Tax and Trade Benefits for Companies Operating in Special Economic Zones (SEZs)

The Special Economic Zones (SEZs) are very important in driving the industrial, foreign investment and export development in India. These areas are set to provide an environment where the competitiveness of the business and international trade can be realised. The firms in the SEZs have a number of tax exemptions and trade privileges, and this is what makes them appealing to local and foreign investors. Companies that intend to establish operations in the SEZs need to understand the framework, tax and trade implications, and their implications.

What is a Special Economic Zone (SEZ)?

A Special Economic Zone (SEZ) is a defined region within a country with separate economic regulations. To encourage exports, foreign direct investment (FDI) and employment opportunities, the Government of India came up with SEZs under the SEZ Act, 2005.

The concept of SEZs is to provide a business environment with minimal regulatory requirements, state-of-the-art infrastructure, and fiscal incentives. SEZs operate as duty-free enclaves; i.e., a product imported or exported out of the zone is not charged the normal customs duties and trade barriers imposed on it outside the zone.

Objectives of SEZs in India

The main purposes of the creation of SEZs are:

1. Promotion of exports of goods and services.
2. Encouraging both local and foreign investment.
3. Improving employment and regional development.
4. Streamlining of regulatory procedures to create easy doing business.
5. Emerging infrastructure and competitive globalization.

Types of SEZs in India

In India, SEZs are set up in different industries, which include:

1. IT/ITeS SEZs: Specialise in information technology and software services.
2. Manufacturing SEZs: These are meant to produce and assemble.
3. Multi-Product SEZs: Serve an assortment of industries within a single zone.
4. Petroleum and Petrochemical SEZs: Establish petroleum refinery and industries.

All forms of SEZ have their sector-specific infrastructure and incentives that are in tandem with the nature of business activities that is being undertaken.

Tax Benefits for SEZ Units

Taxation is considered one of the greatest benefits for firms operating in SEZs. Under the Income Tax Act and the SEZ Act, 2005, there are several fiscal incentives to facilitate investment and exports.

1. Income Tax Exemptions

Second, under Section 10AA of the Income Tax Act, units will receive the following income tax deductions:

• 100 percent exemption on export income during the first 5 years of the year the production commences.
• Fifty percent exemption on export revenue over the following 5 years.
• Reinvested profits in business expansion are to be deducted at 50 percent in another 5 years.

This form of exemption is organized and enables the companies operating in SEZ to be profitable and use the profits to grow the company.

2. Excise Duty Exemptions and Customs

The companies in SEZs enjoy:

• Remission of customs duty on imported raw materials, capital goods and machinery.
• No excise duty on goods obtained in the Domestic Tariff Area (DTA).
• Inter-SEZ tax-free Central Sales Tax (CST).

These exemptions lower the costs of operation radically and enhance competitiveness in exports.

3. Goods and Services Tax (GST) Advantages

In GST, supplies to the SEZs are considered as zero-rated supplies. This means:

• SEZs’ suppliers are eligible to receive input tax credit (ITC) or a refund.
• SEZ units would not pay Integrated GST (IGST) on importing goods and services.

This makes tax not a blow on exports and production in SEZs, being cost-effective.

4. Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT)

In the past, SEZ units were not required to pay Dividend Distribution Tax (DDT) and Minimum Alternate Tax (MAT). Nevertheless, a new amendment has introduced the applicability of the MAT at 15 percent of book profits, although it is still low compared to the applicability of the same to non-SEZ companies. All firms have been eliminated in the Finance Act, 2020, which is helpful to SEZ developers.

Trade Implications for SEZ Companies

SEZs are considered foreign lands as far as trade and customs are concerned, despite their location being within India. This special classification has a number of trade-related benefits:

• Free Movement of Goods: Businesspeople are not restricted in the importation of raw materials and machinery, and in the re-importation of finished goods.
• Streamlined Exportation Process: SEZs have simplified procedures in exportation because of the lenient documentation and inspection standards.
• Foreign Exchange Flexibility: SEZ units have the option of holding a foreign currency account and are free to repatriate profits, provided they comply with the requirement stipulated by statutes.
• Improved Internationalisation: SEZs also enable more access to international suppliers, manufacturers, and distributors, making Indian businesses competitive in the global arena.

All these provisions assure a favourable environment in terms of trade and exports of the SEZ-based companies.

Compliance and Regulatory Framework

Although SEZs present plenty of incentives, they have certain regulations that are provided by the SEZ Act, 2005 and the SEZ Rules, 2006. The companies need to seek the Board of Approval (BoA) and the Development Commissioner’s permission to set up operations.

The following are some of the compliance requirements:

• Filing performance reports once a year to the Development Commissioner.
• Keeping good records of imports, exports and local purchases.
• Compliance with foreign trade policy and environmental standards.

Failure to comply with the regulations of SEZ is subject to the withdrawal of tax benefits and fines.

Challenges for SEZ Companies

In spite of their benefits, SEZs have certain practical difficulties:

• Unstable policies because of frequent changes in taxes.
• Sluggish approvals and infrastructural set-ups.
• Less competitive SEZs after 2017 because of lower tax incentives.
• Other countries have better incentives that compete with us on a global level.

These issues are critical to ensure that the SEZ framework in India remains successful in the long term.

Conclusion

The SEZs have played a major role in India’s export-oriented industrial strategy. SEZs offer the best option for companies intending to internationalise their businesses due to tax exemptions, customs advantages, and ease of trade regulations. Nevertheless, business organisations should remain abreast of changing legislation and be aware of the effects of alterations in tax policy. Companies that are organised and guided by the SEZ policies can use these zones to achieve efficiency, profitability, and global competitiveness.

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