This article has been written by Parthvi Singh, Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.


Industrialisation is considered the driving engine for development, as Amartya Sen opined that there has not been a developed nation that has reached ‘there’ solely relying on agriculture. The Special Economic Zone Act was passed by Parliament in 2005. The underlying objective of the SEZ policy is to provide a geographical area with liberalised business regulations to facilitate foreign investments and enhance the ease of doing business in India. Enactment of the long term SEZ policy was a methodology adopted by the government to balance economic development and progress in various regions of India by simplifying the procedure to set-up or maintain a SEZ unit and ensuring exemptions from taxes to promote exports and employment. 

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Procedure to Establish a SEZ unit

Section 15 of the SEZ Act elucidates the procedure to establish a SEZ unit in India. A company that wants to set up a unit in a SEZ is required to submit a consolidated proposal in Form F of the SEZ Rules to the Development Commissioner  of the specific Special Economic Zone. The SEZ approval procedure is a single window clearance system. The development commissioner then should submit that proposal, under Clauses (c) and (e) of sub-section (2) of Section (9), to the Approval Committee. The Approval Committee could either approve with modification or without modification and can reject the proposal within 15 days based on the requirements prescribed by the Central Government. A person aggrieved by the decision of the Approval Committee can prefer an appeal before the Board before the expiry of the prescribed time. The board is constituted by the Central Government and consists of 19 members from various bodies (Ministry of Law & Justice, Ministry of  Central Board of Excise and Customs, Department of Economic Affairs, etc.)  and is chaired by the Secretary, Department of Commerce, Ministry of Commerce and Industry. 

After the approval of the consolidated proposal, a Letter of Approval in Form G is issued by the Development Commissioner. The letter of approval for setting up the unit would contain several details regarding the unit, such as the nature of the business and net foreign exchange. The LOA is valid for a year from the date of issuance. Within that duration, the unit should have commenced the production or service activity and the date of such commencement should be communicated to the respective Development Commissioner. An extension for up to two years can be given to the unit based on the reasoning provided to the Commissioner and additionally, an extension for one year can be provided when the company can show that two third of the activities regarding setting up  have been completed, including a charter engineer’s certificate. 

The LOA is valid for five years from the commencement date of activities and after the five years, the particular unit can request the Development Commissioner for an extension of the validity of the LOA for a further duration of five more years. In the case of Cambay SEZ Hotels Pvt. Ltd. v. Board of Approval for SEZs (2018), the Gujarat High Court opined that the Board of Approval has the power to cancel the LOA at any time, provided that it has sufficient reason and cause to believe the SEZ unit or developer in question has been consistently in contravention of the terms and conditions of the LOA. 

Administrative set up

Section 8-14 of the SEZ Act elucidates the three-tier administrative set up of a SEZ. First is the Board of Approval (BOA), which is the apex body headed by the Secretary, Department of Commerce, Ministry of Commerce and Industry. Second, at the zonal level, is the Unit of Approval (UAC), which is concerned with the approval of units of SEZs. Lastly, each zone is headed by the specific development commissioner, who is also the ex-officio chairperson of the approval committee. 

The mechanism followed is that when a SEZ obtains approval from the Apex Body Board of Approval (BOA) and the Central Government notifies that area of the SEZ, units can be set up in that SEZ. Further, the approval regarding the SEZ unit takes place by the Approval Committee at the zonal level, which involves the Development Commissioner with discussions with customs officials and representatives of the state government. The Approval Committee has another branch that specifically oversees the performance of the SEZ units periodically. The third tier consists of the Development Commissioner, who is considered the nodal officer of the SEZs and is responsible for providing support in case of any problems faced by units or developers.    

Benefits and exemptions

Tax benefit 

Section 7 of SEZ Act states that goods or services exported, imported or procured from a Domestic Tariff Area by a Special Economic Unit or by a developer would be subject to exemption from tax, cess or duties under the Acts mentioned in First Schedule of SEZ Act some of the enactments it includes are the Agriculture Produce Cess Act, Coffee Act, Rubber Act, etc. Some other tax benefits, such as the first 5 years of 100% income   exemption for exports for a SEZ unit under Section 10AA of the Income Tax Act, would be 50%; the next 5 years would be 50%. SEZ units also benefit from duty-free imports or domestic goods for the development and maintenance of a unit. Moreover, SEZ units fall under the exemption of Section 16(3) of the GST Act and any supplies to such units are considered zero rated. Section 54 with Rule 96 allows claiming a refund of tax paid. 

Custom benefit

Certain custom exemptions that can be claimed by SEZ units include being permitted to import and receive goods from domestic sources duty-free without approval. The goods, either imported or domestically procured duty-free, can be utilised over the approval duration of 5 years.

Environmental exemptions

SEZ units are exempted from a public hearing in the EIA (Environment Impact Assessment) Notification. Furthermore, SEZs are allowed to have non-polluting industries in IT and facilities such as golf courses, hotels, desalination plants and non-polluting service industries in the Coastal Regulation Zone area. 

Foreign direct investment   

Foreign direct investment is encouraged by the implementation of the SEZ Act,   hence 100 % FDI is freely permitted in the manufacturing sector in SEZ units. However, this is subject to some exemptions in the case of arms, explosives, atomic substances, narcotics and hazardous chemicals, the brewing of alcoholic drinks, cigarettes, cigars and other activities associated with tobacco and its substitutes. 

Labour laws 

Labour regulations in SEZs are primarily enforced by the respective state governments. It is important to highlight that state governments have been advised to implement a method devoid of ambiguity by introducing a single window clearance mechanism by delegating appropriate powers to the Development Commissioners. 

In accordance with Section 49 of the SEZ Act, the application of labour laws in SEZs cannot be suspended, especially those regarding the welfare of the labour, that is, trade unions, labour dispute welfare, provident funds, etc. 

Exit procedure

The procedure to exit for an SEZ unit has been outlined in Section 74 of SEZ Rules 2006, which states that a SEZ unit may opt-out of a SEZ with the approval of the Specific Development Commissioner. The exit would be subject to payment of the duties on the imported or local capital goods, raw materials, components, consumables, and finished goods in stock. However, if the specific unit has not been able to attain a positive net foreign exchange, it would be subject to a penalty under the Foreign Trade Development and Regulations Act, 1992.

Another aspect to be considered is that the Development Commissioner may permit the SEZ unit a one-time exit option under the EPCG Scheme by payment of duty on the goods. However, the unit would have to meet the prerequisites of the EPCG scheme. Standard Conditions for Exit: A unit wishing to exit from a SEZ should pay the respective penalty imposed by the authorities. When there is an appeal against the penalty imposed by the authorities, an exit will be considered subject to the unit obtaining a stay order from the requisite authority. Additionally, the unit should have furnished a bank guarantee for the penalty. In a situation where a particular unit has failed to comply with the terms and conditions stated in the Letter of Approval or has penalties that have been imposed or may be imposed, a legal undertaking for the payment of the penalties should be executed with the Development Commissioner. 

Under Rule 74A of the SEZ Rules, a unit may transfer its assets and liabilities to another and exit from a SEZ through a transfer of ownership. However, the conditions stated under Rule 74A must be duly satisfied by the unit. 


The legislative intent behind the establishment of SEZs in India has been to ensure a procedure devoid of complexity for setting up businesses to facilitate investments in those designated areas. Although the scheme of the SEZ Act, Rules and other circulars must be duly complied with to avoid cancellation of the LOA, which would negatively impact the units as they would be exempted from the various benefits available to a unit in the SEZ, the units should ensure compliance in accordance with the terms of the LOA as well as various SEZ regulations for smooth functioning and to avail themselves of the benefits. 


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