Setting up a Business Unit in a Special Economic Zone

This article titled ‘Setting up a Business Unit in a Special Economic Zone.’ is written by Mayank Shekhar and discusses whether a business should be set up in a special economic zone or not.

I. Introduction

Special Economic Zones (“SEZ”) have been formed in India with the goal of attracting Foreign Direct Investment (‘FDI”) and enabling native firms to compete on a global scale. It has improved the trade balance, employment, investment, and administrative effectiveness.

SEZs may be established jointly or severally by the Central Government, State Governments, or any person (including a private or public limited company, partnership, or proprietorship) for the following reasons under the Special Economic Zones Act, 2005.

1. Fabrication of items; or
2. To be provided services; or
3. Both for the manufacture of commodities and the provision of services; or
4. As a sector of free trade and warehousing.

The Act for State Governments envisions an SEZ’s primary duty as export promotion and infrastructure development. A single-window process for SEZ approval has been established via the establishment of a 19-member inter-ministerial SEZ Board of Approval (“BoA”). The BoA considers applications that have been properly proposed by the appropriate State Governments/UT Administrations on a case-by-case basis. The BoA makes all decisions by a majority vote of the members present.

II. What is a Special Economic Zone

An SEZ is a duty-free zone within a country that typically has its own business and commercial laws, primarily to encourage investment and job creation. Apart from creating jobs and stimulating investment, SEZs are established to improve the administration of these regions, hence enhancing the convenience of doing business.

III. Compliance Requirements for Establishing a Business

When a business wishes to establish a unit in a particular SEZ, an application must be filed to the Development Commissioner’s office, which oversees the Special Economic Zones. For instance, the SEZs in Karnataka, Kerala, Lakshadweep, and Mahe are administered by the Cochin Special Economic Zone (CSEZ), which is headquartered in Bangalore and Cochin.

Thus, a firm wanting to establish a unit in an SEZ should submit to the Development Commissioner a consolidated proposal in Form F in five copies, together with the accompanying documents:

1. A copy of the CSEZ/letter Developer’s of intent to assign space in the Zone.
2. Application Fees – A demand draught for Rs.10,000/- in favour of “The Pay & Accounts Officer, Cochin Special Economic Zone” is required.
3. Affidavit of undertaking in the manner provided in Form-F on Rs.100/- stamp paper.
4. A project report detailing the capital goods to be imported/purchased, the raw materials and other imports, technical collaboration, marketing collaboration, and proposed activities, among other things (including a write up on the background of the promoters establishing their credentials and standing)
5. Copies of the Certificate of Incorporation, Articles of Association, and Memorandum of Association in the case of corporations, and an attested copy of the Partnership Deed in the case of partnership firms.
6. Three-year income tax returns for proprietors/partners. In the case of a firm, the latest three years’ audited balance sheet.
7. Copies of Promoters’ Pan Cards
8. Proof of promoter’s residency (Copy of Ration Card, Voter ID Card, Passport, Driving License)

Additionally to the aforementioned, a firm requesting to establish a unit in an SEZ must be required to provide the following information: Permission for subcontracting on an annual basis; Provision of an IEC Number; Provision of land/industrial sheds in the SEZ; Provision of water; Registration-cum-Membership Certificate; Registration of Small Scale Industries; Central Pollution Control Board registration; Electricity connection; building approval plan; sales tax registration; factory inspection permission; pollution control clearance, where applicable; and any other approvals required by the State Government.

This is a Clearance for a Single Window. Following that, the Development Commissioner will submit this plan to the Approval Committee for consideration.

The Approval Committee may approve or reject the proposal with or without amendments. In the event of a modification or rejection, the Approval Committee is required to give the person concerned an opportunity to be heard before issuing the approval or rejection.

IV. Approval Criteria

The Approval Committee examines the proposal in accordance with Rule 18(2) of the SEZ Rules 2006. The proposal must satisfy the Rules’ need for positive net foreign exchange earnings determined in accordance with Rule 53 and the Rule’s criterion for value addition earnings.

Space availability and other infrastructure assistance have been requested. Any leasing arrangement between a developer and the Company must be entered into once the Development Commissioner issues the Letter of Approval. Within six months after the date of issuing of the Letter of Approval, a copy of such an agreement must be sent to the Development Commissioner. Failure to do so may result in the Approval being revoked.

The applicant agrees to adhere to all applicable environmental and pollution control regulations. To the satisfaction of the Development Commissioner, the applicant produces evidence of residency, namely a passport or ration card, a driver’s licence or a voter identification card, or any other proof of the owner, partners in partnership businesses, or directors of the company.

The applicant sends the Proprietor’s or Partners’ income tax returns, with annexures, or, in the case of a corporation, the company’s audited balance statement for the preceding three years.

V. Facilities & Incentives for Special Economic Zones

The government provides several incentives to firms and industries located in SEZs. Several notable examples include the following:

1. Import duty-free or local purchase of commodities necessary for the development, operation, and maintenance of SEZ units.
2. Revenue tax exemption of 100% on export income for SEZ units under the Income Tax Act for the first five years, 50% for the following five years, and 50% on ploughed-back export profit for the next five years. (The Sunset Clause for Units will take effect in 2020.)
3. Units are not subject to the Minimum Alternate Tax (MAT).
4. They were not subject to the Central Sales Tax, the Service Tax, or the State Sales Tax. These have been included into GST, and shipments to special economic zones are now zero-rated under the IGST Act, 2017.
5. Single point of contact for approvals at the federal and state levels.
6. No license is required for import.
7. With the exception of a few areas, 100 percent FDI is permitted in the manufacturing sector.
8. Profits earned are freely repatriated without the necessity for a dividend balance.
9. There is no need for separate customs and export-import policy documents.
10. Numerous SEZs provide constructed plots and space that is ready to utilise.
11. The linked article contains information on the Directorate General of Foreign Trade (DGFT).
12. Apart from the enterprises operating in SEZs, the government provides several perks and incentives to SEZ developers.

VI. Challenges faced in Special Economic Zones

1. Because SEZs provide a plethora of incentives and tax advantages, it is predicted that many current domestic enterprises would simply relocate their operations to SEZs.
2. There is concern that the development of SEZs may come at the expense of fertile agricultural land, food security, reducing income to the government, and resulting in unequal growth with detrimental consequences.
3. Apart from food security, water security is harmed as a result of water consumption being diverted to SEZs.
4. SEZs also contribute to pollution, particularly via the discharge of untreated effluents. Mangroves have been decimated in Gujarat, harming the fisheries and dairy industries.
5. SEZs must be fostered, but not at the expense of the country’s agricultural economy. Additionally, it should have no bad effect on the environment.

VII. Transfer of Units between SEZs

If an entrepreneur wishes to transfer a unit between SEZs, he or she may submit a request to the Department of Commerce for consideration and approval.

VIII. Conclusion

The Central and State Governments have made the process of establishing a business unit in an SEZ simple and transparent in order to promote investment in this sector. All processes are detailed in the 2005 Special Economic Zone Act, the 2006 Special Economic Zone Rules, and subsequent revisions and circulars issued by the Government. All forms are accessible online on the SEZ websites.

The Government of India has issued thorough recommendations on how to apply for the establishment of an SEZ/SEZ Unit under the SEZ Act and Rules. While the method looks to be complicated, it is a very intriguing area to investigate. The technique detailed above provides an overview of the steps required to establish an SEZ unit. Needless to add, this article is meant to give insight into the procedural elements of establishing an SEZ unit.

---