SEZ India Invest, Kolkata, India
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Myth 1 : Tax benefits available to SEZ units have a sunset clause / specific timeframe  
Reality : No. All the input taxes i.e. Excise, Import duty, WCT, Electricity Duty & service tax, VAT (on inputs for manufacturing for export purposes) etc. are forever exempted in a SEZ. However, the Income Tax is exempted for a period of 15 years i.e. 100% of export profit is exempted from Income Tax for the first 5 years from the date of first exports. For the next 5 year, 50% of export profit is exempt. For the last 5 years, 50% of the ploughed back export profit is exempt from Income Tax. Above benefits are available subject to attainment of positive Net Foreign Exchange (NFE) earning in a block of 5 years from the date of commencement of operations.
Mobile Monopoly
Myth 2 : NFE calculation is a complex equation
Reality : NFE is calculated on a simple formulae i.e. Exports (FOB value of all exports) – Imports (CIF value of all imports) > 0. In simple words, if a unit is bringing in ‘X’ amount foreign exchange i.e. exports and is buying ‘Y’ amount of foreign exchange from the Government and if X is > Y even by 1$, it has achieved a positive NFE.
Myth 3 : SEZ is similar to EOUs and STPIs
Reality :

EOU is a scheme with an applicable sunset clause whereas SEZ is an Act. The SEZ scheme has many advantages over the EOU scheme.

  • Net Foreign Exchange earnings as a percentage is not applicable. Only units have to be NFE (net foreign exchange) positive cumulatively at the end of 5 years.
  • Predetermined value addition is not compulsory.
  • No maturity restriction on external commercial borrowings
  • l; Duty free material could be utilized in five years time instead of one year.
  • Self certification is applicable for imports and exports.
  • Mandatory period of 180 days for receipt of export proceeds has been extended to 360 days.
  • As per Sunset Clause, STPI or EOU's may not be eligible for any Income tax benefit u/s 10B, for exports affected after 31/03/11.
Myth 4 : Supplies from Domestic Tariff Area (DTA) to SEZ Units are “deemed exports”
Reality :

No. Supplies from DTA to SEZ are treated as physical export. The DTA supplier would be entitled to:

  • Drawback/DEPB
  • CST Exemption
  • Exemption from State Levies if provided through notification
  • Discharge of Export Performance if any on the suppliers
  • Income Tax benefit as applicable to physical export under section 80 HHC of the Income Tax
Myth 5 : A Unit situated in a SEZ has to fulfil a large no. of obligations
Reality :

SEZ operations are much easier and only have to perform the following obligations:

  • SEZ units have to achieve positive net foreign exchange earned over five years i.e. Exports (FOB value of all exports) - Imports (CIF value of all imports) > 0. Please see Clause 53 of Chapter VI of the SEZ Rules, 2006 for a more detailed explanation
  • The units have to maintain proper records of accounting
  • Annual Performance Reports must be submitted to the Development Commissioner
  • The units just have to execute a bond with the Development Commissioner and Specified Officer (Customs) for their operations in the SEZ
Myth 6 : SEZ is only Income Tax haven. It does not provide any other benefits to the Units.
Reality :

Apart from a 15 year income tax holiday, following benefits are available to a Unit:

  • Exemption from Excise and Customs Duties
  • Exemption from Central Sales Tax / VAT (For input material used for manufacturing for export purposes)
  • Exemption from Service Tax
  • 100% FDI through automatic route
  • Domestic Sales on payment of applicable duties by the buyer
  • External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions
  • No requirement for Import License
  • Freedom to bring in export proceeds without any time limit
  • Flexibility to keep 100% of export proceeds in EEFC account
  • Offshore banking unit
  • On-site custom house
  • Self-certification
  • Warehouses/ICD
Myth 7 : DTA exports are faster than SEZ
Reality :

No. Due to procedural ease as provided in the scheme and the on-site Customs House, the turnaround time for imports and exports in a SEZ is shorter. Customs examination is to the bare minimum. SEZ units function on self certification basis. Also, loading and unloading costs are cheaper due to service tax exemptions. A SEZ allows the following operational benefits:

  • In-house Customs Clearance
  • Self-declaration for Imports & Exports
  • In-house logistics & Warehousing Zone
  • Exports can be made directly from the sub-contractor’s premises located anywhere
  • No license required for imports
  • Inter-SEZ units job-work and sale allowed
  • 24X7 Electricity & Water
Myth 8 : Being a deemed foreign territory, SEZ Units cannot opt for subcontracting part of its production / job-work.
Reality :

Yes. SEZ units can subcontract (with prior permission of the Specified Officer sought annually) to units in the DTA which are registered with the excise department (if excise applicable). The goods sent out for subcontracting have to be returned to the SEZ within 120 days from the date of removal or within a period as may be extended by the Special Officer in charge of this procedure. Goods then can also be exported directly from the DTA unit provided it is registered with the Central Excise Department. This is allowed only by way of direct export and not through third parties.

SEZ units can also do contract work for domestic companies, provided all raw material including semi-finished goods and consumables including fuel is supplied by the DTA exporter. In this case, the finished goods must be directly exported from the SEZ unit on behalf of the DTA exporter. The export document is jointly in the name of the DTA unit and the SEZ unit. The DTA exporter is eligible for refund of duty paid on the inputs by way of brand rate of duty drawback.

Myth 9 : Routine examination of goods by customs in the EOU is common. Will the same practice continue at the SEZ?
Reality : Customs examination is to the minimum. SEZ units function on self certification basis. The meaning of Hassle Free Zone clearly originates from this concept. No Tax, No Duties, No Hurdles.
Myth 10 : SEZ units cannot operate both in the domestic tariff area (DTA) and SEZ area?
Reality : No. In-fact a company can set up units both in the SEZ and DTA, provided separate accounting procedures are maintained by the units. A unit in the DTA cannot export to itself in the SEZ. The recent changes in Section 10AA of the Income Tax Act in the recently announced Union Budget allow a business to have the same unit in DTA as well as SEZ. The amendment was made to rectify an anomaly in the wording of the Section that adversely affected SEZ units. As per the Section 10AA, ‘export turnover of the unit’ is divided by the ‘total turnover of the company’ for calculation of exemption from income tax on export profit. Now the total turnover of the “undertaking” i.e. unit located in the SEZ will be considered instead of total turnover of the business of the company. The rectification of the anomaly will be a very big incentive for companies to move into the SEZs as they can keep the tax rebate earned on exports from SEZs separate from similar rebate earned from their units in DTA (or the area outside SEZs in the country where normal taxes and duties apply).
Myth 11 : SEZ units cannot sell to the domestic market
Reality : SEZ units can sell goods and services, including rejects and scrap or other by-products of the manufacturing process in the domestic market on payment of applicable customs and excise duties. In-fact unlike EOU, where only up to 50% of FOB value of sales of preceding year can be sold in the DTA, there is no upper limit on DTA sales in a SEZ.
Myth 12 : A unit has to immediately commence operations with full-fledged facilities.
Reality : As per the SEZ Act, a Unit must be operational within a year from the date mentioned on the LoA (Letter of Approval). By citing relevant reasons, a further extension of 1 year is also available. Also in order to be operational, it is not a must to have an upfront full-fledged facility. Operations can be commenced even from a pre-fabricated (e.g. Kirby) factory and expansion can be done thereafter.
Myth 13 : Multiple authorities govern a SEZ
Reality : The Unit Approval Committee consists of representatives from State Government, Income Tax, Excise & Customs, DGFT etc. and is headed by the Development Commissioner. The DC appointed for the SEZ, therefore, is the nodal officer and is the superseding authority in all the matters related to a Unit situated in a SEZ. The performance of the SEZ Units too is monitored by the Unit Approval Committee on annual basis.
Myth 14 : Banks are reluctant to provide finance to a SEZ Unit
Reality : The application for setting up a Unit in SEZ is scrutinized by the Unit Approval. Committee consist of representatives from State Government, Income Tax, Excise & Customs, and DGFT. If the application is approved by the committee, Banks and Financial Institutions are more than willing to finance the Units as they consider the project to be viable and safe. Also SEZ Act allows Units to opt for External Commercial Borrowings (ECBs) up to $500 million with cheaper interest rate without any maturity restrictions. Overseas Banking Units (OBUs) also offer term loans at London Inter Bank Offer Rate to the Units situated in a SEZ.
Myth 15 : Exit route is not clearly defined in a SEZ
Reality : Through a recent notification (No. S.O.1293 (E) dated 20-05-2009), the Approval Committee has also been empowered to approve of change of the entrepreneur of an approved unit, if the incoming entrepreneur undertakes to take over the assets and liabilities of the existing Unit. In other words, a suitable exit route has been defined if a unit is not able to function. If the SEZ unit is also operational in the DTA under the same name, the exit allows the outgoing unit to be operational in DTA under the previous name. The outgoing unit has to first surrender the LoA to the DC and then can bring a new unit. The new entrepreneur then will have to apply for a fresh unit approval and will also get a 15 year Income tax holiday.
Myth 16 : Part-shipment is not possible from a SEZ
Reality : Part-shipment can be easily done from a SEZ. Cartons are sealed by the in-house customs and are then handed over to the Clearing & Handling Agent (CHA). The CHA then sends it to the designated port. If the seal is found in-tact, the carton is exported to the desired destination.
Myth 17 : Used capital goods cannot be transferred from DTA to a SEZ Unit
Reality : Units are now permitted to shift used capital goods into SEZ beyond the stipulated valuation limit by forgoing income tax benefits. This move will be a big incentive for all the units coming into SEZs as they will now be able to shift expensive capital items, worth over 20 percent ( On depreciated value) of total new investments made in an SEZ (which is the current norm) provided they pay income tax on it. This amendment will help SEZ units save a fortune by transferring capital goods as compared to purchasing new ones.
Myth 18 : Unit Approval process is tedious and cumbersome
Reality :

Ministry of Commerce has issued instruction to all the Development Commissions to conduct the Unit Approval Committee Meeting within an interval of 20 days. All approvals are given by the Unit Approval Committee headed by the Development Commissioner. Clearance from the Department of Policy and Promotion/Board of Approvals, wherever required will be obtained by the Development Commissioner, before the Letter of Intent is issued. Approval Committee to approve if:

  1. The proposal meets with the positive NFE earning requirement
  2. The proposal confirms availability of space, confirmed by the Developer in writing, by way of a provisional letter of allotment
  3. The applicant undertakes to fulfil the environmental and pollution control norms
  4. The applicant submits proof of residence, namely, passport or ration card or driving license or voter identity card or any other proof of the proprietor or the partners of partnership firms or Directors of the Company, as the case may be, to the satisfaction of Development Commissioner
  5. The applicant submits the Income tax returns along with the annexure of the Proprietor or partners, or in the case of a company, audited balance sheet for the last three years.
Myth 19 : Trading is not allowed in a SEZ
Reality : Trading activities (with zero value addition) are permitted in a SEZ. The profits earned on such trading activities are too exempted from Income Tax provided the goods are physically imported to the SEZ from outside India i.e. a foreign country. In case goods are imported from DTA and are re-exported, profits from such transactions are not subject to Income Tax exemption.
Myth 20 : Labour laws are different in a SEZ
Reality : No. Labour Laws in SEZ remains the same. SEZ is granted a Public Utility Status (PUS), it definitely is a no-strike zone, and thus routine activities in SEZs are not hampered by labourunrest.
Myth 21 : Sale of Scrap is not allowed from a SEZ
Reality : SEZ units can sell scrap to DTA units on payment of applicable duties depending on the tariff of the product.

Raghvendra Agarwal
India Realty Group
098 715 11225


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