1. Special Economic Zone (SEZ) Export Oriented Units (EOU)
SNK
TAX EXEMPTION SCHEME
Special Economic Zone (SEZ)
And
Export Oriented Units (EOU)
Presentation By:
Ankur Shah
Partner
SNK

2. Agenda Special Economic Zone: Incentives under Income Tax
Incentives under Other Acts
Other Special Fiscal Provisions
Export Oriented Unit:

3. Special Economic Zone (SEZ)

4. What is an SEZ?
“….it is a specifically delineated duty-free enclave and shall deemed to be a foreign territory for the purposes of trade operations and duties and tariffs”
EXIM Policy 2000, Chapter 9 para 30
The purpose -
“... to provide an internationally competitive and hassle-free environment for exports”
I will start with how our government defines the special economic zones…these are basically duty free enclaves that would be foreign territory for the purpose of trade operations - these are basically going to be economic zones designated for private – government/ or joint developer to carry out business – or provide an estate to units to carry out business – in the service, manufacturing and other sectors like infrastructure building like ports etc
The key objective behind having these zones is to provide a hassle free environment for exports

5. What is special?
Duty-free! Exemption from taxes, various subsidies and tax sops
Hassle-free! Exemption from stringent labour and environment regulations
Foreign enclave! A designated duty free enclave and to be treated as foreign territory for trade operations and duties and tariffs
Single Window Clearance!
No license required for import
Only 25% of the area for industrial activity – the rest of the area for entertainment and residential as well as other commercial activities!
What will be special about these zones is that they will be duty free, they will be almost tax free – almost 21 tax related legislations and policies have been amended to allow these sezs to come up, apart from this there will subsidies on stamp duties on land and water and electricity will also be subsidised
The second important specialty is hassle free environment – reducing procedural requirement for clearances as well as allowing escape from some labour and environment related legislations which I will speak of later
The area will be a foreign enclave and the provisions of the state and central sez rules and act will apply
There are specifications as to how much area can be acquired by what kind of project but the multiproduct SEZs will have to acquire a minimum of 1000 ha of land and that’s a minimum. All specifications are about the minimum area that can be acquired
And another special aspect is that a SEZ project or developer has to ensure that 25% of the area has industrial activity or units – the rest of the area is for other purposes – starting from shopping malls to golf courses and other entertainment as well as for housing
The most special part is that all this is within a legislative framework

6. What is special? No fixed wastage norms
Full freedom for subcontracting including subcontracting abroad
Job work on behalf of domestic exporters for direct exports allowed
Contract farming allowed for agriculture/ horticulture units
No routine examination by Customs of export & import cargo
In house customs Clearance
What will be special about these zones is that they will be duty free, they will be almost tax free – almost 21 tax related legislations and policies have been amended to allow these sezs to come up, apart from this there will subsidies on stamp duties on land and water and electricity will also be subsidised
The second important specialty is hassle free environment – reducing procedural requirement for clearances as well as allowing escape from some labour and environment related legislations which I will speak of later
The area will be a foreign enclave and the provisions of the state and central sez rules and act will apply
There are specifications as to how much area can be acquired by what kind of project but the multiproduct SEZs will have to acquire a minimum of 1000 ha of land and that’s a minimum. All specifications are about the minimum area that can be acquired
And another special aspect is that a SEZ project or developer has to ensure that 25% of the area has industrial activity or units – the rest of the area is for other purposes – starting from shopping malls to golf courses and other entertainment as well as for housing
The most special part is that all this is within a legislative framework

7. website : www.sezindia.nic.in

8. Fiscal Benefits available to SEZ
Income Tax
Exemptions of tax, duties or cess in 21 Acts
Cenvat
Customs
VAT
Central Sales tax
Service Tax
Stamp Duty
Securities Transaction Tax
FEMA
Other Acts

9. Synopsis of Key Tax incentives under SEZ Act, 2005
Direct Tax –
SEZ Developers
10 year tax holiday to SEZ 33.99%
Exemption from levy of Minimum Alternate 11.33% (on book profits)
Exemption from levy of Dividend Distribution %
Direct Tax – units in SEZs
15 year tax holiday to units operating in SEZs and earning export 33.99%
Exemption from levy of Minimum Alternate 11.33% (on book profits)
Indirect Tax – SEZ Developers and units in SEZs
Exemption from customs 10%
Exemption from excise
Exemption from service 12.36%
Exemption from levy of Central sales 3%
Drawback of duties paid on goods/ services bought from outside SEZ area
In addition to the above, most State Governments extend additional benefits & incentives under their respective SEZ Schemes such as exemption from local taxes, levies & duties, exemption from electricity, water duties, declaration of SEZs as Public Utility Services

10. Income Tax Benefits

11. Relevant Sections in Income Tax Act,1961
Sr.
Section
Description 1
10(15)(viii)
Interest received on deposit with Offshore Banking Unit (OBU) is exempt 2
10AA
Exemption to newly established Units in SEZ 3
54GA
Exemption of Capital gain on transfer of asset in case of shifting of Industrial Undertaking from Urban Area to SEZ 4
80-IAB
Deduction in respect of profits and gains in development of SEZ 5
80LA
Deduction from income of OBU and IFSC (International Financial Services Centre)

12. Relevant Sections in Income Tax Act,1961
Sr.
Section
Description 6
115JB(6)
Non applicability of MAT to SEZ Developer and Unit 7
115-O
Exemption from dividend distribution tax from current income of SEZ Developer 8
197A
No TDS on interest on deposits made with OBU by Non-resident or person not ordinary resident in India
Changes in the Income Tax Act 1961 relating to SEZ made by
Special Economic Zones Act 2005 w.e.f 10/02/2006

13. Exemption to newly established
Units in SEZ
- Section 10AA

14. Exemption to Unit who begins to manufacture or produce articles or things or provide any services during the PY relevant to any AY commencing on or after
Deduction – Total 15 Years
100% of Profits from export
for 5 consecutive years
50% of Profits from exports
for further 5 assessment years
50% of Profits in the form of credit to “Special Economic Zone Re-investment Reserve Account” for next 5 years

15. Calculation of Deduction
Profit of x ETO of the unit
the unit TTO of the business of
of the assessee
Where,
ETO = Export Turnover
TTO = Total Turnover
Anomaly needs to be resolved

16. Use of Special Economic Zone Re-investment Reserve Account ( S 10AA(2)(a))
Acquiring machinery or plant
Until the acquisition of the machinery or plant, for the purposes of the business of the undertaking other than
for distribution by way of dividends or profits or
for remittance outside India as profits or
for the creation of any asset outside India;

17. Mis-use of Special Reserve Account ( S 10AA(3))
If the Special Reserve Account is misutilised, then the deduction would be taken back in the year in which the Special Reserve Account is misutilised.
If the Special Reserve Account is not utilised for acquiring new plant and machinery within three years then the deduction would be taken back in the year immediately following the period of three years.

18. Consequences for merger and demerger ( S 10AA(5))
Where an undertaking is transferred to another company under a scheme of amalgamation or demerger, the deduction under section 10AA shall be allowable in the hands of the amalgamated or the resulting company.
However, no deduction shall be admissible under this section to the amalgamating company or the demerged company for the previous year in which amalgamation or demerger takes place.

19. Definition of Export in relation to SEZ
As provided under clause (ii) of Explanation 1 to Section 10AA
As per section 2(m) of SEZ Act, 2005
taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise
(i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or
Similar Provisions

20. Definition of Export in relation to SEZ
Income Tax Act
SEZ Act, 2005 --
(ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or
(iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;
Anomaly needs to be resolved

21. Exemption of Capital Gain
on Shifting to SEZ
- Sec 54GA

22. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone.
The exemption is available to all categories of assesses on capital gain arising on the transfer of certain capital asset of industrial undertaking from urban area to SEZ. (whether developed in an urban area or not)
The Asset transferred should be machinery or plant or building or land or any rights in building or land
The capital gain should be utilized within one year before or three years after the date of transfer for the specified purpose.

23. Specified Purpose- 54GA contd..
(i) Purchase of plant or machinery
(ii) Acquisition of building or land or construction of building
(iii) Shifting of the original asset and transferring the establishment of such undertaking to the Special Economic Zone; and
(iv) incurring expenses on such other purposes as may be specified in a scheme framed by the Central Government for the purposes of this section.
The amount of capital gain which is not so utilised for the specific purposes should be deposited in an account with any specified bank or institution and utilised in accordance with the scheme notified by the Central Government

24. Quantum Of Deduction -Sec 54GA contd..
Situation
Result
Amount of Capital Gain < = Cost and expenses incurred for specified Purposes
Entire Capital Gain exempt
Amount of Capital Gain > Cost and expenses incurred for specified Purposes.
Exemption: to the extent of cost and expenses incurred

25. Definition of Urban area
Urban area means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-section.

26. Deduction in respect
of profits
by SEZ Developer
- Sec 80 IAB

27. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in development of Special Economic Zone.
An undertaking which develops a special Economic Zone notified on or after will not be eligible to claim deduction under section 80-IA, but will now be claiming deduction under new section 80 – IAB.
Available to an assessee, being a Developer whose gross total income, includes any profit and gains derived by an undertaking or an enterprise from any business of developing a special Economic Zone, notified on or after under Special Economic Zones Act,2005

28. QUANTUM OF DEDUCTION - Sec 80 IAB contd..
A deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years.
The assessee has the option of claiming the said deduction for any 10 consecutive assessment years out of 15 years beginning from the year in which a SEZ has been notified by the Central Government

29. Transfer of Undertaking
If a taxpayer who develops a special economic zone on or after April 1, 2005 (“transferor”) transfers the operation/maintenance of such zone to another developer (“transferee”), then deduction shall be allowed to the transferee for the remaining period of 10 years as if the operation and maintenance were not so transferred.
Similar rule will be applicable in the case of amalgamation of an Indian company which has developed a special economic zone with another Indian company.

30. Non applicability
of MAT to
SEZ Developer and Unit
- Sec 115JB(6)

31. Section 115JB(6) of the Income Tax Act provides that the provisions of this section shall not apply to the income accrued or arising on or after 1st Day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.

32. on Distributed Profits
No Tax
on Distributed Profits
- Sec 115O(6)

33. No tax on dividends would be chargeable in respect of the total income of an undertaking or enterprise engaged in
developing a SEZ or
developing and operating a SEZ or
developing, operating and maintaining a SEZ
If such dividend (whether interim or otherwise) is declared, distributed or paid by such Developer or enterprise, on or after the 1st day of April, 2005 out of its current income
No tax either in the hands of the Developer or enterprise or person receiving such dividend

34. Offshore Banking Unit (OBU)

35. Interest Income from OBU is exempt
In computing the total income of previous year of any person any income by way of interest received by
Non resident or
a person who is not ordinarily resident in India
on a deposit made on or after the 1st day of April, 2005, in an Offshore Banking Unit
shall not be included (Section 10(15)(viii))

36. Deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre 80LA
Assesses covered
Scheduled bank, or, any bank incorporated by or under the laws of a country outside India; and having an Offshore Banking Unit in a Special Economic Zone; or
(ii) Unit of an International Financial Services Centre,

37. Amount of deduction-Sec 80LA(1)
(a) 100% of such income for 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which
the permission,under 23(1)(a) of the Banking Regulation Act, 1949 or
permission or registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or
any other relevant law was obtained, and thereafter;
(b) 50% of such income for next 5 consecutive assessment years.

38. Income Exempted-Sec 80LA(2)
Income refers to income :
(a) from an Offshore Banking Unit in a SEZ; or
(b) from the business referred to in Section 6(1) the Banking Regulation Act, 1949 with an undertaking located in a SEZ or any other undertaking which develops, develops and operates or develops, operates and maintains a SEZ; or
(c) from any Unit of the International Financial Services Centre from its business for which it has been approved for setting up in such a Centre in a SEZ.

39. Other Benefits

40. Benefits under Customs
Exemption from any duty of customs on goods imported into, or services provided in, an SEZ or a Unit, to carry on the authorised operations by the Developer or Entrepreneur.
Accordingly, as definition of import does not include DTA to SEZ supply, the procurement of goods or providing of services from will not amount to import.
Exemption from any duty of customs on goods exported from, or services provided from, an SEZ or a Unit, to any place outside India.
Drawback or such other benefits as may be admissible from time to time on goods brought or services provided from the DTA into an SEZ or Unit or services provided in an SEZ or Unit by the services providers located outside India.

41. Benefits under Excise
Exemption from any duty of excise, on goods brought from DTA to an SEZ or Unit to carry on the authorised operations by the Developer or Entrepreneur.
Domestic sales by SEZ units will now be exempt from SAD

42. Benefits under Service Tax
The exemption from payment of service tax on taxable services rendered to a Developer or a Unit (including a Unit under construction)
by any service provider
shall be available to carry on the authorized operations in a Special Economic Zone (Consumption Criteria) – Section 26(1)(e) and rule 31

43. Benefits under Central Sales Tax
Every Developer and the entrepreneur is entitled for exemption from the levy of taxes on the sale or purchase of goods other than newspapers under the Central Sales Tax Act, 1956 if such goods are meant to carry on the authorized operations by the Developer or entrepreneur. – Sec 26(1)(g)
This is subject to the condition that the dealer selling goods in the course of inter state trade or commerce to a registered dealer under the Central Sale Tax Act, 1956 shall furnish a declaration in Form – I prescribed under the Central Sales Tax (Registration and Turnover) Rules, Proviso to Rule 32

44. Changes made in Central Sales Tax Act,1956
No CST shall be payable by any dealer in respect of sale of any goods made by such dealer,
in the course of inter-State trade or commerce,
to a registered dealer (developer of SEZ or SEZ Unit as the case may be)
for the purpose of manufacture, production, processing, assembling, repairing, reconditioning, re-engineering, packaging or for use as trading or packing material or packing accessories in an unit located in any SEZ,
if such registered dealer has been authorised to establish such unit by the authority specified by the Central Government in this behalf. (Development Commissioner is of SEZ is authorized to permit a person to set up unit in SEZ) (Section 8(6) of Central Sales Tax Act, 1956)

45. Benefits under Securities Transaction Tax
Every Developer and the entrepreneur shall be entitled to exemption from the securities transaction tax leviable under section 98 of the Finance (No. 2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre. Sec 26(1)(f)

46. Benefits under Stamp Duty under Indian Stamp Act,1899
Exemption from stamp duty on any instrument executed, by, or on behalf of or in favour of the Developer, or Unit or in connection with the carrying out of purposes of the Special Economic Zone. (Section 3 Third Proviso of Indian Stamp Act,1899)
Effected by Change in Indian Stamp Act,1899 by Special Economic Zones Act, 2005 Third Schedule, Part III

47. Benefits under Foreign Direct Investment (FDI)
FDI is allowed through automatic route for all manufacturing activities in SEZ except -
Arms and ammunition , Explosives and allied items of defence equipments, Defense aircrafts and warships,
Atomic substances, Narcotics and Psychotropic Substances and hazardous Chemicals,
Distillation and brewing of Alcoholic drinks and
Cigarette/cigars and manufactured tobacco substitutes.

48. FDI Contd.. 100% FDI in trading activity is permitted
100% FDI allowed for townships and recreational facilities on a case to case basis,
100% FDI allowed for franchise for basic telephone service in SEZ
SEZ Unit can manufacture articles reserved for SSI even if foreign equity exceeds 24%. No License is required (Department of Industrial License Press Note No 5 dated Notification 7(11)/2000-IP dated )

49. Benefits under Companies Act, 1956
Enhanced limit of Rs crores per annum allowed for managerial remuneration
Regional office of Registrar of Companies in SEZs
Exemption from requirement of domicile in India for 12 months prior to appointment as Director

50. Benefits under Banking / External Commercial Borrowings
External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions
Freedom to bring in export proceeds without any time limit
Flexibility to keep 100% of export proceeds in EEFC account. Freedom to make overseas investment from it
Commodity hedging permitted
Exemption from interest rate surcharge on import finance
SEZ units allowed to ‘write-off’ unrealized export bills

51. Direct Dispatch of documents to Foreign buyer
SEZ Units can dispatch export documents direct to consignee outside India.
These need not be routed through authorized dealer
Remittance should be obtained and GR/SDF form should be submitted to authorized dealer within 21 days for monitoring RBI Circular 8/ dated 01/07/2005

52. Job Work abroad and direct dispatch
SEZ Units can undertake Job work abroad and export goods from that country itself
Exporter has to make satisfactory arrangement for realisation of full exports proceeds
(RBI Circular 8/ dated 01/07/2005)

53. Concessions under Environment (Protection) Act
SEZs permitted to have non-polluting industries in IT, and recreational facilities like golf courses, desalination plants, hotels, and non-polluting service industries in the Coastal Regulation Zone area.
Exemption from public hearing under Environment Impact Assessment Notification dated 27th January, issued under Environment (Protection) Rules, 1986 as amended.

54. Labour Laws for SEZ units
The labour laws of the land apply to all units inside the Zone. However, the respective State Government may declare units within the SEZ as public utilities and may delegate the powers of the Labour Commissioner to the Development Commissioner of the SEZ.

55. Exemption from Employees Provident Fund Act and ESI Act.
Ministry of Labour has decided that in respect of SEZs, the State Government may apply for exemption, to the Central Government under Section 16(2) of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952, from the applicability of the provisions of the said Act to SEZ for 5 years. The decision is required to be taken on case-to-case basis.
In respect of the Employee's State Insurance Act, 1945, the State Government, being the appropriate Government, may take a decision as per the powers provided under the Act.

56. Other Fiscal Provisions for SEZ
Chapter VI of Special Economic Zones Act ,2005 (Section 26 to Section 30) relates to “Special Fiscal Provisions for SEZ”
Chapter IV of Special Economic Zones Rules, 2006 (Rule 22 to Rule 46) relates to “Terms and conditions subject to which entrepreneur and developer shall be entitled to exemptions, drawbacks and concessions”
Chapter V of Special Economic Zones Rules, 2006 (Rule 47 to Rule 52) relates to “conditions subject to which goods may removed from Special Economic Zones to DTA”

57. Exemption available to Sub contractor also – Rule 10
Exemptions, drawbacks and concessions on the goods and services allowed to a Developer or Co-developer will also be available to the contractors appointed by such Developer or Co-developer
All the documents in such cases should bear the name of the Developer or Co-developer along with the contractor
Documents should be filed jointly in the name of the Developer or Co-developer and the contractor:

58. Exemption from
All state and local taxes including VAT
R & D Cess
Electricity duty
Under the respective State Acts

59. Other Fiscal Benefits to Special Economic Zones Section 7 of the SEZ Act, 2005

60. Section 7 provides that
Any goods or services
Exported out of, or
Imported into, or
Procured from the Domestic Tariff Area By
A Unit in a Special Economic Zone, or
A Developer
shall be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule.

61. First Schedule to The Special Economic Zones Act, 2005
The Agricultural Produce Cess Act, 1940
The Coffee Act, 1942
The Mica Mines Labour Welfare Fund Act, 1946
The Rubber Act, 1947
The Tea Act, 1953
The Salt Cess Act, 1953
The Medicinal and Toilet Preparations (Excise Duties) Act, 1955

62. First Schedule to Special Economic Zones Act, 2005
The Additional Duties of Excise (Goods of Special Importance) Act, 1957
The Sugar (Regulation of Production) Act, 1961
The Textiles Committee Act, 1963
The Produce Cess Act, 1966
The Marine Products Export Development Authority Act, 1972
The Coal Mines (Conservation and Development Act, 1974
The Oil Industry (Development) Act, 1974

63. First Schedule to Special Economic Zones Act, 2005
The Tobacco Cess Act, 1975
The Additional Duties of Excise (Textile and Textile Articles) Act, 1978
The Sugar Cess Act, 1982
The Jute Manufactures Cess Act, 1983
The Agricultural and Processed Food Products Export Cess Act, 1985
The Spices Cess Act, 1986
The Research and Development Cess Act, 1986

64. EXPORT ORIENTED UNITS (EOUs) Also covering EHTP/STP64

65. Benefits under Income Tax Act
Exemption from payment of Income tax under Section 10B of Income tax Act, 1961.
90% of the profits earned by units in EOU is allowed deduction while computing taxable profits.
Sun-set Clause: No deduction would be admissible from A.Y under the provisions of Section 10B. 65

66. Other Fiscal Benefits
100% foreign equity (is permitted through Automatic Route similar to SEZ units) in Export Oriented Units (EOUs) even if it is manufacturing an item reserved for the small scale sector
Project with minimum investment of Rs.10 million and above in building, plant and machinery qualify to be considered under EOU scheme
- This shall not apply in case of certain industries like agriculture, floriculture, information technology, services, hand made jewellery, etc.
Goods and services exported from units in DTA and units in EOU, remission of service tax levied shall be allowed.
100% of the export earnings can be retained in EEFC A/C. 66

67. Other Fiscal Benefits Contd…
EOUs enjoy several privileges like duty exemption on import and domestic procurement and also Income tax exemption till
EOUs, other than gems and jewellary, are permitted to supply upto 50% of FOB value of exports in the domestic market, subject to fulfillment of positive NFE on payment of concessional duties.
Exemption of Industrial Licensing for manufacture of items reserved for SSI sectors.
Permission to issue of shares or convertible debentures to a person resident outside India in excess of 24% subject to specific sectoral caps on investments by person resident outside India. (Annexure 2 of Master Circular on Foreign investments in India Dated ) 67

68. ELECTRONIC HARDWARE AND SOFTWARE TECHNOLOGY PARKS
100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports
Such units are eligible to purchase, free of customs duty/ excise duty, their entire requirement of capital goods, raw materials and components, spares and consumables, office equipments etc.
Income tax exemption on exports for a block of 10 years of its operation under Section 10A and eligible up to Assessment Year (till )
Such units are permitted to supply upto 50% of production in the domestic market in value terms subject to net foreign exchange earnings 68

69. QUESTIONS/ SUGGESTIONS/ COMMENTS ???
Please on for your queries & suggestion.

70. Thank You
CA. Ankur Shah
Partner
SNK & Co.