may temporarily remove goods specified in Rule 50 to Domestic Tariff Area without paymentof duty with prior intimation to Assessing Officer.

• The goods shall be brought back to the SEZ within 120 days from the date of taking the goods out ofthe SEZ.

• The Unit may opt out of Special Economic Zone with the approval of the Development Commissionerand such exit shall be subject to payment of applicable duties.

• If the unit has not achieved positive Net Foreign Exchange, the exit shall be subject to penalty thatmay be imposed under the Foreign Trade (Development and Regulation) Act, 1992.

• Every developer and unit shall file applications and returns electronically on the Special Economic Zoneonline system.

• Every developer and unit shall fulfill the environmental and pollution control norms.

Foreign Exchange Earning — Requirements and Monitoring As per Rule 53 of SEZ Rules, 2006 the unit shall achieve Positive Net Foreign Exchange to be calculatedcumulatively for a period of five years from the commencement ofproduction according to the following formula, namely:—

Positive NFE = A - B > 0, where

A = FOB value of exports and other specified supplies;

B = Sum total of

• CIF Value of all imported inputs used for authorized operations & Capital goods (including goodspurchased on high seas basis for which payment is made in INR)

• value of goods obtained from another SEZ unit/ EOU/ EHTP/ STP/ BTP/ bondedwarehouse etc

• CIF value of the goods and services (including free of cost supplies of capital goods)

Incentives and facilities offered to the SEZs

The incentives and facilities offered to the units in SEZs for attractinginvestments 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 5years.

• Exemption from minimum alternate tax under section 115JB of the Income Tax Act.• 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• External commercial borrowing by SEZ units up to US $ 500 million in a year without any maturity

restriction through recognized banking channels.

Source http://www.sezindia.nic.in

Incentives and facilities offered to the SEZs (Contd..)

The major incentives and facilities available to SEZ developers include:-• Exemption from customs/excise duties for development of SEZs for authorized

operations approved by the BOA.• Income Tax exemption on income derived from the business of development of the SEZ

in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.• Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.• Exemption from dividend distribution tax under Section 115O of the Income Tax Act.• Exemption from Central Sales Tax (CST).• Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Source http://www.sezindia.nic.in

SEZ act benefits are available only to Exporter and not a unit in DTA

In CCE, Thane- I v Tiger Steel Engineering (I) Pvt Ltd [2010 -TMI - 201623 - CESTAT, MUMBAI] it was observed that SEZ Act, 2005 deems supplies from DTA to SEZ unit or developer as exports and deeming provisionsare meant exclusively for the benefit of SEZ units. DTA units can not claim any complementary benefit based on deeming provision of SEZ Act or Rules by mere supply of goods to SEZ units.

SEZ Act and Finance Act 1994As per Section 26 (e) of the SEZ Act 2005, read with the provisions of service tax legislation, SEZ unitshave been provided exemption from the payment of service tax on services received by them.Refer the extract below :

CHAPTER VISpecial Fiscal Provisions for Special Economic Zones26. (1) Subject to the provisions of sub-section (2), every Developer and the entrepreneur shall beentitled to the following exemptions, drawbacks and concessions, namely:….(e) exemption from service tax under Chapter-V of the Finance Act, 1994 on taxable services provided to a Developer or Unit to carry on the authorized operations in a Special Economic Zone;

• The unit or developer needs to get Service Tax Registration number from CBDT as per theprovisions of Finance Act 1994 and Service Tax Rules, 1994.

• The unit/developer has to declare Specified services that are liable to service tax as are requiredfor the authorized operations approved by the Approval Committee of the SEZ.

SEZ unit claiming refund of Service Tax paid• As per Notification No. 12 / 2013-Service Tax dated July 1, 2013, exemption from payment of Serv

ice Tax shall be provided by any of the following way:

• refund of service tax paid on the specified services received by a unit located in a SEZ or the developer of SEZ and used for the authorized operations;

• no service tax ab initio if the specified services are received in SEZ and used exclusively forauthorized operations i.e.., 100% used for authorized operations.o For ab initio exemption the SEZ unit/developer shall furnish a declaration in Form A-1, verified

by the Specified Officer of the SEZ, declaring that the unit/developer does not own or carry onany business other than the operations in SEZ and in case of any contradiction, the unit/developer would be liable to pay service tax to the extent of exemption along with interest and theapplicable penalty. Also the service provider shall furnish a copy of such authorizationreceived by the unit/developer Form A-2 and provide specific services without payment ofservice tax.

o The SEZ unit/developer shall submit Quarterly statement to Superintendent of Central Excisewith details pf specified servicers received without payment of Service tax in Form A-3.

• The notification does not specify criteria/condition for determining when a service is said to havebeen “used exclusively for authorized operations”. Therefore the usage needs to be demonstratedwith corroborative evidences.

SEZ unit claiming refund of Service Tax paid(Contd..)

Conditions/Requirements for Refund of service tax:• The unit/developer must have discharged the service tax liability as per bill/invoice/ challan of

service provider indicating the service tax paid on such specified services or liability arising in caseof reverse charge mechanism.

• The refund of service tax on(i) the specified services that are not exclusively used for authorized operation, or(ii) the specified services on which ab-initio exemption is admissible but not claimed,

shall be allowed subject to the following procedure and conditions as follows : the service tax paid on the specified services that are common to the authorized oper

ation in an SEZ and the operation in domestic tariff area shall be distributed amongstthe SEZ Unit /Developer and the DTA unit as per rule 7 of the Cenvat Credit Rules.

As per Rule 7 of Cenvat Credit Rules:1- The credit so distributed shall not exceed the amount of service tax paid.2- The credit specifically pertaining to unit in DTA shall not be distributed to the unit in SEZ.

Similarly credit exclusively pertaining to SEZ unit shall not be distributed to the unit inDTA.

3- The credit of service tax on specified services used by one or more units shall bedistributed on pro-rata on the basis of turnover of such units to the total turnover of allunits which are operational during that period.

As per Rule 7A, output service provider shall take credit of inputs and capital goods on thebasis of bill/invoice/challan issued as per Central Excise Rules, 2002.

Conditions/Requirements for Refund of service tax (contd)…. A claim for refund of service tax has to be filed for obtaining the said refund. Following con

ditions need to be fulfilled for filing the claim:• In case the unit/developer is registered as an assessee under the Central Excise Act,

1944 (1 of 1944) or the rules made thereunder and Finance Act 1994, shall file the claimfor refund to the Assistant Commissioner of Central Excise or the Deputy Commissioner

ofCentral Excise, having jurisdiction over the SEZ in Form A- 4.

• In case the unit/developer is not registered as an assessee as above shall make anapplication for registration under Rule 4 of Service Tax Rules, 1994.

The claim for refund of such service tax paid shall be filed within one year from the end ofthe month in which actual payment of service tax was made to the registered service provider.

The SEZ Unit or the Developer shall submit only one claim of refund for every quarterbeginning from April 1st of the financial year.

In case of multiple registrations of one unit under common service tax registration, acommon claim of refund could be filed at the option of such unit.

• The unit/developer has the option of taking CENVAT and not availing the exemption as per the saidnotification.

• The unit/developer shall maintain proper record of invoice/bill/challan as issued by the registeredservice provider indicating the service tax paid on such specified services.

• It should be noted that the refund is restricted to the amount of service tax determined based onRule 7 of Cenvat Credit Rules, 2004 relating to Input Service Distributor.

SEZ unit claiming refund of Service Tax paid (Contd..)

Section 26(1) of the SEZ Act read with Rule 32 of the SEZ Rules provides exemption from the levy of taxes on the following :

1. duty of customs, under the Customs Act, 1962 or the Custom Tariff Act, 1975on good exported or imported.

2. duty of excise, under the Central Excise Act, 1944 or the Central Excise TariffAct, 1985

3. sale or purchase of goods other than newspapers under the Central Sales TaxAct, 1956 (‘CST Act’) if such goods are meant to carry on the authorized operations as perLOA by the Developer or SEZ Unit.

As per rule 32 of SEZ Rules, 2006 the dealer selling goods in the course of inter-Statetrade or commerce to a registered dealer under the CST Act shall furnish a declarationin Form-I prescribed under the Central Sales Tax (Registration and Turnover) Rules, 1957 (‘CST (R&T)Rules’).

Exemptions from payment of VAT/CST/ED/ID

The First Schedule of SEZ Act , 2005, provides for a blanket exemption against all taxes, duties and cesses leviable by the following Acts:

– The Agricultural Produce Cess Act, 1940 – The Coffee Act, 1942 – The Mica Mines Labour Welfare Fund Act, 1946 – The Rubber Act, 1947 – The Tea Act, 1953 – The Salt Cess Act, 1953 – The Jute Manufactures Cess Act, 1983 – The Medicinal and Toilet Preparations (Excise Duties) Act, 1955 – The Additional Duties of Excise (Goods of Special Importance) Act, 1957 – The Sugar (Regulation of Production) Act, 1961– The Textiles Committee Act, 1963 – The Produce Cess Act, 1966 – The Marine Products Export Development Authority Act, 1972 – The Coal Mines (Conservation and Development Act, 1974 – The Oil Industry (Development) Act, 1974 – The Tobacco Cess Act, 1975 – The Sugar Cess Act, 1982 – The Additional Duties of Excise (Textile and Textile Articles) Act, 1978– The Agricultural and Processed Food Products Export Cess Act, 1985– The Spices Cess Act, 1986 – The Research and Development Cess Act, 1986

Other exemptions for SEZ units and developers

• Rule 22(2) of SEZ Rules requires every SEZ unit to maintain financial year-wise accountsand such accounts should clearly indicate, in value terms, the goods imported or domestic procurements,consumption or utilization of goods, production of goods, including byproducts/ waste/ scrap/ remnants, disposal of goods produced by way of exports, sale,supplies in DTA or transferred to other SEZ/ EOU/ STP etc. and balance in stock. Further, as per terms and conditions of Bond-cum-LUT submitted, SEZ unit is required

to maintain the records in the above said manner. As per the aforesaid rule SEZ unit need to maintain the bond register and ARE-1 register for duty free

import of goods and duty free domestic procurement respectively. All the pages of the above mentioned registers is required to be signed by Authorised

Signatory of the SEZ unit and countersigned by Authorised Officer/Specified Officer ofCentral Excise and Customs.

• Bond Register for Imports including compliance to Rule 29(2)(g) of the SEZ Rules for filingof Bills of Entry and completion of re-warehousing documentation within 45 days from the date ofclearance of goods

• ARE - 1 Register for indigenous procurement of goods including compliance to Rule 30(12)(d) of the SEZ Rules for completion of re-warehousing documentation within 45 days fromthe date of clearance of goods

• Registers being maintained for goods procured on a duty paid basis.

Statutory records to be maintained for assets

• Movement of persons into the processing area to be regulated by the DC throughissue of identity cards;

• The identity card shall be valid up to a period of five years and shall be issued in Form K by the DC as per Rule 70.

• When the employee ceases to be under employment of the unit or when the Unit ceases to hold a valid Letter of Approval, the identity cards loose validity.

Compliances related to employees

The SEZ units in Uttar Pradesh are governed by U.P. Special Economic Zone (Amended) Policy, 2007Part A and B.

• SEZ developer and unit shall be exempt from all kinds of taxes, cess or levies of theGovernment of UP or any other local authority within the precincts of SEZ.

• Developers/Co-developers/Units will get total exemption from stamp-duty arising out of its firsttransfer only.

• There is no provision of exemption on the Royalty on Minerals.• Registration fees of vehicles would be payable.• Electricity duty and taxes in so far as used for any purpose in the processing area shall

be exempt for a period of 10 years from the date of production or start of service.• There is a mechanism of single point clearance in respect of all state level clearances.

SEZ developer and unit in U.P.

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)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?

Checklist for APPLICATION FOR SETTING UP OF SPECIAL ECONOMIC ZONE, Form-A, Rule-3 SEZ Rules,2006

15. Whether the land is contiguous? 16. Projected investment in the project. 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. Net worth of the Applicant (including Group companies) duly supported by Audited Accounts of the Developer for last 3 Years (for all the constituents in case the Developer is a SPV). If the company is a new company, audited accounts of Flagship Company/promoters may be provided. 22. Extent of FDI (if any) in million U.S. Dollars 23. Source of FDI (Country and Company details may be provided) 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?

Checklist for APPLICATION FOR SETTING UP OF SPECIAL ECONOMIC ZONE, Form-A, Rule-3 SEZ Rules,2006 (contd)….

1. Setting up of units in Special Economic Zone; 2. Annual permission for sub-contracting; 3. Allotment of Importer Exporter Code Number; 4. Allotment of land/industrial sheds in the Special Economic Zone; 5. Water Connection; 6. Registration-cum-Membership Certificate; 7. Small Scale Industries Registration; 8. Registration with Central Pollution Control Board; 9. Power connection; 10. Building approval plan; 11. Sales Tax registration; 12. Approval from Inspectorate of factories; 13. Pollution control clearance, wherever required; 14. Any other approval as may be required from the State Government.

Application form has to be duly filled with initials on all pages and full signature and stamp on the last page of the authorized signatory.

Checklist for filing CONSOLIDATED APPLICATION FORM for SETTING UP UNIT IN SPECIAL ECONOMIC ZONE, Form F-Rule 17 SEZ Rules 2006

• Digital Photograph (3x3cms) of the Designated Partner/Director of the Company signing the application.

• Copy of PAN card of the applicant entity.• Copy of Passport (first & last page)/Voter’s I-Card /UID (Aadhar Card) /Driving License/ PAN (any one of

these) of the Managing Partner/Director signing the application.• Certificate of incorporation as issued by the RoC• Sale deed in case business premise is self-owned; or Rental/Lease Agreement, in case office is rented/

leased; or latest electricity /telephone bill.• Bank Certificate as per ANF 2 A(I)/Cancelled Cheque bearing preprinted name of the

company and A/C No

Documents required for IMPORT EXPORT CODE

Summary of Forms

Form SEZ Rules 2006 Particulars

Form A Rule 3 Application for setting up of SEZ

Form B Rule 6 Format of LOA for SEZ Developer

Form C Rule 6 Format for LOA for providing Infrastructure Facilities in SEZ

Form D Rule 12(5) and Rule 12(1)(ii)

Bond-Cum-Legal Undertaking for developer

Form E Rules 12 and 22 Format for Quarterly and Half Yearly report for SEZ Developer/ Co-Developer to be furnished to the Development Commissioner

Form F Rule 17 Consolidated application form for setting up unit in SEZ

Form G Rule 19 Format for LOA for unit

Form H Rule 22 Bond-Cum-Legal Undertaking for unit

Form I Rule 22 Annual Performance Report for Units

Form J Rule 55 Form for Appeal

Form K Rule 70 Permanent Identity Card

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