1. Do tax benefits available to SEZ units have a sunset clause / specific timeframe?

All the input taxes i.e. Excise, Import duty, CST, Minimum Alternate Tax (MAT), Work Contract Tax, Service Tax, VAT (on inputs for manufacturing for export purposes) etc. are forever exempted in a SEZ. However, the Income Tax is exempted for a period of 15 years i.e. 100% of export profit is exempted from Income Tax for the first 5 years from the date of first exports. For the next 5 year, 50% of export profit is exempt. For the last 5 years, 50% of the ploughed back export profit is exempt from Income Tax. Above benefits are available subject to attainment of positive Net Foreign Exchange (NFE) earning in a block of 5 years from the date of commencement of operations.

2. Is NFE calculation a complex equation?

NFE is calculated on a simple formulae i.e. Exports (FOB value of all exports) - Imports (CIF value of all imports) > 0. In simple words, if a unit is bringing in ‘X’ amount foreign exchange i.e. exports and is buying ‘Y’ amount of foreign exchange from the Government and if X is > Y even by 1$, it has achieved a positive NFE.

3. Is SEZ similar to EOUs?

EOU is a scheme with an applicable sunset clause whereas SEZ is an Act. The SEZ Act has many advantages over the EOU scheme.

• Net Foreign Exchange earning as a percentage is not applicable. Only units have to be NFE (net foreign exchange) positive cumulatively at the end of 5 years.
• Predetermined value addition is not compulsory.
• No maturity restriction on external commercial borrowings
• Duty free material could be utilized in five years time instead of one year.
• Self certification is applicable for imports and exports.
• Mandatory period of 180 days for receipt of export proceeds has been extended to 360 days.
• As per Sunset Clause, EOU's may not be eligible for any Income tax benefit u/s 10B, for exports affected after 31/03/11.

4. Are supplies from Domestic Tariff Area (DTA) to SEZ Units considered as "deemed exports"?

Supplies from DTA to SEZ are treated as physical export. The DTA supplier would be entitled to:

• Drawback/DEPB
• CST Exemption
• Exemption from State Levies if provided through notification
• Discharge of Export Performance if any on the suppliers
• Income Tax benefit as applicable to physical export under section 80 HHC of the Income Tax Act.

5. Does a Unit situated in a SEZ has to fulfil a large number of obligations?

SEZ operations are much easier and only have to perform the following obligations:

• SEZ units have to achieve positive net foreign exchange earning in a block of five years i.e. Exports (FOB value of all exports) - Imports (CIF value of all imports) > 0. Please see Clause 53 of Chapter VI of the SEZ Rules, 2006 for a more detailed explanation
• The units have to execute a bond with the Development Commissioner and Specified Officer (Customs) for their operations in the SEZ
• The units have to maintain proper books of accounts
• Annual Performance Reports must be submitted to the Development Commissioner

6. is SEZ only Income Tax haven. It does not provide any other benefits to the Units?

Apart from a 15 year income tax holiday, following benefits are available to a Unit:

• Exemption from Excise and Customs Duties
• Exemption from Central Sales Tax / VAT (For input material used for manufacturing for export purposes)
• Exemption from Service Tax
• 100% FDI through automatic route
• Domestic Sales on payment of applicable duties by the buyer
• External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions
• No requirement for Import License
• Freedom to bring in export proceeds without any time limit
• Flexibility to keep 100% of export proceeds in EEFC account
• On-site custom house
• Self-certification
• Warehouses/ICD

7. Are DTA exports faster than SEZ?

Due to procedural ease as provided in the scheme and the on-site Customs House, the turnaround time for imports and exports in a SEZ is shorter. Customs examination is to the bare minimum. SEZ units function on self certification basis. Also, loading and unloading costs are cheaper due to service tax exemptions. A SEZ allows the following operational benefits:

• In-house Customs Clearance
• Self-declaration for Imports & Exports
• In-house logistics & Warehousing Zone
• Exports can be made directly from the sub-contractor’s premises located anywhere
• No license required for imports
• Inter-SEZ units job-work and sale allowed
• Uninterrupted Electricity & Water supply

8. Being a deemed foreign territory, can SEZ Units opt for subcontracting part of its production / job-work.?

SEZ units can subcontract (with prior permission of the Specified Officer sought annually) to units in the SEZ/DTA which are registered with the excise department (if excise applicable otherwise to any other unit). The goods sent out for subcontracting have to be returned to the SEZ within 120 days from the date of removal or within a period as may be extended by the Special Officer in charge of this procedure.

Goods then can also be exported directly from the DTA unit provided it is registered with the Central Excise Department. This is allowed only by way of direct export and not through third parties. SEZ units can also do contract work for domestic companies, provided all raw material including semi-finished goods and consumables including fuel is supplied by the DTA exporter. In this case, the finished goods must be directly exported from the SEZ unit on behalf of the DTA exporter. The export document is jointly in the name of the DTA unit and the SEZ unit. The DTA exporter is eligible for refund of duty paid on the inputs by way of brand rate of duty drawback.

9. Routine examination of goods by customs in the EOU is common. Will the same practice continue at the SEZ?

Customs examination is to the bear minimum. SEZ units function on self certification basis. The meaning of Hassle Free Zone clearly originates from this concept. No Tax, No Duties, No Hurdles.

10. Can SEZ units operate both in the domestic tariff area (DTA) and SEZ area?

In-fact a company can set up units both in the SEZ and DTA, provided separate accounting procedures are maintained by the units.

The recent changes in Section 10AA of the Income Tax Act in the recently announced Union Budget allow a business to have the same unit in DTA as well as SEZ. The amendment was made to rectify an anomaly in the wording of the Section that adversely affected SEZ units. As per the Section 10AA, ‘export turnover of the unit’ is divided by the ‘total turnover of the assessee’ for calculation of exemption from income tax on export profit.

Now the total turnover of the “undertaking” i.e. unit located in the SEZ will be considered instead of total turnover of the business of the assesses.

The rectification of the anomaly will be a very big incentive for companies to move into the SEZs as they can keep the tax rebate earned on exports from SEZs separate from similar rebate earned from their units in DTA (or the area outside SEZs in the country where normal taxes and duties apply).

11. Can SEZ units sell to the domestic market?

SEZ units can sell goods and services, including rejects and scrap or other by-products of the manufacturing process in the domestic market on payment of applicable customs and excise duties. In-fact unlike EOU, where only upto 50% of FOB value of sales of preceding year can be sold in the DTA, there is no upper limit on DTA sales in a SEZ.

12. Should a unit immediately commence operations with full-fledged facilities.?

As per the SEZ Act, a Unit must be operational within a year from the date mentioned on the LoA (Letter of Approval). By citing relevant reasons, a further extension of 1 year is also available.

Also in order to be operational, it is not a must to have an upfront full-fledged facility. Operations can be commenced even from a pre-fabricated (e.g. Kirbi) factory and expansion can be done thereafter.

Unlike EoU, there is no minimum Capital expenditure limits imposed on the units in SEZ. A unit can start with minimum infrastructure to get going.

13. Is SEZ govern by multiple authorities.?

The Unit Approval Committee consists of representatives from State Government, Income Tax, Excise & Customs, DGFT etc. and is headed by the Development Commissioner. The DC appointed for the SEZ, therefore, is the nodal officer and is the superseding authority in all the matters related to a Unit situated in a SEZ.

The performance of the SEZ Units too is monitored by the Unit Approval Committee on annual basis.

14. Are banks reluctant to provide finance to a SEZ Unit?

The application for setting up a Unit in SEZ is scrutinized by the Unit Approval Committee consisting of representatives from State Government, Income Tax, Excise & Customs, DGFT. If the application is approved by the committee, Banks and Financial Institutions are more than willing to finance the Units as they consider the project to be viable and safe.

Also SEZ Act allows Units to opt for External Commercial Borrowings (ECBs) upto $500 million with cheaper interest rate without any maturity restrictions. Overseas Banking Units (OBUs) also offer term loans at London Inter Bank Offer Rate to the Units situated in a SEZ.

15. Exit route is not clearly defined in a SEZ

Through a recent notification (No. S.O.1293 (E) dated 20-05-2009), the Approval Committee has also been empowered to approve of change of the entrepreneur of an approved unit, if the incoming entrepreneur undertakes to take over the assets and liabilities of the existing Unit. In other words, a suitable exit route has been defined if a unit is not able to function.

If the SEZ unit is also operational in the DTA under the same name, the exit allows the outgoing unit to be operational in DTA under the previous name. The outgoing unit has to first surrender the LoA to the DC and then can bring a new unit. The new entrepreneur then will have to apply for a fresh unit approval and will also get a 15 year Income tax holiday.

16. Is part-shipment possible from a SEZ?

Part-shipment can be easily done from a SEZ. Cartons are sealed by the in-house customs and are then handed over to the Clearing & Handling Agent (CHA). The CHA then sends it to the designated port. If the seal is found in-tact, the carton is exported to the desired destination.

17. Can used capital goods be transferred from DTA to a SEZ Unit?

Units are now permitted to shift used capital goods into SEZ beyond the stipulated valuation limit of 20% by paying income tax. This move will be a big incentive for all the units coming into SEZs as they will now be able to shift expensive capital items, worth over 20 percent of total value of new capital goods installed in the SEZ unit (which is the current norm) provided they pay income tax on it.

This amendment will help SEZ units save a fortune by transferring capital goods as compared to purchasing new ones.

18. Are unit Approval process tedious and cumbersome?

Ministry of Commerce has issued instruction to all the Development Commissions to conduct the Unit Approval Committee Meeting within an interval of 15 days.

All approvals are given by the Unit Approval Committee headed by the Development Commissioner. Clearance from the Department of Policy and Promotion/Board of Approvals, wherever required will be obtained by the Development Commissioner, before the Letter of Intent is issued.

Approval Committee shall approve if:

• The proposal meets with the positive NFE earning requirement
• The proposal confirms availability of space, confirmed by the Developer in writing, by way of a provisional letter of allotment
• The applicant undertakes to fulfill the environmental and pollution control norms
• The applicant submits proof of residence, namely, passport or ration card or driving license or voter identity card or any other proof of the proprietor or the partners of partnership firms or Directors of the Company, as the case may be, to the satisfaction of Development Commissioner.
• The applicant submits the Income tax returns along with the annexure of the Proprietor or Partners, or in the case of a company, audited balance sheet for the last three years.

19. Is trading not allowed in a SEZ?

Trading activities (with zero value addition) are permitted in a SEZ. The profits earned on such trading activities are too exempted from Income Tax provided the goods are physically imported to the SEZ from outside India i.e. a foreign country for re-export. In case goods are procured from DTA and are exported, profits from such transactions are not subject to Income Tax exemption.

20. Are labour laws different in a SEZ?

Labour Laws in SEZ remains the same. SEZ is granted a Public Utility Status (PUS), it definitely is a no-strike zone, thus routine activities in SEZs are not hampered by labour unrest.

21. Is sale of Scrap allowed from a SEZ?

SEZ units can sell scrap to DTA units on payment of applicable duties depending on the tariff of the product.