What you need to know about india's special economic zones regulations?

What are Special Economic Zones (SEZs)?

A Special Economic Zone is a notified area where the business and trade regulations differ from the rest of the country. These areas are meant to attract foreign investment, exports and to promote economic development.

Even though they are within the boundaries of a country, these locations are considered foreign land for the sake of tax and GST laws.

The rationale behind the establishment of the special economic zone was to position India as a strong and competitive place for international trade through increased exports, attract investments, and support businesses by giving them tax holidays and liberalized policies.

SEZs are giving industries a single-window clearance duty-free area and light regulation. SEZs promote improved business culture through the offer of incentives, infrastructure, and liberalized policies.

Objectives of SEZs

The main reasons for setting up SEZs are:

• Boosting export of goods and services.
• Boosting foreign direct investment (FDI) and flow.
• Boosting employment generation.
• Infrastructure growth and development.
• Technology transfer and innovation

Legal Framework Governing SEZs

India's SEZs are regulated under a special legal framework, the primary legislation being the SEZ Act, 2005. It is supplemented by the SEZ Rules, 2006.

Main Regulatory Agencies:

• Ministry of Commerce & Industry (Department of Commerce) – Framing of policies
• Board of Approval - The approving authority for approving plans for SEZs.
• Development Commissioners (DCs) – Manage SEZs at the local level.
• Unit Approval Committees (UACs) – Approve individually individual SEZ units.

Benefits of Opening and Running Business in SEZs

1. Direct Tax Relaxations under section 10AA of the Income Tax Act

SEZ units formed and operational before 1 April 2020 will be given the following taxation under Section 10AA:

• 100% of export income for the first 5 years.
• 50% of income for next 5 years.
• 50% reinvestment of profit in business within the next 5 years and so on.

Note: Such income tax relief is sunset provided and no longer available to units set up after 1 April 2020, unless reinstated by the government.

2. Indirect Tax Relief
• GST relief on bringing in goods or services from the Domestic Tariff Area (DTA).
• Duty exemption on importation.
• Central excise exemption (as may be applicable).
• Input tax refund and duty drawback.
• Treatment of zero-rated supply to SEZs with regard to supplies.
3. Operational Benefits

• Approvals and compliances process cleared through a single window.
• Labour and environment standards eased.
• Export earnings and profit fully repatriable.
• World-class infrastructure, including utilities, warehousing, and logistics.

Compulsory Compliance Obligations for SEZ Units

For benefit and compliance, the following shall have to be followed by SEZ units:

1. Letter of Approval (LoA): Approval by the Development Commissioner for SEZ units before the commencement of operations.
2. Bond-cum-Legal Obligation: Execution of a bond and maintenance of terms of approval by units.
3. Annual Performance Report (APR): To be submitted to the Development Commissioner on an annual basis with export, import, NFE (Net Foreign Exchange), and employment information.
4. Export Obligations: The unit would be obligated to incur a positive NFE in five years.

Formula: Export revenue – Import cost ≥ 0

5. DTA Sales: Units can sell in the domestic market but the sales would be levied with customs duty as if goods are imports from India.

GST and SEZ: Key Highlights

• SEZ units are considered separate persons under GST.
• SEZ inputs are zero-rated supplies (i.e., exempt with input tax credit).
• File Letter of Undertaking (LUT) or pay IGST by GST suppliers on the above supplies.
• SEZ unit exports are exempt from GST.

Transition and Reforms: What's Changing?

The government has proposed replacing the SEZ Act with a new model of the Development of Enterprise and Service Hubs (DESH) Bill.

Key Proposed Changes:

• Eliminate compulsorily exportable commitments for SEZ units.
• Provide enhanced autonomy to sales in India.
• Try to make SEZs an export hub and domestic production hub as well.
• De-link tax incentive with SEZ status.

Such an amendment will make SEZs WTO-friendlier policy-oriented and increase economic activity overall.

SEZs from Auditor/Accountant's Viewpoint

Tax professionals, auditors, or accountants will find SEZs a whole package of best areas of interest:

• Area_audit/Compliance Focus
• Income Tax Sec 10AA eligibility, computation of export profit.
• Indirect Tax reconciliation of GST returns, duty-free import.
• Performance Computation of NFE, exports vs DTA sales report.
• Records Bond-cum-LUT records, stock movement records.
• Financials Reconciliation of exports, forex receipts, and repatriation.

These are particularly useful for statutory auditors, GST consultants, and internal auditors dealing with SEZ clients.

Conclusion

India Special Economic Zones have proven to be a blessing for job growth, industrial development, and the growth of exports. Even though relief from taxations has been withdrawn since 2020, business ease, regulatory ease, and operating benefits continue to make SEZs the first choice of preference.

With the upcoming changes such as the DESH model, SEZs will also be harmonized increasingly with the domestic market and services sector. SEZ regulations must be made known by experts and companies to fit the evolving trade and tax landscape of India.