Special Economic Zones (“SEZs”) are specified delineated duty free territories and deemed to be foreign territories for the purpose of trade.
The SEZ policy was first introduced in April 2000, as a part of the Export-Import policy of the country. However, in its initial form the concept was not able to inspire enough confidence for investors to commit substantial funds for development of infrastructure. But now it is realised that SEZ concept is surely a step in the right direction.
Realizing the need for promoting the sunrise sectors of Information technology, the area requirement for this sector has been reduced to 10 hectares (being approx 25 acres).
Over the past decade, the Information Technology (IT) industry has become one of the fastest growing industries in India. In recognition of the potential of the IT sector to transform the Indian economy, and to provide the requisite impetus special concessions have been afforded under the SEZ policy for this sector.
Basic Conditions for setting up an IT SEZ:
- Minimum land area requirement is only 10 hectares (approx. 24.7 acres).
- Land should be vacant and contiguous.
- Minimum built up processing area should be one lakh square meters.
- At least 50 % of the area should be processing area.
- In case the land is held on a ‘lease-hold’ basis, then the lease period should comprise of a minimum term of 20 years.
- 24 hours uninterrupted power supply at stable frequency in the zone.
- Reliable connectivity for uninterrupted and secure data transmission.
- Provision for central air-conditioning system.
- A ready to use, furnished plug and pay facility for end users.
- Use of plant or machinery previously used for any purpose in domestic tariff area or conversion/ relocation of existing STP/ EOU/ EHTP units into SEZ units would not be permitted.
Eligible Services
SEZ Rules, 2006 have expanded the scope of services that can be undertaken by an SEZ unit and has defined Services to include, research and development services, computer software services, to include information enabled services such as back-office operations, call centers, content development or animation, data processing, engineering and design, graphic information system services, human resources services, insurance claim processing, legal data bases, medical transcription, payroll, remote maintenance, revenue accounting, support centers and web-site services, other business services, amongst others.
Tax Benefits:
Section 10AA introduced under the Indian Income Tax Act, 1961 (“the Act”) provides for deduction to SEZ units commencing manufacturing or producing articles or things or which start providing services from April 1, 2005 as under. Units set up prior to April 1, 2005 would be governed by the existing provisions of section 10A
Quantum of deduction |
SEZ units set up on or after April 1, 2002 but before March 31, 2005 |
SEZ units set up on or after April 1, 2005 |
100% of export profits |
First 5 years starting from the year in which manufacture/ provision of services commences |
First 5 years starting from the year in which manufacture/ provision of services commences |
50% of export profits |
Next 2 years |
Next 5 years |
Upto 50% of export profits transferred to SEZ Reinvestment Reserve Account, subject to conditions |
Next 3 years |
Next 5 years |
The quantum of deduction would be computed as follows:
Profits of the business of the undertaking x Export turnover of unit
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Total turnover of business of the assessee
Fiscal Benefits:
Indirect tax –Developers and units |
Direct tax – SEZ developers |
Direct tax – SEZ units |
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Exemption from customs duty on imports into or exports from SEZ
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Exemption from excise duty on procurement of goods from DTA
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Exemption from service tax on service provided to an SEZ
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No specific exemption for services provided by an SEZ unit. Same is subject to ‘export of services rules’
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Exemption from central sales tax
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Drawback of duties paid on goods/services bought from outside the SEZ area
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10-year tax holiday to SEZ developers
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Exemption from levy of minimum alternate tax at 8.415% (on book profits)
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Exemption from levy of dividend distribution tax at 14.025%
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Exemption on income earned by investors from investments made in developer company
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Exemption from levy of minimum alternate tax at 8.415% (on book profits)
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Exemption from levy of capital gains tax (ranging between 20% to 34%) arising on transfer of assets on shifting an undertaking from urban area to SEZ
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Other Benefits:
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A unit in SEZ may import or procure all types of goods and services from Domestic Tariff Area for creating a central facility for software development without payment of duty, taxes or cess
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Software units may be allowed to use the computer system for training purpose (including commercial training) provided that no computer terminal shall be installed outside the SEZ premises for this purpose.
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Environmental Clearance is one area where Ministry of Environment and Forests (MOEF) will consider the Board’s approval equivalent to Central level clearance for IT SEZs
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