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India has been a pioneer in Asia, establishing Export Processing Zones (EPZs) to boost its exports. In 2000, the country introduced Special Economic Zones (SEZs) to attract foreign investment and create a favorable environment for exports. This initiative has proven successful in propelling India’s export growth. This blog explores the key aspects of SEZs, including their objectives, benefits, the process for setting up a unit, and recent regulatory updates.
Special Economic Zones (SEZs) are designated duty-free enclaves that operate under distinct economic laws, separate from the rest of the country. This area is free from high excise duties and charges by the government, and they provide tax exemption on duties (IT, excise, customs, sales) and subsidies on the use of water and electricity. It is an entity outside India’s customs boundaries in relation to authorized operations. These zones aim to provide a conducive environment for export-oriented industries by offering various incentives and exemptions. SEZs have been instrumental in transforming regions into thriving economic hubs, not just in India but globally, with successful implementations in countries like China, the Philippines, and Russia.
Any person, whether an individual, company, firm, or cooperative society, can apply to set up a special economic zone (SEZ). SEZ can be established either jointly or separately by the central government, any State Government, or any other person for manufacturing goods or rendering services, or both. Asian countries like India were the first to recognize the efficiency of the export processing zone (EPZ) model, which is used to promote exports.
Table of Contents
The Main Objectives of Establishing a SEZ
The primary objectives of establishing SEZs in India include:
- Generating Economic Activity: SEZs are designed to boost economic growth by encouraging industrial and commercial activities.
- Promoting Exports: SEZs facilitate the production and export of goods and services, contributing significantly to India’s export earnings.
- Attracting Investments: SEZs aim to attract both domestic and foreign investments by providing a favorable business environment.
- Creating Employment Opportunities: The development of SEZs has led to the creation of numerous jobs across various sectors.
- Infrastructure Development: SEZs contribute to the development of state-of-the-art infrastructure, including roads, ports, and utilities.
- Exposure to Global Markets: SEZs offer businesses access to advanced technology and global market dynamics, enhancing their competitiveness.
Benefits And Incentives of Setting Up a Business Unit in a SEZ
Setting up a business unit in an SEZ offers numerous advantages, including:
- Tax Benefits: Businesses enjoy tax holidays, income tax exemptions, and exemptions from excise and customs duties.
- Liberal Labor Regulations: SEZs provide flexibility in labor laws, making it easier for businesses to operate.
- Streamlined Approval Processes: A single-window system ensures that businesses can obtain necessary approvals quickly and efficiently.
- Liberal Foreign Direct Investment (FDI) Norms: SEZs offer a liberal approach to FDI, encouraging more investment from abroad.
- Increased Capital Account Convertibility: Businesses in SEZs benefit from greater flexibility in capital transactions.
- Full Repatriation of Profits: Companies can repatriate their profits without restrictions.
- Exemptions from Environmental Laws: SEZ units are exempt from certain environmental regulations, making operations smoother.
Documents Required for Setting Up a SEZ In India
The following documents, along with an undertaking and affidavit, are required to be submitted in Form A for setting up of SEZ:
- Name of the applicant
- Proposed area of SEZ
- Status of recommendation of proposal by the state government, if available
- Whether the proposal is for formal approval or in-principle approval
- Whether it is a multi-product SEZ
- Whether it is a sector-specific SEZ? If yes, the details of the sector thereon
- Projected investment in the project
- Projected export from the project
- Projected employment generation from the project
- Source of fund of project
- Net worth of the applicant
- Extent of foreign direct investment (FDI), if any
- Source of FDI
Procedure for Setting Up an SEZ in India
Setting up an SEZ involves several steps, each crucial for obtaining the necessary approvals and starting operations. Here’s a simplified guide:
1. Application Process: Obtaining a SEZ Approval
- Form A Submission: The first step is to submit an application in Form A to the state government. The proposal can also be made directly to the Board of Approval (BoA) after identifying the area for the SEZ, but in this case, the applicant is required to obtain the approval of the state government simultaneously.
- State Government’s Role: The state government reviews the proposal and forwards it to the BoA with its recommendations.
- BoA’s Decision: The BoA may approve, modify, or reject the proposal based on the merits.
- If approval is given without modification: The Board is obligated to communicate the approval to the central government.
- In case of approval with modification: The Board is required to communicate the modification to the applicant or the state government of the concerned applicant. 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.
- If the proposal is rejected: The Board is required to record the reason for rejection and communicate it to the central government. The central government, in turn, would intimate the same to the person or the state government.
- Approved Proposal: Approved proposals are communicated to the central government, which issues the final letter of approval.
2. Setting Up a Unit in an SEZ:
- Form-F Submission: Companies looking to establish a unit in an SEZ must Form-F Submission. To apply, the company needs to fill out Form-F, as stipulated by SEZ rules. The applicants filing the form need to submit it online through the SEZ online system using the module New Unit Application (NUA).The steps for NUA are summarized below:
- Creating user ID: To set up a new unit in SEZ, the user, for registration, shall log in to the SEZ online system and create a new user ID.
- Raising NUA request: After registration, users are required to fill out a “new user application” providing the necessary details, which include general details of the company, details of directors, items/products in which the company deals, and other details like investments, equity, for-ex, applicant and marketing collaborations of the company.
- Submitting Form- F and other documents: Applicants need to upload the below-listed documents with a filled Form – F, as mentioned in the “Add Documents” field.These enlisted documents have to be submitted physically in DC’s office:
- Copy of incorporation certificate, Articles, and Memorandum of Association of the company
- Demand draft of INR 5000/- in favor of “The Pay & Accounts Officer, < payable location>”
- Copy of company’s profile, directors’ profile and project report
- Copy of board resolution
- List of imported and Indigenous capital goods
- Forms 18 and 32 filed with ROC
- Copy of residential proof and identity proof of directors
- Income tax returns of last 3 years
- Copy of audited financials
- Copy of IEC of the company
- Copy of PAN of the company
- Copy of term sheet for incubation premises
- Copy of term sheet for main premises
- Letter for marketing/buyback plan
- List of directors with their details
- Letter mentioning website and e-mail address
- Undertaking for pollution control
- Affidavit
- Rectification of deficiencies: If the DC may raise a demand for additional documents, the applicant shall submit the documents within the stipulated time.
- Approval and Registration: The Development Commissioner’s (DC) office reviews the application and, upon approval, facilitates the registration process.Here is the detailed process.
- Approval of request: After verifying all the documents submitted and other requirements fulfilled by the applicant, DC is authorized to approve the request of NUA. Further to the approval, an email describing the supplementary will be sent to the applicant on the registered email address.
- Payment of registration fee: After approval from the DC office, a link for payment of the registration fee will be enabled, enquiring about a few payment details. On payment of the fee, an NSDL Database Management Ltd. (NDML) representative will verify receipt of payment and authorize the payment upon verification of a valid payment entry in the SEZ online system. Upon authorization of payment, an applicant can create administrator and operational user IDs.
- Lease Agreement: After the letter of approval is accepted, the unit is expected to enter into a lease agreement with the developer of the SEZ in which it is commencing business. After entering into the agreement, the unit will have to enter the lease deed details in the SEZ online system and submit them online to the DC’s office. The unit shall also have to submit a copy of the lease deed to the DC’s office in physical form.
3. Commencement of Operations:
Intimation of date of commencement: As soon as the unit commences production, the date of commencement has to be intimated to the DC’s office. The unit shall intimate the date of incorporation online through the SEZ system. In addition, the DC may also require the unit to submit supporting documents in physical form.
Special Economic Zones Rules, 2024
| RULES | DATES |
| SEZ Rules, 2006 – Amendment to rule | 05-Feb-2024 |
| SEZ Rules, 2006 – Second Amendment to rule to 21B | 14-Mar-2024 |
| Third Amendment in Rule 29A of the SEZ Rules, 2006 | 06-Jun-2024 |
| Fourth Amendment in Rule 18 of the SEZ Rules, 2006 | 20-Jun-2024 |
SEZ Rules, 2006 – Amendment to rule
In the Special Economic Zones Rules of 2006, sub-rule (6) of rule 27 has been amended to include the following: “After the word ‘Agencies,’ insert the words ‘or free of charge from the foreign buyer and Export thereof to the same foreign buyer.”
This addition allows Units or Developers within Special Economic Zones to import or procure goods from the Domestic Tariff Area without paying duty, taxes, or cess. They can also procure goods from other units within the same or different Special Economic Zones, as well as from Export Oriented Units, Software Technology Park Units, Electronic Hardware Technology Park Units, Bio-technology Park Units, or warehouses.
SEZ Rules, 2006 – Second Amendment to rule to 21B
In the Special Economic Zones Rules, 2006, rule 21B has been updated to include the following: “Wherever the words ‘aircraft leasing’ appear, they should now be replaced with ‘aircraft or ship leasing.”
This modification allows Units engaged in aircraft or ship leasing activities to operate within the framework of the SEZ rules.
Benefit: The amendment acknowledges the significance of both aircraft and ship leasing in the context of Special Economic Zones, facilitating smoother operations and encouraging investment in these sectors.
Third Amendment in Rule 29A of the SEZ Rules, 2006
In the Special Economic Zones Rules, 2006, rule 29A has been updated as follows:
“Wherever the word ‘aircraft’ appears, it should now be replaced with ‘aircraft or aircraft engine.”
Meaning: This modification allows Units within the International Financial Services Centre to engage in the import, export, procurement from, or supply to the Domestic Tariff Area of both aircraft and aircraft engines.
Benefit: The amendment aims to facilitate smoother operations and encourage investment in these sectors.
Fourth Amendment in Rule 18 of the SEZ Rules, 2006
In the Special Economic Zones Rules, 2006, rule 18 has been updated as follows:
Reconditioning, Repair, and Re-engineering: “Units within Special Economic Zones are now allowed to engage in reconditioning, repair, and re-engineering activities.”
Meaning: Reconditioning, repair and re-engineering may be permitted only when export shall have one to one correlation with imports i.e. when a product is imported for reconditioning, repair and re-engineering, it must be exported back after its reconditioning or repairing or re-engineering as the case maybe.
Benefit: This provision encourages efficient utilization of resources and promotes economic activity within the SEZs.
Non-Hazardous Metal and Metal-Alloy Wastes: “Only non-hazardous metal and metal-alloy wastes, in metallic and non-dispersible form, are eligible for sale in the Domestic Tariff Area.”
Meaning:These wastes must not contain contaminants listed against Basel No. B1010 in Part D of Schedule III of the Hazardous and Other Wastes (Management and Transboundary Movement) Rules, 2016. The sale of such wastes is subject to payment of applicable customs duty. Import of these wastes is permitted only to the actual user or to traders authorized by the Verification of specified documents is required by the Customs Authority to ensure compliance with waste management regulations.
These changes reflect India’s commitment to maintaining a dynamic and investor-friendly SEZ policy that balances economic growth with environmental considerations.
Why Consider Setting Up a SEZ?
SEZs in India offer a unique blend of benefits, from tax incentives to streamlined processes, making them an attractive option for businesses looking to expand their operations. With ongoing regulatory updates and a focus on creating a favorable business environment, SEZs continue to play a crucial role in India’s economic landscape. Whether you are a domestic company or a foreign investor, SEZs provide a gateway to explore new opportunities and drive growth.
Are you ready to take advantage of the opportunities that SEZs in India offer?
We will help you register in an SEZ and reduce the complexity of growing your business. Contact us for guidance on setting up your business in an SEZ and unlocking its full potential.
FAQs
SEZ in India is especially a delimited enclave. The economic laws in this geographical are different from the prevailing laws in other parts of India. An SEZ is deemed foreign territory for matters related to trade tariffs, duties, and operations. The SEZ Act of 2005 governs all SEZs’ regulatory and legal aspects and units under SEZs.
The primary objectives of the SEZ Act are as follows:
For setting up a unit in Private Special Economic Zone, the applicant has to apply online and submit the print out of the online filled in Form F, duly, signed along with the required documents.
The Indian government had long used export processing zones (EPZs) to promote exports. In fact, Asia’s first EPZ was established in 1965 at Kandla, Gujarat state.
There are nearly 5,400 SEZs today, more than 1,000 of which were established in the last five years.
The guidelines (determined in Section 5 of the SEZ Act, 2005) for the consent of SEZs are
- Generation of additional economic activity
- Promotion of exports of goods and services
- Promotion of investment from domestic and foreign sources
- Formation of employment opportunities
- Development of infrastructural facilities
- Maintenance of supremacy and integrity of India
The incentives and facilities provided to the units in SEZs for attracting investments into the SEZs, includes:
- Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
- 100% Income Tax exemption on export income for SEZ for first 5 years, 50% for next 5 years thereafter and 50% of the worked back export profit for next 5 years.
- Exemption from Central Sales Tax, Exemption from Service Tax and Exemption from State sales tax. These have now subsumed into GST and supplies to SEZs are zero rated under IGST Act, 2017.
- Other levies as imposed by the particular State Governments.
- Single window clearance for Central and State level approvals.
- Supplies to SEZ are zero rated under IGST Act, 2017.
The key entities in the SEZ scheme are:
Department of Commerce (DOC)
The function of DOC is the and analyzing of the strategy including regulatory structure for SEZs. The highest decision making body for SEZs namely the Board of Approval (BOA) is also managed by the DOC.
Office of Development Commissioner
The office of the Development Commissioner (DC) administers the regulatory framework of SEZs. This includes administrative approvals, whichever by the Unit Approval Committee or the DC on file. The customs officers are manage for the customs clearances of goods and services to and from the SEZ.
Developer
A Developer means a person who, or a State Government which, has been allowed 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 accepted SEZ. He would need to enter into an agreement with the Developer. The proposal for any co-developer, if approved by the BOA, is allowed an LOA by the BOA for the same.
SEZ Units
Units are entities that are esentally who have been assigned LOA for engaging in exports (including deemed exports), imports, domestic sourcing and domestic sales of goods and services under the SEZ managing framework. It also includes Offshore Banking Units and Units in an International Financial Services Centre.
The developer requires a certificate from the concerned State Government or its authorized agency stating that the developer(s) have:
- Legal possession
- Irrevocable rights to develop the said area as SEZ
- The said area is free from all encumbrances
The State Government shall, while advicing a scheme for setting up of Special Economic Zone to the Board indicate whether the proposed area falls under reserved or ecologically fragile area as may be specified by the concerned authority. Where the Board approves a proposal received for setting up an SEZ, the person shall obtain concurrence of the State Government within six months from the date of such approval.
The State Government is not directed but shall undertake that the following are made available in the State to the suggested 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 acquired 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.
- Permit 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.
- Legation 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 of 1947).
- Providing single point authorization system to the Developer and unit under the State Acts and rules
The unit may opt out of Special Economic Zone with the sanction of the DC and such exit shall be subject to payment of relevant duties on the imported or innate capital goods, raw materials, components, consumables, spares and finished goods in stock, if the unit has not attained positive NFE, the exit shall be subject to penalty that may be inflicted under the Foreign Trade (Development and Regulation) Act, 1992.
The following situations shall apply on the exit of the Unit:
- Penalty inflicted by the competent control would be paid and in case an appeal against an order imposing penalty is pending, exit shall be contemplated if the unit has acquired a stay order from competent authority and has acquired a Bank Guarantee for the penalty determined by the appropriate authority unless the appeal authority makes a specific order exempted the unit from this requirement;
- In case the unit has failed to fulfill the terms and conditions of the LOA and penal opeartions are to be taken up or are in process, a legal undertaking for payment of penalties, that may be imposed, shall be accomplished with the Development Commissioner;
- The unit shall continue to be managed a unit till the date of final exit.
