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SEZ – Special Economic Zone

What is a Special Economic Zone?

A special Economic Zone is a geographical region that is governed by economic laws that are more liberal than a country’s typical economic laws. Usually, the goal in creating an SEZ is to achieve an increase in foreign investment. It is a win-win arrangement that is attractive both or business and for the country. Special Economic Zones in India are governed by provisions of Special Economic Zone Act, 2005, Special Economic Zone Rules, 2006 and any state SEZ Act or state policies where such SEZ is located apart from economic and other legislations.

What is “Special” about Special Economic Zones?

The word “Special” refers to the special economic systems, procedures and policies that apply within the SEZ. The central government gives SEZ special policies, flexible measures and simplified procedures allowing SEZs to utilize a special economic management system.

Why does the government create such Special Economic Zones?

The government can have many objectives in creating such SEZs. Some of them are:

  • Attract Foreign Direct Investment (FDI)
  • Earn foreign exchange and contribute to exchange rate stability.
  • Boost the export sector, especially nontraditional exports.
  • Introduce new technology and create employment opportunities.
  • Develop economically backward regions.
  • Stimulate sectors such as electronics, information technology, R&D, tourism, infrastructure and human resource development that are regarded as strategically important to the economy.
  • Create backward and forward linkages to increase output and raise the standard of local enterprises that supply goods and services to the zone.
  • Provide fast track mechanism for operationalisation and growth.

What are some of the salient features of an SEZ?

The salient features of SEZs are:

  • No additional license required for import.
  • Manufacturing, Trading or Services activities allowed, based on type of SEZ.
  • Freedom of subcontracting.
  • Self declaration for export / import of cargo, acceptable to customs authorities.
  • SEZ units to have positive net foreign exchange earnings on cumulative basis at the end of 5 years and thereafter.

How do I set up my business in Hirco Business City – an SEZ?

First of all know that your relationship manager from Hirco is here to help you in setting up your business in the Hirco Business City. Enterprises in SEZ are typically referred to as a unit. A unit does not have to mean manufacturing. Enterprises that wish to set up units within a special economic zone must be aware of the following points:

  • SEZ Rules provide for single window clearance for setting up a unit in SEZ.
  • Prior to establishing a unit in SEZ, approval must be obtained from the Board of Approval (BOA).
  • SEZ units are permitted to provide contract – manufacturing services to foreign principals.
  • International financial services center (IFSC) / Offshore Banking Units (OBU) may be set up in SEZ to provide low cost finance.

What incentives and facilities do I get when I set up a unit in SEZ?

SEZ units benefit from policy concessions granted by the government. A multitude of fiscal, non- fiscal facilities and benefits are available including duty free import of raw materials, capital goods and income tax exemption.
A summary of some of these benefits are given below:

1. Customs & Excise Concessions

  • The import of goods and local procurement by SEZ units is duty free.
  • SEZ units may either import or procure from domestic sources all their requirements of capital goods, raw materials, consumables, spares, packing materials, office equipments, DG sets etc. – necessary for setting up and operating a unit in the Zone – without any additional license or specific approval.
  • Goods imported duty free or procured locally could be utilized during the approval period.
  • Domestic sales permitted from the unit on payment of applicable customs duty.
  • Domestic sale permitted for rejected goods, waste and scrap on payment of applicable customs duty on the transaction value.
  • 2. Income Tax Concessions

    • 100% income tax exemption for first 5 years and 50% for next 5 years and 50% of the ploughed back export profits for next 5 years.
    • Carry-forward of losses.

    3. Foreign Direct Investment

    • 100% foreign direct investment under the automatic route is allowed in manufacturing sector in SEZ units except arms and ammunition; explosives; atomic substance; narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks; and cigarettes, cigars and manufactured tobacco substitutes.
    • No limits on foreign investment for Small Scale Industries (SSI) reserved items.

    4. Banking / Insurance/ External Commercial Borrowing

    • Setting up Offshore Banking Units (OBU) is allowed in SEZ.
    • External commercial borrowing up to $ 500 million a year allowed.
    • Freedom to bring in export proceeds without any time limit.
    • Flexibility to keep 100% of export proceeds in Exchange Earners Foreign Currency (EEFC) Account.
    • Freedom to make overseas investment.
    • Commodity hedging permitted.
    • Exemption from interest rate surcharges on import finance.

    5. Central Sales Tax Act

    • Exemption from sales tax for sales from Domestic Tariff Area (DTA) to SEZ units.

    6. Service Tax

    • Exemption from Service tax to SEZ units for services consumed within the SEZ.

    7. Environment

    • SEZ permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels and non polluting service industries in the Coastal Regulation Zone area.
    • Exemption from public hearings under Environment Impact Assessment Notification.

    8. Drugs And Cosmetics

    • Exemption from port restrictions under drugs and cosmetics rules.

    9. Sub-Contracting / Contract Farming

    • SEZ units may sub- contract part of production or production process to units in the Domestics Tariff Area or to other EOU / SEZ units.
    • SEZ units may also sub-contract part of their production process abroad.

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