SEZs: Should you relocate your business to a Special Economic Zone?

SEZs: Should you relocate your business to a Special Economic Zone?. As India aspires to become a $5 trillion economy by 2025, Special Economic Zones (SEZ) become far more relevant than ever before.
Imagine a large industrial area - full of the latest manufacturing equipment, data security, service apparatus like high speed WiFi, processing facilities, power generation and connectivity to transport hubs. That’s an ideal SEZ for you. In this article, our experts at Compliance Calendar simplify the unique advantages offered by Special Economic Zones to your business and address frequent questions on the same.
With the aim of boosting exports of both services and goods and promoting investment from foreign sources, the Special Economic Zones Act, 2005 was passed.
Before we begin our discussion on whether shifting your existing unit or setting up your new unit in a SEZ is worthwhile, let us first take a look at specific advantages that a SEZ offers to its business units.
Duty Free Imports

Duty- free economic area : Even though the SEZ is very much a part of Indian territory; for the purpose of duty exemption, the government treats the area designated as a SEZ as a duty-free import area, outside of Indian taxable territory. This means that you can import raw materials, machinery or services from abroad, for the consumption in your business, without taxation.

No license needed for import: In addition to tax free imports, you also do not need registration for an import license if you operate from a SEZ.

No routine examination by customs bodies: Ancillary to the above mentioned advantages, your import/export cargo would not be subject to routine examination by customs authorities in India.

Single window clearances are available in most states, for taxation, labour and other routine licenses.

Income Tax and GST Exemption

100% income tax exemption on export income: Under the Income Tax Act, your business gets a 100% exemption from taxation on export income for a period of five years. This exemption gets reduced to 50% for the next five years. This exemption, however, is restricted to units commencing operations before March 31, 2020.

Capital Gains exemption: If an existing unit in an urban area transfers its assets to a Special Economic Zone, additional capital gains exemptions under Section 54 of the Income Tax Act are available. This includes purchase of machinery, acquisition of land and shifting of original assets to SEZ.

GST: Supplies to a unit located in SEZ are zero-rated. Thus, for your business located in a SEZ, the supplier would be eligible to claim a refund of input taxes. However, for outbound supplies from the unit in the SEZ, the receiving business has to pay applicable IGST or import duties.

External Commercial Borrowings for units in a SEZ : Units located in SEZ are eligible to raise foreign currency loans from commercial entities abroad. This can be utilised for the purchase of capital and non capital goods. Compliance Calendar LLP routinely assists its diverse clientele in obtaining funding from multiple sources at the best possible terms.
Sectoral-composition of SEZs in various states:
Each SEZ that is focused on a specific product category, offers a bouquet of opportunities including plug and play facilities for faster manufacturing, specific heavy capital and industrial machinery and supply chain connectivity. With over 300 operational SEZs in India, you can find a SEZ catering to your specific business requirements broadly in the following industries:

Agro processing

Aluminium

Aviation

Mineral based industries

Biotechnology

Engineering and metallurgical goods

Footwear and Leather products

Gems and Jewellery

Pharmaceutical and Chemicals

Textile and apparel

Granite processing

Power and solar energy

IT, ITES, electronic hardware and software

Tracing India’s performance between 2005 and 2021
Based on the latest data available, there has been substantial increase in exports, investments and employment, since the passing of the SEZ Act of 2005.

Exports: Exports worth INR 22,840 crores (2005-06) have increased to over INR 6 lac crores (2020-21).

Investment: Investments which were just INR 4,035 crores (2005-06) have now increased to over INR 6 lac crores (2020-21).

Employment: Employment data shows that 1,34,704 persons (2005-06) employed in export-import business, has now increased to more than 23 lac persons (2020-21).

How is a new unit allowed to set base in a SEZ?

An Approval Committee is constituted for every SEZ. There are currently over 370 SEZs in India, across all states. This Committee grants approval for provision of services, setting up of Units for manufacturing, warehousing or trading in SEZ.

A proposal may be submitted to the Development Commissioner.

Export Promotion Councils have also been set up to authorise the issue of Registration and Membership Certificates to 100% Export Oriented Units, SEZ units and the developers of the same.

For more details on setting up in a new SEZ or moving your existing business, reach out to our legal and compliance experts at Compliance Calendar. Our talented team of experienced professionals are the best in the industry to guide you on seamlessly obtaining requisite approvals and documentation.
Banking units and International Financial Services Centres in SEZ
The SEZ Act also allows Off-shore banking units to be set up in the SEZ. This can be done on approval from the Reserve Bank of India. The Central Government can grant permission for establishing International Financial Services Centres, (such as the one of GIFT City, Gujarat) which provide essential international banking facilities. The income of such offshore banking units are also eligible for a tax holiday of 100% of such income for five years.
Designated Courts for offences
Every state government designates a special court for trying offences arising in the SEZ, including civil and notified economic offences. This ensures faster legal proceedings and timely resolution, as opposed to long delays in the regular judicial setup.
Would you have to pay customs duty for exports from a SEZ?
No, the SEZ Act exempts all entrepreneurs and business units located in the SEZ from payment of customs duty, on services or goods being supplied outside of India. Moreover, your business becomes eligible for several duty drawback schemes for taxes and incidental expenses incurred while exporting your goods (such as the Duty Drawback Scheme by the Ministry of Commerce).
SEZ and Work From Home Rules
In a notification released in July, 2022, the Ministry of Commerce has allowed work from home for a maximum period of one year for 50% of employees. There’s also additional flexibility for expanding the limit to more than 50% of employees, on permission from the Development Commissioner of SEZs.
SEZ units will provide infrastructural aid in terms of taking of equipment by employees, secure communication and connectivity for enabling work from home.
Product and industry-specific SEZs

Airport-led SEZs : With the massive increase in investment and returns on SEZ units, most states have started creating industry-led For instance, Telangana offers an airport-led multi-product Special Economic Zone, with runway access and free trade warehousing zones. This is ideal for perishable products, consumer goods and latest technology that relies on air-based shipments.

Defence based SEZs are a key focus in Uttar Pradesh, offering cutting edge technologies for manufacturing of defence equipment in India.

Port-led SEZs : In coastal states like Gujarat, Maharashtra and Karnataka, there is availability of port-based special economic zones that improve access and value addition for export-import businesses. These provide enhanced processing, warehousing and shipping arrangements.

Concerns for business units

Net Positive Foreign Exchange Requirements: The SEZ Act specifies that every unit that sets base in the SEZ must attain a positive foreign exchange balance within five years from commencing production. This is determined by subtracting the value of imported inputs by the business, input services and capital goods and other payments made in foreign exchange from the value of exports made by it. A business encountering post-production financial difficulties may find itself embroiled in legal action.

Lack of facilities in certain states, especially if you deal in niche categories like petroleum processing, renewable energy etc, may not be available in all states.

DESH - Development of Enterprise & Service Hubs Scheme
Whether your business caters to the manufacturing or service sector, the Special Economic Zones scheme offers distinct advantages. However, many states currently have under-utilisation of capacity and issues in land grants etc. This has necessitated a new scheme, which is still at the drafting phase. This new scheme aims to develop integrated manufacturing and service hubs. Our experts at Compliance Calendar are closely monitoring this development, to keep your business apprised of the latest news on this. You may reach out at info@ccoffice.in if you think we can help you out.

As India aspires to become a $5 trillion economy by 2025, Special Economic Zones (SEZ) become far more relevant than ever before.

Imagine a large industrial area - full of the latest manufacturing equipment, data security, service apparatus like high speed WiFi, processing facilities, power generation and connectivity to transport hubs. That’s an ideal SEZ for you. In this article, our experts at Compliance Calendar simplify the unique advantages offered by Special Economic Zones to your business and address frequent questions on the same.

With the aim of boosting exports of both services and goods and promoting investment from foreign sources, the Special Economic Zones Act, 2005 was passed.

Before we begin our discussion on whether shifting your existing unit or setting up your new unit in a SEZ is worthwhile, let us first take a look at specific advantages that a SEZ offers to its business units.

Duty Free Imports

Duty- free economic area : Even though the SEZ is very much a part of Indian territory; for the purpose of duty exemption, the government treats the area designated as a SEZ as a duty-free import area, outside of Indian taxable territory. This means that you can import raw materials, machinery or services from abroad, for the consumption in your business, without taxation.
No license needed for import: In addition to tax free imports, you also do not need registration for an import license if you operate from a SEZ.
No routine examination by customs bodies: Ancillary to the above mentioned advantages, your import/export cargo would not be subject to routine examination by customs authorities in India.
Single window clearances are available in most states, for taxation, labour and other routine licenses.

Income Tax and GST Exemption

100% income tax exemption on export income: Under the Income Tax Act, your business gets a 100% exemption from taxation on export income for a period of five years. This exemption gets reduced to 50% for the next five years. This exemption, however, is restricted to units commencing operations before March 31, 2020.
Capital Gains exemption: If an existing unit in an urban area transfers its assets to a Special Economic Zone, additional capital gains exemptions under Section 54 of the Income Tax Act are available. This includes purchase of machinery, acquisition of land and shifting of original assets to SEZ.
GST: Supplies to a unit located in SEZ are zero-rated. Thus, for your business located in a SEZ, the supplier would be eligible to claim a refund of input taxes. However, for outbound supplies from the unit in the SEZ, the receiving business has to pay applicable IGST or import duties.

External Commercial Borrowings for units in a SEZ : Units located in SEZ are eligible to raise foreign currency loans from commercial entities abroad. This can be utilised for the purchase of capital and non capital goods. Compliance Calendar LLP routinely assists its diverse clientele in obtaining funding from multiple sources at the best possible terms.

Sectoral-composition of SEZs in various states:

Each SEZ that is focused on a specific product category, offers a bouquet of opportunities including plug and play facilities for faster manufacturing, specific heavy capital and industrial machinery and supply chain connectivity. With over 300 operational SEZs in India, you can find a SEZ catering to your specific business requirements broadly in the following industries:

Agro processing
Aluminium
Aviation
Mineral based industries
Biotechnology
Engineering and metallurgical goods
Footwear and Leather products
Gems and Jewellery
Pharmaceutical and Chemicals
Textile and apparel
Granite processing
Power and solar energy
IT, ITES, electronic hardware and software

Tracing India’s performance between 2005 and 2021

Based on the latest data available, there has been substantial increase in exports, investments and employment, since the passing of the SEZ Act of 2005.

Exports: Exports worth INR 22,840 crores (2005-06) have increased to over INR 6 lac crores (2020-21).
Investment: Investments which were just INR 4,035 crores (2005-06) have now increased to over INR 6 lac crores (2020-21).
Employment: Employment data shows that 1,34,704 persons (2005-06) employed in export-import business, has now increased to more than 23 lac persons (2020-21).

How is a new unit allowed to set base in a SEZ?

An Approval Committee is constituted for every SEZ. There are currently over 370 SEZs in India, across all states. This Committee grants approval for provision of services, setting up of Units for manufacturing, warehousing or trading in SEZ.
A proposal may be submitted to the Development Commissioner.
Export Promotion Councils have also been set up to authorise the issue of Registration and Membership Certificates to 100% Export Oriented Units, SEZ units and the developers of the same.

Banking units and International Financial Services Centres in SEZ

The SEZ Act also allows Off-shore banking units to be set up in the SEZ. This can be done on approval from the Reserve Bank of India. The Central Government can grant permission for establishing International Financial Services Centres, (such as the one of GIFT City, Gujarat) which provide essential international banking facilities. The income of such offshore banking units are also eligible for a tax holiday of 100% of such income for five years.

Designated Courts for offences

Every state government designates a special court for trying offences arising in the SEZ, including civil and notified economic offences. This ensures faster legal proceedings and timely resolution, as opposed to long delays in the regular judicial setup.

Would you have to pay customs duty for exports from a SEZ?

No, the SEZ Act exempts all entrepreneurs and business units located in the SEZ from payment of customs duty, on services or goods being supplied outside of India. Moreover, your business becomes eligible for several duty drawback schemes for taxes and incidental expenses incurred while exporting your goods (such as the Duty Drawback Scheme by the Ministry of Commerce).

SEZ and Work From Home Rules

In a notification released in July, 2022, the Ministry of Commerce has allowed work from home for a maximum period of one year for 50% of employees. There’s also additional flexibility for expanding the limit to more than 50% of employees, on permission from the Development Commissioner of SEZs.

SEZ units will provide infrastructural aid in terms of taking of equipment by employees, secure communication and connectivity for enabling work from home.

Product and industry-specific SEZs

Airport-led SEZs : With the massive increase in investment and returns on SEZ units, most states have started creating industry-led For instance, Telangana offers an airport-led multi-product Special Economic Zone, with runway access and free trade warehousing zones. This is ideal for perishable products, consumer goods and latest technology that relies on air-based shipments.
Defence based SEZs are a key focus in Uttar Pradesh, offering cutting edge technologies for manufacturing of defence equipment in India.
Port-led SEZs : In coastal states like Gujarat, Maharashtra and Karnataka, there is availability of port-based special economic zones that improve access and value addition for export-import businesses. These provide enhanced processing, warehousing and shipping arrangements.

Concerns for business units

Net Positive Foreign Exchange Requirements: The SEZ Act specifies that every unit that sets base in the SEZ must attain a positive foreign exchange balance within five years from commencing production. This is determined by subtracting the value of imported inputs by the business, input services and capital goods and other payments made in foreign exchange from the value of exports made by it. A business encountering post-production financial difficulties may find itself embroiled in legal action.
Lack of facilities in certain states, especially if you deal in niche categories like petroleum processing, renewable energy etc, may not be available in all states.

DESH - Development of Enterprise & Service Hubs Scheme

Whether your business caters to the manufacturing or service sector, the Special Economic Zones scheme offers distinct advantages. However, many states currently have under-utilisation of capacity and issues in land grants etc. This has necessitated a new scheme, which is still at the drafting phase. This new scheme aims to develop integrated manufacturing and service hubs. Our experts at Compliance Calendar are closely monitoring this development, to keep your business apprised of the latest news on this. You may reach out at info@ccoffice.in if you think we can help you out.

SEZs: Should you relocate your business to a Special Economic Zone?

Share this article:

Search more articles:

You may also like