In this blog post, Chandra Bhanu Mitra, a Senior Manager (Operations & Support) at RS Software (I) Ltd and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, shares his insights on Tax benefits for a Special Economic Zone in India.

Special Economic Zones or SEZs as they are more commonly known were created during the turn of this century to encourage and boost economic activity, increase foreign exchange earnings through exports, generate employment and attract foreign direct investment. In other words, SEZs were conceived with the aim to promote industrialization and economic growth through sustainable development.

SEZ is a geographically demarcated region which enjoys liberal economic laws compared to similar laws applicable elsewhere in the country.  SEZs are specifically delineated duty-free enclaves and are deemed to be foreign territory for the purposes of trade operations, duties and tariffs. The SEZs are governed by the SEZ Act, 2005 and SEZ Rules, 2016 apart from the Foreign Trade Policy and Handbook of Procedures.

Taxation & SEZ

In order to make an investment in SEZs more attractive in comparison to investments made elsewhere, the Government came up with certain tax incentives apart from introducing simplified procedures with respect to statutory approvals and compliances. The taxation of the SEZs and units operating within the SEZs can broadly be said to be governed by the following tax laws:

1.    Income Tax Act, 1961;
2.    Central Sales Tax Act, 1956;
3.    Service Tax Act, 2013;
4.    Customs Act, 1962;
5.    Central Excise Act, 1944;
6.    Income Tax Act, 1961

Under the Income Tax Act, 1961, the Government has provided tax incentive to newly established SEZs / operating units in an SEZ through Sec 10AA in the following manner:

In order to avail Income Tax benefit, a SEZ / operating unit in an SEZ has to fulfil the following conditions:

Condition 1:

The assesse will be deemed to be an entrepreneur as defined in section 2(j) of SEZ Act, 2005.

An entrepreneur is a person who has been granted a letter of approval by the Dev. Commissioner to set up a unit in a Special Economic Zone.

Condition 2:

The unit in Special Economic Zone begins to manufacture or produce articles or things or provide services during the financial year 2005-06 or any subsequent year. A sunset clause has recently been proposed by the Finance Minister while presenting the 2016-17 Annual Budget. An SEZ developer will be able to avail income tax exemption so long as the SEZ becomes operational before 31-Mar-17. In the event the SEZ becomes operational subsequent to such date tax incentive so long availed will no longer be available. Similarly, a unit in an SEZ will be able to avail tax incentive so long as it becomes operational before 31-Mar-21 as these incentives will no longer be available subsequent to such date.

Condition 3:

The assesse has exported goods or provided services out of India from the Special Economic Zone by land, sea, air or by any other mode, whether physical or otherwise.

Condition 4:

Books of the account of the assesse is audited. The assesse needs to submit audit report in Form No. 56F along with the return of income.

If the above conditions are satisfied, one can claim deduction under section 10AA as described below:

Deduction during first five Assessment Years:

Deduction of 100 per cent of the profit and gains derived from export of articles or things or from services is allowed for a period of 5 consecutive assessment years. Deduction for the first year is available in the assessment year relevant to the previous year in which the unit begins to manufacture or produce articles or things or provide services.

Deduction during sixth Assessment Year till tenth Assessment Year:

Deduction of 50 per cent of the profit and gains derived from export of articles or things or from services is deductible from the sixth assessment year to the tenth assessment year.

Deduction during eleventh Assessment Year till fifteenth Assessment Year:

During the next 5 years, a further deduction is available amounting to 50 per cent of the profit provided an equivalent amount is debited to the profit and loss account of the previous year and credited to Special Economic Zone Re-investment Allowance Reserve Account subject to fulfilment of certain conditionality.

The provisions of Minimum Alternate Tax (MAT) have been made applicable to Special Economic Zone (SEZ) Developers and Units with effect from 1st April, 2012, and the exemption of Dividend Distribution Tax (DDT) in the case of SEZ Developers under the Income-tax Act for dividends declared, distributed or paid is not available after 1st June, 2011. The withdrawal of these two exemptions have made the SEZs unpopular to a large extent.

2.    Central Sales Tax Act, 1956

The SEZs have also been provided with certain tax benefits under Central Sales Tax Act, 1956. As per this Act, no tax shall be payable under Central Sales Tax Act by any dealer in respect of sale of any goods made by such dealer, in the course of inter-State trade or commerce to a registered dealer for the purpose of “setting up, operation, maintenance, manufacture, trading, production, processing, assembling, repairing, reconditioning, re-engineering, packaging or for use as packing material or packing accessories in an unit located in any special economic zone or for development, operation and maintenance of special economic zone by the developer of the special economic zone, if such registered dealer has been authorised to establish such unit or to develop, operate and maintain such special economic zone by the authority specified by the Central Government in this behalf.” In other words, goods sold to a unit in a SEZ or the developer of the SEZ are on most occasions exempt from levy of Central Sales Tax.

Goods as referred to above “shall be the goods of such class or classes of goods as specified in the certificate of registration of the registered dealer”. Further, the dealer selling such goods is mandated to furnish to the prescribed authority a declaration in Form I duly filled in and signed by the registered dealer to whom such goods are sold in order for the tax exemption to be availed.

3.    Service Tax Act, 2013

The Government has demonstrated its intent in providing tax benefits to the SEZs under the Service Tax Act, 2013 also. The Central Government had issued a detailed notification – Notification No. 12 / 2013-Service Tax – which outlines the tax exemption that a unit in the SEZ or an SEZ developer can enjoy.

Through this Notification the Government has exempted the services on which service tax is leviable under section 66B of the Service Tax Act, received by a unit located in a Special Economic Zone or Developer of SEZ and used for the authorised operation from the whole of the service tax, education cess, and secondary and higher education cess leviable in ordinary course. This exemption is available by way of refund of service tax paid on the specified services received by the SEZ Unit or the Developer and used for the authorised operations. However, the Government has also made a provision wherein the Service Tax may not be paid ab initio subject to certain procedural compliances by the parties and only when specified services received by the SEZ Unit or the Developer are used exclusively for authorised operations.  

4.    Customs Act, 1962 & Central Excise Act, 1944

The Customs & Central Excise Acts have adequate provisions for allowing duty exemptions to the SEZ Unit or the SEZ Developer.

Vide Notification Nos. 22/2003 & 58/2003 – Central Excise, the Central Government has allowed 100% exemption to goods manufactured by DTA unit and supplied to SEZ from payment of central excise duty subject to compliance of the following procedures:

1.    Such goods are brought directly from the factory or warehouse of manufacture;
2.    Such goods so brought are used for purposes specified in clauses (a) to (d) in Notification No. 22/2003;
3.    Such goods are supplied against a domestic procurement certificate issued to the special economic zone unit by customs authorities in the special economic zone;
4.    Proof of export of such goods duly certified by the customs authorities in the special economic zone is submitted to the officer-in-charge of the Central Excise range concerned, within a period of one month from the date of removal of such goods from the place of manufacture or production;
5.    the SEZ user executes a bond with the jurisdictional Central Excise / Customs Office as the case may be, for the proper account of the receipt, storage and utilization of such goods, to achieve positive Net Foreign Exchange Earning and comply with the conditions stipulated in this notification and the Export and Import Policy, and binding itself to pay on demand sums as directed from time-to-time;

Similarly, vide Notification No. 137 / 2000-Customs, the Central Government has allowed 100% exemption to goods from payment of customs duty when imported into India or procured from a Public Warehouse or a Private Warehouse appointed or licensed under section 57 or section 58 of the Customs Act for the purposes of manufacture of goods, services, production, processing, assembling, trading, repair, reconditioning, re-engineering, packaging by a unit of a Special Economic Zone subject to certain compliances.

Conclusion

The journey of the SEZ in India began with unbounded enthusiasm when the SEZ concept got introduced in early 2000. The idea of fostering world class production facilities in specifically delineated duty-free enclaves having liberalised regulations and fast track approval and clearance procedures was enthusiastically received by the trade and industry. Given the attractive tax exemptions and tax holidays made available to SEZs and SEZ units, large companies did make a foray in developing up SEZs or setting up units in the SEZs in spite of the huge capital investments involved and many of them successfully brought up profit making production units which are still operational. However, restrictive approach of the Government later during the decade saw withdrawal of certain tax benefits which has somewhat soured the journey and it remains to be seen how the SEZ concept fares in the days to come.

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References:

1.    Foreign Trade Policy 2009-14;
2.    Handbook of Procedures, Vol -1;
3.    SEZ Act, 2005;
4.    SEZ Rules, 2006;
5.    Income Tax Act, 1961;
6.    Central Sales Tax Act, 1956;
7.    Service Tax Act, 2013;
8.    Customs Act, 1962;
9.    Central Excise Act, 1944;
10. www.incometaxindia.gov.in
11. www.cbec.gov.in
12. www.sez.nic.in
13. Relevant Central Excise & Customs Notifications;