A special economic zone (SEZ) is a designated zone or enclave within a country’s national borders with more permissive economic laws than the rest of the country. It’s a duty-free zone within a country with its own set of economic and commercial laws, primarily to attract investment and job creation.
Apart from creating job opportunities and encouraging investment, SEZs are established to improve administration in these areas, hence boosting the convenience of doing business.
If you are an entrepreneur or a businessman, you will undoubtedly be interested in learning more about what is the special economic zone in India? Or if the government has created a Special Economic Zone Act to promote trade and if there are any income tax benefits for SEZ units.
What is the special economic zone in India?
The Indian government had previously used export processing zones (EPZs) to encourage exports with the first EPZ in Asia being in Kandla, Gujarat. Consequently, the government developed SEZs under the Foreign Trade Policy in 2000.
SEZs were designed to address the infrastructure and bureaucracy challenges that had limited EPZ success. In many ways, the government’s SEZs follow the model of China. SEZs aim to attract domestic and foreign investment, boost India’s exports and create new employment opportunities. The Special Economic Zone Act of 2005 changed the country’s SEZ policy even further by converting numerous EPZs to SEZs.
Special Economic Zone Act of 2005
It is described as an Act to provide for the establishment, development and management of special economic zones for the promotion of exports as well as activities connected with or incidental to such establishment.
The primary goals of SEZ Act are:
- Increased economic activity
- Promotion of goods and service exports
- Promoting domestic and international investment
- Employment opportunities
- Infrastructure facilities development
The SEZ Act is expected to result in a substantial influx of foreign and domestic investment in SEZs, infrastructure and productive capacity, resulting in increased economic activity and employment possibilities.
SEZ incentives and facilities
The government provides numerous incentives to companies and businesses that operate in special economic zones. Among the most important are:
- Import of commodities duty-free or domestically procured for the development, operation and maintenance of SEZ units.
- The minimum alternate tax (MAT) is not applied to units.
- They were not subject to the central sales tax, service tax or state sales tax. These have now been absorbed under GST and under the IGST Act of 2017, supplies to SEZs are now zero-rated.
- Central and state level approvals are processed through a single window.
- With the exception of a few segments, 100% FDI is permitted in the manufacturing sector.
- Profits earned are free to be repatriated without the necessity for dividend balancing.
- There is no need for separate customs and export-import policy documentation.
- Many SEZs have developed plots and space that is ready to use.
Did you know that businesses that establish operations in a special economic zone (SEZ) are entitled for a package of incentives and a streamlined operating environment? For instance, a license is not required for imports, including old machinery. So, if you are considering establishing a unit in a SEZ and want to learn more about incentives, contact our CoffeeMug specialists, who come from a diverse group of entrepreneurs and business owners.
Income tax benefits for SEZ units
- Under Section 10AA: SEZ units engaged in manufacturing or delivering services are exempt from paying taxes. The Special Economic Zone Act of 2005 added a new section 10AA to the IT Act which states that units in SEZ that begin manufacturing or producing articles and things or providing services on or after April 1, 2005 are eligible for a deduction of 100% of export profits for the first five years from the year in which such manufacture and provision of services begins and 50% of export profits for the next five years. In addition, over the next five years, a deduction of up to 50% of profit debited to the profit and loss account and deposited to the special economic zone reinvestment reserve account will be allowed.
- Under Section 80LA: SEZ-based offshore banking units are tax exempt. Scheduled banks and foreign banks with an offshore banking unit in a SEZ or an IFSC unit will be able to deduct certain revenues under the new section 80LA. The deduction is for 100% of income for five years, beginning with the year in which permission and registration was acquired under the Banking Regulation Act, the SEBI Act or any other relevant statute and 50% of income for the following five years.
- Under Section 115JB: Exemption from minimum alternate tax. Under section 115JB, income generating or accruing on or after April 1, 2005 from any business carried on or services performed by a SEZ unit is free from MAT.
- Non-residents and ordinary residents who make deposits with an offshore banking unit on or after April 1, 2005 will get tax-free interest.
- Exemption from Capital Gains: Capital gains accruing on the transfer of assets (equipment, plant, building, land or any rights in buildings and land) resulting from the relocation of industrial activity from an urban area to any SEZ would be free from capital gains tax. If the following occurs within one year before or three years after the transfer:
- The assessee purchases machinery or plant for the purposes of operating an industrial undertaking in a SEZ.
- Assessee has purchased or developed land or a facility for the purpose of conducting business in the SEZ.
- The original assets are relocated and the industrial undertaking is transferred to the SEZ as well as other stipulated costs.
Income tax benefits for SEZ developers:
- Under Section 80-IAB: The Special Economic Zone Act 2005 added a new section 80-IAB to the IT Act, allowing a developer of SEZ to deduct 100% of earnings received from the business of constructing SEZ (notified on or after April 1, 2005) for any 10 consecutive years, out of 15 years starting from the year in which SEZ was notified.
- Under Section 10 (23G): The tax exemption provided to infrastructure capital funds or cooperative banks under section 10 (23G) on interest and long-term capital gains investments has been extended to SEZ developers who qualify for a tax holiday under section 80-IAB of the IT Act. With effect from the 2007-08 assessment year, this exception has been revoked.
- Dividend Distribution Tax (DDT) Exemption: A developer of SEZ would not have to pay DDT on dividends declared, distributed or paid out of current income on or after April 1, 2005.
- Under Section 115JB: Exemption from MAT- A SEZ developer’s income received on or after April 1, 2005 is exempt from MAT under section 115JB from the domestic tariff area (DTA) to the SEZ.
Conclusion
SEZs are critical to a country’s rapid economic development. It not only creates jobs for the local population but it also attracts foreign investment and enhances our country’s GDP. With so many perks ranging from duty-free import of capital goods and raw materials to income tax benefits of 100% tax deduction on export revenues for the first five years, the SEZ policy certainly promises a bright future for Indian entrepreneurs.
If you want to be a part of India’s economic progress and want to set up a unit in a SEZ but need further information on how to choose a SEZ location or how to register for a SEZ unit, don’t worry. We have a large network of entrepreneurs and industry veterans at CoffeeMug who can provide you with relevant SEZ startup advice.
FAQs
Q. Who can establish SEZs? Can foreign firms establish SEZs?
A. An SEZ can be established by any private, public or joint sector entity or by the state government or its agencies. Even an international organization can establish SEZs in India.
Q. How many SEZs are there in India?
A. There are 268 operational SEZs in the country as of March 31, 2022. The five states of Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra account for 64% of the SEZs.
Q. What is the role of the State government in SEZ approvals?
A. The state governments play a critical role in export promotion and infrastructure development. A 19-member inter-ministerial SEZ board of approval has given a single-window SEZ approval procedure (BoA). This BoA considers applications that have been duly recommended by the different state governments and UT administrations on a regular basis. The board of approvals makes all judgments unanimously.
Q. Is the government in charge of SEZs?
A. The government has jurisdiction over all statutory functions in SEZs. The operation and maintenance functions in the seven central government-controlled SEZs are also under government control. The remaining operations and maintenance are contracted out.
Q. Do labour laws apply to SEZs?
A. SEZs are subject to standard labor rules that are implemented by state governments. By allocating suitable authorities to development commissioners of SEZs, state governments have been asked to simplify procedures and returns and implement a single window clearance method.
