In this article, Siddhartha Sain, a student pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the regulation of units in Special Economic Zones.
SEZ – Special Economic Zone
The term SEZ stands for special economic zone. Such zones are set up by governments in different countries in order to boost the global business, attract foreign investments and enhance the standard of export. In a SEZs, the tariffs, customs and tax rates are completely different from the rest of the country which creates a level playing field for the domestic manufacturers and enterprises to be able to compete worldwide. SEZ are set up in various countries around the world in order to achieve the same objective. India, Malaysia, Singapore, South Korea, Jordan, China, Russia, Philippines and Africa are some of the examples of the countries having SEZs.
SEZ in India
In 2000, SEZ policy was made in India for the first time. The concept which was originally borrowed from the neighbouring country China was finally adopted by India. The objective was to attract foreign investors by giving tax breaks and single window clearance etc. However, this policy only applied through various amendments in different laws and executive orders and was in a dire need of a robust framework as the policy was not nearly as good as China’s SEZ framework. It was only till 23rd June 2005, SEZ Act, 2005 was passed by the assent of the President of India. This Act along with SEZ Rules, 2006, became the sole statute covering all the legal and regulatory aspects of the SEZs along with units set up under it. In the Act, SEZs are defined under Section 2(za) as any area which is notified by the government after prescribed requirements under the Act as “Special Economic Zone”. Under Section 3(1) of the Act, SEZ is established by the Central government, state government or any other person jointly or severely for rendering services or manufacture of goods or free trade warehousing zone. Further, SEZ Rules, 2006 provides detailed rules with respect to SEZs.
How to Set up a Unit under SEZ Act, 2005?
A “unit” within the Act is defined under Section 2(zc) as a Unit set up by a businessperson in a Special Economic Zone which includes an Offshore Banking Unit, existing Unit and a Unit in an International Financial Services Centre. In order to set a unit under SEZ, Act 2005 an entrepreneur or a manufacturer has to follow procedures laid down under Section 15 of the Act, which are as follows:
Step 1: Any person who intends to set up Unit for carrying on the authorized operations in SEZ, must submit a proposal to the Development Commissioner in a prescribed form and manner with prescribed particulars.
Step 2: On the receipt of the proposal, the Development Commissioner shall submit the proposal to Approval Committee for approval.
Step 3: The Approval Committee may, “approve the proposal without modification” or “approve the proposal with modifications” or “reject the proposal”.
Step 4: Any aggrieved person has an option to appeal to the board within the prescribed time and no appeal will be preferred after the expiry of the prescribed time under Section 15 (5).
Step 5: A letter of approval is granted by “Development Commissioner” after the approval of the proposal under Section 15 (3) to the person concerned to set up a Unit.
Step 6: Under Section 16, the “approval committee” may also cancel the letter of approval if they have a reason to believe that the entrepreneur has violated any terms and conditions on which the letter of approval was granted.
Regulation of SEZ Units under the SEZ Act, 2005
As it has been established above that a unit can be set up by applying to the Development Commissioner under SEZ, Act 2005. Further, the Approval committee approves or rejects the application. Development Commissioner and approval committee have given powers under SEZ Act, 2005 in order to approve or reject the application of setting up of a unit under the Act through various provisions. Under the Act, an approval committee is instituted by the central government under subsection (1) of Section 13, which consists of a Development Commissioner. The approval committee with respect to the SEZ units has the power to approve, modify or reject a proposal for setting up the units and also to grant a license under the provisions of the Act. The approval committee can also refer to the board of approval for a decision on any process which the committee is unable to decide if a particular process involves manufacture or not.
Now apart from that, Central Government also has certain powers to regulate and inspect the framework of a unit under the Act these powers are discussed below:
- Under Section 20 of SEZ Act, 2005, the Central government has the power to specify any agency or officer to carry out surveys or inspections for securing of compliance with the provisions of any central Act by a Developer or an entrepreneur. It may also, under Section 21, specify any act or omission made punishable under any central Act and may appoint any officer in order to conduct investigation, inspection or search or seizure under relevant Central Act in respect of notified offences.
- Under Section 23 of the Act, the state government with the correspondence with the Chief Justice of High Court of that state, designate one or more courts to try all suits of civil nature and notified offences in SEZ.
Regulation of SEZ Units under SEZ Rules, 2006
The Central Government has the powers to make the rules under SEZ Rules, 2006 by Section 55 of Special Economic Zones Act, 2005. Under SEZ Rules, 2006 there are detailed procedures mentioned in order to set up of an SEZ Unit under Rule 17 to 21. Under the Act, the approval committee and the development commissioner have been given various powers to regulate the units and their operations. These powers are discussed in detail below:
- Under Rule 17 of the Act, the proposal for approval of unit is made to the development commissioner under form F. After the proposal it is now up to the Approval committee to consider the proposal for setting up of a unit in SEZ under Rule 18 of the Act, which scrutinizes the whole proposal and approves or approve with modification or rejects it within 45 days of the receipt. It is pertinent to mention that the proposals only get approved if they have met positive net foreign exchange earning requirements, available space and infrastructure, undertaken to fulfil environmental and pollution control norms amongst other requirements.
- Letter of approval is granted after the approval by the Development Commissioner and it specifies certain terms & condition which the unit has to abide under Rule 19 of the Act. Under Rule 22 (3) the units under SEZ are required to submit Annual Performance Reports in Form I to the Development Commissioner and further the Development Commissioner forward it to the Approval Committee.
- A unit’s performance is monitored under Rule 54 of SEZ Rules, 2006. An approval committee which is set up under the Act monitors the performance of the unit. A unit needs to achieve net foreign earning, abide by the terms & conditions of Letter of Approval or bond-cum-legal undertaking and if the approval committee come to a decision that the unit has not complied with any of the above-mentioned requirements then the said unit shall be liable for penal action under the provisions of Foreign Trade (Development and Regulation) Act, 1992.
- Appeal: Under Rule 55 of the Act any person who is aggrieved by an order passed by the approval committee with respect to cancellation of the letter of approval, can appeal to the board of approval in Form J.
SEZ Units and the Goods and Services Act
Under the IGST Act, 2017 concept of “Zero-rated supply” has been introduced in which export or supply of goods and services, made to a unit under SEZ will be termed as the same under Section 16 of IGST Act, 2017.
Further, under Section 17 (5) of IGST Act, input tax credit can be claimed for such supplies. Under Section 7 (5) of IGST Act, 2017 supply of goods and services to or by SEZ Unit is treated as the supply of goods or services as an inter-state trade.
|For example, a supplier named as X Ltd. supplies the goods for Rs.1, 50,000/- to a Unit located in Surat SEZ, 18% IGST will be charged. The invoice for the whole transaction would be like:
Selling price of the supply = Rs.1,50,000/-
18% applicable IGST = Rs. 27,000/-
Total = Rs.1,77,000/-
The supplier X Ltd. will now get a refund of Rs.27,000/- after claiming input tax credit.
Most of the rules and regulations that currently exist are under SEZ Act, 2005 and SEZ Rules, 2006 for the units under SEZ. Under these acts as discussed above, there are few bodies that regulate the functioning and operations of the unit under SEZ such as Approval Committee, Development commissioner and board of approval. These bodies have a crucial role in regulating the units under SEZ and are the only source of authority apart from central government. In each framework, a regulatory body is a must as it helps the framework grow and keep it in check.