Special Economic Zone (SEZ)
Special Economic Zone (SEZ)
What is SEZ Scheme?
India is one of the first country in Asia to recognize the importance of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. India’s Special Economic Zone (SEZ) area is now widespread with many established product and service exporting enterprises operating in it.
Benefits of Special Economic Zone (SEZ Scheme):
How will we help to obtain SEZ Scheme Benefits and comply with the SEZ Scheme Procedures?
Frequently Asked Questions
All you need to know before applying for SEZ Scheme:
Special Economic Zone (SEZ) is a geographically delineated duty-free enclave and shall be deemed to be a foreign territory for the purposes of trade operations and duties and tariffs.
DTA, as defined in the SEZ Act means the whole of India (including the territorial waters and continental shelf) but does not include the areas of the SEZ. Hence, all the territory outside the SEZ is the DTA.
The salient features of the SEZ scheme are: –
- All Goods and services supplied by SEZ units to DTA are treated as imports into India and subject to all procedures and rules applicable in case of normal imports into India.
- SEZs are deemed to be an airport, port, Land Custom Stations, and Inland Container Depot under the Customs Act.
- SEZs ensure ease of doing business by reducing procedural complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, tariff and labor policies
- Economic laws are generally more liberal than rest of the country’s general economic laws.
- No routine examination by customs authorities of export/import cargo;
The guidelines (specified in Section 5 of the SEZ Act, 2005) for approval of SEZs are:
- Generation of additional economic activity
- Promotion of exports of goods and services
- Promotion of investment from domestic and foreign sources
- Creation of employment opportunities
- Development of infrastructural facilities
- Maintenance of sovereignty and integrity of India
Free trade Warehousing Zone (FTWZ) means a Special Economic Zone wherein mainly trading and warehousing and other activities related thereto are carried on. (Section 2(n) of SEZ Act). Warehousing is normally done on behalf of a third party while trading is done by the SEZ unit itself.
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
- Exemption from Central Sales Tax, Service Tax and State sales tax. These have now subsumed into GST and supplies to SEZs are zero rated under IGST Act, 2017.
- Other levies, if exempted by the respective State Governments.
- Single window clearance for Central and State level approvals.
- Supplies to SEZ are zero rated under IGST Act, 2017.
- Bonded and secure area where the developer can create state of the art infrastructure
Department of Commerce (DOC): The function of DOC is the formulation and review of the
policy including regulatory framework for SEZs. The highest decision making body for SEZs namely
the Board of Approval (BOA) is also administered by the DOC.
Office of Development Commissioner: The office of the Development Commissioner (DC)
administers the regulatory framework of SEZs. This includes administrative approvals, either by the
Unit Approval Committee or the DC on file. The customs officers are responsible for the customs
clearances of goods and services to and fro from the SEZ.
Developer: A Developer means a person who, or a State Government which, has been granted a LOA
for setting up and infrastructure development of the SEZ. While, most SEZs have only a single
developer, there is a provision in Section 3(10) of SEZ Act to approve more than one Developer in
cases where one Developer does not have in his possession the minimum area of contiguous land, for
setting up a SEZ.
Co-developer: A Co-Developer is any entity co-operated by the developer for setting up
infrastructural facilities in the approved SEZ. He would need to enter into an agreement with the
Developer. The proposal for any co-developer, if approved by the BOA, is granted an LOA by the
BOA for the same.
SEZ Units: Units are entities that are primarily who have been allotted LOA for engaging in exports
(including deemed exports), imports, domestic sourcing and domestic sales of goods and services
under the SEZ regulatory framework. It also includes Offshore Banking Units and Units in an
International Financial Services Centre.
A proposal shall be made by the developer(s) in Form ‘A’ and be submitted to the concerned Development Commissioner (DC) (as specified in Annexure-III of the SEZ Rules), who, shall forward it to the Board of Approval (BOA) within 15 days with his inspection report, State Government’s recommendation and other details to be furnished for issue of notification for declaration of an area as SEZ (specified under rule 7.)
The State Government shall forward the proposals BOA along with its recommendations, within 45 days of receipt of such proposal. If the BOA approves a proposal received, the person shall obtain concurrence of the State Government within 6 months from the date of such approval. While
forwarding a proposal, the State Government shall ensure that the requirements for establishment of SEZ under (Rule 5 of SEZ Rules) have been complied with and shall attach copies of relevant notifications issued by it in this regard.
The central government shall within a period of 30 days of the communication received grant either a formal or an in-principle approval.
The State Government is not mandated but shall endeavour that the following are made available
in the State to the proposed SEZ Units and Developer, namely: –
Exemption from the State and local taxes, State Goods and Services Tax, levies and duties,
including stamp duty, and taxes levied by local bodies on goods required for authorized
operations by a Unit or Developer, and the goods sold by a Unit in the DTA except the goods
procured from DTA and sold as it is
Exemption from electricity duty or taxes on sale, of self-generated or purchased electric
power for use in the processing area of a SEZ
Allow generation, transmission and distribution of power within a SEZ
providing water, electricity and such other services, as may be required by the developer be
provided or caused to be provided
Delegation of power to the DC under the Industrial Disputes Act, (No. 14 of 1947) and other
related Acts in relation to the Unit and workmen employed by the developer.
Declaration of the SEZ as a Public Utility Service under the Industrial Disputes Act, (No.14
Providing single point clearance system to the Developer and unit under the State Acts and
The DTA supplier supplying goods or services to a Unit or Developer shall clear the goods or services, as in the case of export/zero-rated permitted under Goods and Services Tax laws or Central Excise law, or as duty or tax paid goods under claim of rebate, on the cover of documents laid down
under the relevant Central Excise law for the purpose of export by a manufacturer or supplier.
Supplier of precious and semi-precious stones and synthetic stones and processed pearls from DTA to SEZ units shall be eligible for grant of Replenishment, provided that the application for the Replenishment License shall be made to the Development Commissioner.
Free on Board value of export of the Unit can be clubbed with Free on Board value of export of entrepreneur in the DTA or vice versa for the purpose of according status holder certificate.
Any goods removed from a Special Economic Zone to the DTA shall be chargeable to duties of customs which includes basic customs duty, IGST, antidumping, countervailing and safeguard duties (under the Customs Tariff Act, 1975), where applicable, as leviable on such goods when imported.
The rate of duty and tariff valuation, if any, applicable to goods removed from a Special Economic Zone shall be at the rate and tariff valuation in force as on the date of such removal, and where such date is not ascertainable, on the date of payment of duty.
In the case of Advance Authorization or EPCG licenses, there has to be repeated applications made to the regional offices of DGFT. However, in the case of SEZ, as long as the inputs are related to the manufacturing or services, there is no need for such applications. Moreover, even building
materials for the use of the units can be imported under the SEZ Scheme.
The goods admitted into a SEZ shall be used by the Unit or the Developer only for carrying out the authorized operations but if the goods admitted are utilized for purposes other than for the authorized operations or if the Unit or Developer fails to account for the goods as provided under these rules, duty shall be chargeable on such goods as if these goods have been cleared for home consumption, in case a Unit is unable to utilize the goods imported or procured from DTA, it may export the goods or sell the same to other Unit or to an Export Oriented Unit(EOU) or Electronic Hardware Technology Park(EHTP) Unit or Software Technology Park(STP) Unit or Bio-technology Park(BTP) Unit, without payment of duty, or dispose of the same in the DTA on payment of applicable duties on the basis of an import license submitted by the DTA buyer, wherever applicable.
A Unit may export goods or services as per the terms and conditions of LOA including agro-products, partly processed goods, sub-assemblies and components except prohibited items under the Import Trade Control (Harmonized System) Classification of Export and Import Items and the Unit
may also export by-products, rejects, waste scrap arising out of the manufacturing process.
A Unit engaged in development of computer software may undertake export, including export of professional services, using data communication links or do physical exports, including through courier service.
The Foreign Trade Policy restrictions on State Trading Enterprises shall not apply to SEZ manufacturing Units. Provided that export of iron ore shall be subject to conditions as may be laid down by the Central Government from time to time.
Minimum export price and requirements of export in consumer pack as provided for in the Foreign Trade Policy shall apply in case the raw materials are procured indigenously and exported without further processing or manufacturing activities.
The export of textile items shall be governed by bilateral agreements, if any.
A Unit may export free samples without any limit, including samples made in wax moulds or silver mould or non-precious metal alloy or rubber moulds through all permissible modes of export.
The annual review of performance of unit and compliance with the conditions of approval shall be undertaken by Approval Committee on the basis of Annual Performance Report (in Form I) duly certified by an independent Chartered Accountant before the end of the first quarter of the following
Units, which have not completed one year of operation from the date of commencement of production, will not be monitored. In case a unit has completed less than five years from the date of commencement of production, it will be monitored for the number of completed years. Annual monitoring in the cases of old units which have completed more than five years will be undertaken for only such number of years which fall in the subsequent block/s of five years.
The Units are only required to achieve Positive Net Foreign Exchange to be calculated cumulatively for a period of five years from the commencement of production:
NFE = (A-B) where
- A is the sum of physical exports in free foreign exchange and deemed exports (as per Rule 53
of the SEZ Rules)
- B is the sum of the imported and domestically procured raw materials and consumables along
with the amortised value (10% per year over a 10-year period) of the capital goods and
foreign technical know-how fees
Although both EOUs and SEZs, were initiated to boost exports, there are differences between the two. An EOU can be set up anywhere in the country, provided it meets the scheme’s criteria. On the other hand, an SEZ is a specially demarcated enclave that is deemed to be outside the Customs
jurisdiction and therefore, a foreign territory. Thus, any sale made from an SEZ to DTA is considered as import for the DTA unit. Moreover, any supply from DTA to an SEZ is considered as export. On the other hand supplies from DTA to an EOU are considered as deemed exports.
Being a clearly demarcated area, there is substantial control over the physical movement of goods to and from SEZs, but the same cannot be said about EOUs. In terms of the fiscal treatment, SEZs are zero rates and hence exempt from payment of GST while in the case of EOUs, the principle of refund
of GST paid is applicable.
Minimum investment in plant and machinery and building is Rs 1 crore for EOUs. This should be before commencement of commercial production, there is no such limit for SEZ.
More questions? Seek help of our experts