What is Special Economic Zone (SEZ)?
Special Economic Zone or SEZ are dedicated geographical regions present in a country, providing businesses with simpler tax and legal compliances. In a manner of saying, SEZ can be considered as a Trade Capacity Development tool, which has been established to boost the economic growth of the nation.
The Special Economic Zones are deemed as foreign territory for trading operations and taxation purposes, i.e. any goods or services supplied to the SEZ shall be treated as Zero-Rated supply and attract 0% GST. Conversely, any supply made from the SEZ shall be treated as a normal supply and normal GST rates, as applicable, may apply on such transactions.
In India, prior to the implementation of SEZ, Export Processing Zones (EPZ) were being established for similar gains. However, on account of the infrastructural and bureaucratic challenges faced by EPZ, SEZ was introduced in India on April 1, 2000.
[Trivia: India’s EPZ at Kandla, Gujrat, was the first EPZ to be established in Asia, in the year 1965.]
Meaning of SEZ under GST
“As per Section 2(19) of IGST Act, Special Economic Zone shall have the same meaning as assigned to it in clause (za) of Section 2 of the Special Economic Zones Act, 2005.
The specific clause (za) of Section 2 provides that “Special Economic Zone in GST” means each Special Economic Zone notified under the proviso 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.
It is pertinent to refer clause (i) of Section 2 which defines that “Domestic Tariff Area” means the whole of India but does not include the areas of the Special Economic Zones.
Further, exports defined under Section 2(m) of the SEZ Act as “Export” means-
- Taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or
- Supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or
- Supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone.”
What is the need for Special Economic Zone?
The Prime objective for the implementation of SEZ was to augment the foreign investment in the country while providing an internationally competitive & hassle-free environment for the exporter in India. The presence of SEZ in a country not only promotes export from a country but also ensures a level playing ground is enabled for domestic enterprises and manufacturers, for them to be able to scale the global competition.
Moreover, a well-located SEZ can help in balancing the growth of the economy and enhance economic activities, such as
- Rapid Economic Growth
- Better Employee Opportunities
- Improved Foreign Export
- Enhanced Brand value
- Better Revenue Collection, etc.,
in the given area.
How does the Special Economic Zone function?
Establishing an SEZ requires massive development program, for which the government requires a huge amount of funds. In order to fulfil these requirements, the government seeks potential partners to tie up. In such scenarios, the government is benefited with the financial capabilities and domain expertise of their partners. On the other hand, the partnered organisation enjoys the right to market and perks of SEZ’s relaxed tax laws to increase their revenue-generating capacity. Leading to a win-win situation for both the parties involved
What are the benefits of establishing SEZ?
The key benefits of an SEZ are as follows:
- A unit in SEZ does not require any license for imports
- The Units are only required to achieve Positive Net Foreign Exchange, which is calculated cumulatively for a 5 year period from the commencement of production;
- Full freedom for subcontracting;
- No routine examination by customs authorities of export/import cargo;
- SEZ Developers /Co-Developers and Units enjoy Direct Tax and Indirect Tax benefits as prescribed in the SEZs Act, 2005.
What is the procedure to set up an SEZ in India?
- Any individual, partnership firm, company or co-operative society can apply for setting up of Special Economic Zone in India. These zones can be established jointly or individually by Central Government, State Government or any person for the manufacture of goods or for rendering of services or for both or as a Free Trade and Warehousing Zone. Procedure for setting up of Special Economic Zone (SEZ) as provided under section 3 of the Special Economic Zone Act, 2005 are as follow:
- Any person willing to set up a Special Economic Zone has to make a proposal to the State Government. The application for proposal for setting up of Special Economic Zone is to be made in form A. The proposal can be made only after identifying the area for setting up of SEZ. Proposal for setting up of SEZ can even directly be made before the Board.
- In case a proposal is directly made against Board, the person, after getting approval from the Board, is required to obtain the concurrence of the State Government.
- On receipt of the proposal, the State Government shall forward the same to the Board along with its recommendation.
- The Central Government has the right to prescribe various requirement for setting up of Special Economic Zone. The minimum area of land required for setting up of business, terms and conditions for various authorized operations are some of the examples of various requirements which can be prescribed by Central Government.
- Currently, the minimum area requirement for setting up of Special Economic Zone are as follow:
|Sector Specific SEZ||100 hectares|
|IT/ITES/handicrafts SEZ Bio-technology/|
non-conventional energy/gems and
- The Board, on receipt of a proposal, may either approve the proposal subject to such terms and conditions as it may deem fit or may even modify or reject the proposal.
- Final Action of Board on receipt of the proposal:
1. When Board approves the proposal without any modification – In such case, the Board is required to communicate the approval to the Central Government.
2. When Board approves the proposal with modification – In such case, the Board is required to communicate the modification to the person or the State Government of the concerned person. Further, if the modification as proposed by the Board is accepted by the person or the State Government, the Board is required to communicate the same to the Central Government.
3. When Board rejects the proposal – In such case, the Board is required to record the reason for rejection and communicate the same to Central Government. The Central Government, in turn, would intimate the same to the person or the State Government.
- If everything goes well, the Central Government on receipt of communication would issue a letter of approval on such terms and conditions and obligations and entitlements as may be approved by the Board, to the Developer, being the person or the State Government concerned.
What are the Documents Required?
In order to propose for an SEZ set up, the applicant is required to submit the below-given documents in Form A on the SEZ portal along with required undertaking, affidavit and project report.
- Name of the Applicant.
- Proposed Area of Special Economic Zone.
- Status of the recommendation of proposal by the State Government, if available.
- Whether the proposal is for formal approval or in-principle approval?
- Whether it is multi-product SEZ?
- Whether it is sector-specific SEZ? If yes, the details of sector thereon.
- Projected investment in project.
- Projected export from the project.
- Projected employment generation from the project.
- Source of fund of project.
- Net worth of the Applicant.
- Extent of FDI, if any.
- Source of FDI.
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