SEZ, TAX and Trade Implications on Companies Located in SEZ
SEZ or Special Economic Zone can be understood as a zone for business that provides the business entities and their owners with simple tax and easier legal compliance requirements. It is located on the national boundaries of a country and will be treated as a foreign territory for the purpose of taxation despite being located in the same country. It is therefore located within the national borders of a country.
SEZ also includes:
– Free trade zones (FTZ)
– Export processing zones (EPZ)
– Free zones or the Free economic zones (FZ or the FEZ)
– Industrial parks/ industrial estates (IE)
– Free ports
– Bonded logistics parks (BLP
– Urban enterprise zones
Objectives of SEZ
– Increasing the foreign trade by promoting the exports of goods or services,
– Increasing foreign investment of the country and its economy,
– Creation of job opportunities in the domestic market,
– Betterment or improvement of the infrastructure facilities of the country,
– Effective administration and compliance procedures.
Salient Features of SEZ Scheme
The salient features of SEZ include the following:
- SEZ developers or co-developers and Units enjoy various Income Tax and Direct Tax benefits with respect to the SEZs Act, 2005,
- There is full freedom given for subcontracting,
- Manufacturing and service providing are allowed under this scheme,
- No license would be required for imports,
- It is treated as duty-free enclave as the same is a territory outside the customs territory of India and can-do authorized operations in the SEZ,
- There will be no routine examinations by customs authorities for export or import of cargo,
- Domestic sales shall be subject to comply with full customs duty and import policy compliances
- The Units are required to achieve Positive Net Foreign Exchange which is to be calculated cumulatively for a period of five years from the commencement of production.
Some Major Incentives and Facilities available to SEZ Developers
- An exemption is provided to the SEZ developers from customs or excise duties. And this shall be for the development of SEZs for authorized operations approved by the BOA (Board of Approval).
- They will also be provided with an exemption from Income Tax. And this shall be on the income derived from their business development in the SEZ in a block of 10 years in a total of 15 years as per the provisions of Section 80-IAB of the Income Tax Act. Section 80-IAB provides that, in case the gross total income of an assessee who is a Developer is inclusive of any profits or/and gains that was derived by them through the business or entity engaged in developing an SEZ then a deduction of 100% of the profits and gains from such business shall be provided.
- Exemption is also allowed from CST or Central Sales Tax.
- Supplies that are made to the SEZ Developers are treated as zero-rated supplies under the IGST Act.
Incentives and Facilities which are provided to SEZ Developers or Units for Attracting Investments into SEZ
The below-stipulated facilities and incentives are provided to the units in SEZs for attracting investments including foreign investments into the entity:
- A single window is provided for attaining clearance with respect to Central and State Levels,
- Supplies made to the SEZ are treated as zero-rated supplies under the GST Act,
- Duty-free import or procurement of domestic products or goods for the development, operation, and maintenance of SEZ units would be done.
- A 100% exemption from Income Tax on export income for SEZ units under section 10AA of Income Tax Act and the same is given below:
- Taking the first 5 consecutive assessment years beginning with the assessment year which is relevant to the previous year in which the unit begins to manufacture such articles or things or providing of services to the consumers – 100% of the profits and gains derived from the export of such articles or things or from services
- Next 5 consecutive assessment years – 50% of such profits or gains
- Next 5 consecutive assessment years – So much of the amount not exceeding 50% of the profits as is debited to profit and loss account of the previous year. And in respect of which the deduction is to be allowed and should be credited to reserve namely the SEZ Reinvestment Reserve Account which is to be created and utilized for the purpose of the business of the assessee.
- Such other levies which might be imposed by the State Governments and such other facilities provided or allowed by the State Governments shall also be provided.
GST Law Applicability on SEZ
The supply of goods or services or both to or by a Special Economic Zone Developer or Unit will be treated as zero-rated supply under GST Act. It means such supply would attract tax under GST Act. Supply in SEZ would be considered as exports and the same can be supplied under bond or letter of undertaking for making supply, without payment of GST and they can also claim the credit of ITC, and claim a refund for the same or supply by payment of IGST.
When SEZ is supplying goods or services or both to anyone, the same shall be considered as the conducting of an integrated supply and will therefore attract IGST (Integrated Goods and Services Tax). But there is one exception for the same. If the supply of goods or services or both are done to Domestic Tariff Area, the same will be considered as export to DTA, and custom and import duties will be payable.
E-Way Bill Rule for the SEZ
The transporter should carry an E-way bill for transportation of goods if the value of such goods is more than INR 50,000. And this shall be carried for transporting the same from one place to another as this will be treated as an inter-state supply and is required to comply with the same.
Hence, we can conclude that SEZ, is a foreign or a distinct territory within the country India which facilitates easy compliance and simple tax application for the entities or units which are set within such SEZ.