What is SEZ? OR SEZ Full Form
A special economic zone(SEZ) is a specified area within a country that is treated differently for the purpose of taxation. An SEZ is made with the intention of inviting more and more businesses for trade in a specific area, generating employment and encouraging investment. SEZ in India was firstly introduced in the year 2000 in order to match with global ease of doing business rankings.
SEZ is a scheme of ministry of commerce in India to make export promotion. The objective to create an SEZ is make an export favourable ecosystem of money. An SEZ is an export-oriented area with the landmass of India and is considered foreign territory for the purposes of certain taxes.
What is SEZ in India?
Special Economic area is defined as means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone which means the state government and central government has jointly and severally powers to declare a place as special economic zone.
The Special Economic Act, 2005 makes a clear distinction between an SEZ area and domestic Tariff Area.
Under Clause (i) to Section 2 of Special Economic Zone Act, 2005 the “Domestic Tariff Area” is defined as “the whole of India (including the territorial waters and continental shelf) but does not include the areas of the Special Economic Zones;”
Domestic tariff area in simple words means any part in India or outside.
What happens in a Special Economic Zone?
A business in SEZ is exempt for the payment of taxes, duties or cess under all enactments which are given as follows:
The Agricultural Produce Cess Act, 1940 (27 of 1940).
- The Coffee Act, 1942 (7 of 1942).
- The Mica Mines Labour Welfare Fund Act, 1946 (22 of 1946).
- The Rubber Act, 1947 (24 of 1947).
- The Tea Act, 1953 (29 of 1953).
- The Salt Cess Act, 1953 (49 of 1953).
- The Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (16 of 1955).
- The Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957).
- The Sugar (Regulation of Production) Act, 1961 (55 of 1961).
- The Textiles Committee Act, 1963 (41 of 1963).
- The Produce Cess Act, 1966 (15 of 1966).
- The Marine Products Export Development Authority Act, 1972 (13 of 1972).
- The Coal Mines (Conservation and Development) Act, 1974 (28 of 1974).
- The Oil Industry (Development) Act, 1974 (47 of 1974).
- The Tobacco Cess Act, 1975 (26 of 1975).
- The Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978).
- The Sugar Cess Act, 1982 (3 of 1982).
- The Jute Manufactures Cess Act, 1983 (28 of 1983).
- The Agricultural and Processed Food Products Export Cess Act, 1985 (3 of 1986).
- The Spices Cess Act, 1986 (11 of 1986).
- The Research and Development Cess Act, 1986 (32 of 1986).
An SEZ becomes a foreign entity for the purposes of certain taxation and is treated very differently even in the Central Goods and Services Tax Act, 2017 and Income Tax Act, 1956.
There are multiple benefits provided to an SEZ which creates a very favourable environment for a business to grow and boost its profitability. Also, while SEZ area is being set up there is a single window approval system for sez to get approvals from multiple boards. The board through which theses approvals are sought are called Board of Approvals or ‘BOA’.
While there is set of an ‘UNIT’ in SEZ the application is submitted to the development commissioner.
Understanding taxation aspects in SEZ?
- Any business established under SEZ gets deduction of up to 100% of income derived from SEZ for consecutive 5 years in the beginning.
- There is also an exemption from minimum alternative tax Under section 115JB of Income Tax Act, 1961.
- On fulfilment of certain conditions, if a business transfers its assets from an urban area to an SEZ area, capital gain on such transfer will be exempt.
- Exemption from dividend distribution tax for developer of SEZ will be available.
- For businesses under SEZ, the sale of goods from Domestic tariff Area to a SEZ is considered an Export and hence No GST is charged.
- The supply made to an SEZ is considered a Zero-rated supply hence the taxpayer has to either collect no tax or is entitled to get a refund on filing of return.
- A supply made by SEZ to a person in DTA is considered an interstate supply as per section 7 (5) of IGST Act. Now the question arises whether supply from SEZ is to Domestic tariff are be chargeable to duties under Custom Act,1962?
A big Yes! as per section 53 of the SEZ act, SEZ is considered a territory outside the custom territory of India and will be considered as a Port, inland container depot etc for the purposes of Custom Act and hence will be chargeable to
What will happen when exports are made outside India from an SEZ area?
Any supply of goods and services made outside India from SEZ will be considered a Zero-rated supply as per section 16 (1)(a) of IGST Act. And the Supplier will have 2 options :
- Supply without payment of taxes and subsequently filing for ITC which is unutilised.
ii. Supply after making the payment of taxes and subsequently filing for ITC of the taxes so Paid.
Credit facilities Available to SEZ units
- Loans for export business:
The export businesses easily get foundation loans in the form of term loan or working capital finance, which are easy to avail through domestic scheduled banks.
- Packing credit or Pre-shipment credit:
to promote the export business and meet bulky order demands banks provide finance facilities to exporters which can be used to manufacture goods, procure raw material, process and pack the goods. Generally, the rate of intent is not too high and can get extended easily. But if the loan is not adjusted by presenting export documents within 365 days of passing of loans, a higher interest rate is charged.
- Post shipment loans:
Post shipment loans work like discounting and the exporter can avail a loan facility, here he does not have to wait for the payment post shipment.
the exporter can recover the amount of loan from the bank on the invoice value.
- Export Credit Refinance Scheme
Reserve Bank of India (RBI) also provides export credit refinance facility to Banks on the basis of bank’s eligible outstanding rupee export credit both at the pre-shipment and post-shipment stages. Banks can extend a loan of up to 15% of the outstanding export credit eligible for refinancing as at the end of the second preceding fortnight. Export credit refinances scheme must be repaid within 180 days there is no collateral requirement.
Difference between Special Economic Zone (SEZ) and Export oriented Unit (EOU)?
To set up an EOU, manufacturing unit shall have minimum investment et into land, building and machinery of at least 100 lakhs
For SEZ there is no such minimum investment requirement.
Custom clearance procedure
EOUs have a fast-track cleanse scheme under customs of imported consignments.
For an SEZ unit, export and import cleanses are done within the z0ne itself.
EOUs can be set up anywhere in India and does not have any restrictions for location.
An SEZ unit can only be set up at designated places
Central Sales Tax
Purchase-related Central Sales Tax (CST) is reimbursable (but not local tax).
The supplier does not have to pay CST (Central Sales Tax) for SEZ units.
Setting up a business in SEZ or Setting up an EOU is not a big deal, we just need right people to guide us through the starting phase and then it is a sport to play. Setting up SEZ requires certain applications to be made to the Development Commissioner and certain approvals with the board of approvals. There is a tax holiday as SEZ being a part of export promotion policies of a country.
It is recommendatory to Set up in SEZ as there is a huge scope of profits and a plethora of benefits one can avail. Government of India is continuously promoting exports in India. Through tax relaxations, single window approvals and credit schemes there is successful market in to said field.
Also Check : What is Custom Duty?