Understanding SEZ and STPI: Framework, Definitions, and Objectives
SEZ and STPI are effective business vehicles governed by specific legal frameworks like the SEZ Act, 2005. This includes the lifecycle of SEZ and STPI, units within SEZ, and important definitions/concepts. SEZ aims to promote economic activities, exports, investments, job creation, and infrastructure development within designated duty-free enclaves. The legal framework provides an overriding effect on other laws to maintain consistency. Various key definitions like developer, co-developer, entrepreneur, and manufacturing are elucidated within the SEZ context.
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SEZ and STPI Effective Business Vehicles CA Guruprasad G
Lifecycle of SEZ and STPI ENTRY OPERATE EXIT
Legal Framework - SEZ Special Economic Zones Act, 2005 Special Economic Zones Rules, 2006 Notification Instructions Section 51 provides overriding effect over any other law for the time being in force to the extent of any inconsistencies
SEZ - Background Special Economic Zone commonly understood as - A delineated duty-free enclave of units - Operating in a well defined area, within the geographical boundary of a country - Where certain economic activities are performed, and - Are subject to a special fiscal and regulatory regime. The SEZ Act, 2005 (the SEZ Act) and the SEZ Rules, 2006 ( the SEZ Rules ) were enacted with the following key objectives:- - generation of additional economic activity; - promotion of exports of goods and services; - promotion of investment from domestic and foreign sources; - creation of employment opportunities; and - development of infrastructure facilities.
SEZ Important Definitions/ Concepts Developer - Developer means a person who, or a State Government which, has been granted by the Central Government a letter of approval under sub-section (10) of section 3 and includes an Authority and a Co-Developer; Co-Developer "Co-Developer" means a person who, or a State Government which, has been granted by the Central Government a letter of approval under sub-section (12) of section 3; Entrepreneur Entrepreneur means a person who has been granted a letter of approval by the Development Commissioner under Sub-section (9) of Section 15 Manufacture manufacture means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use; and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining;
SEZ Important Definitions/ Concepts Service Service means such tradable service which a) Are covered under the General Agreement on Tariffs and Services annexed as IB to the Agreement establishing the World Trade Organisation concluded in at Marrakesh on 15th April, 1994; b) May be prescribed by the Central Government for the purposes of this Act; and c) Earn Foreign Exchange Export Means a) 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 b) Supplying goods, or providing services, from Domestic Tariff Area to a unit or a developer; or c) Supplying goods, or providing services, from one unit to another or developer, in the same or different Special Economic Zone SEZs can be categorised on basis of sector, function or location and required to have processing as well as non-processing area (it can be multi-product, specific sector or in a port or airport). An SEZ unit may be established for manufacturing of products or for rendering of services or for both
Institutional Framework and Constituents Board of Approval ( BoA ) Approving proposals to set up SEZs Approval of authorised operations in an SEZ Approvals for infrastructure provision (through co-developers, etc) Unit Approval Committee Approve proposals for establishment of SEZ units Monitor compliance by SEZ Developers, Units Approve transfer of the unit Development Commissioner Act as the Chief Executive Officer for the SEZ Developer Planned Development of SEZ Develop, operate and maintain infrastructure Co-Developer Provider of infrastructure facilities
Setting up of an SEZ unit | Approval process
Setting up of an SEZ unit | Approval process Referral Steps in setting up a unit in SEZ 2 1. Identify the Area and make a proposal for setting up the SEZ unit UAC DC 2. The Development Commissioner (DC) to forward the proposal to the Unit Approval Committee (UAC) Decision 3 Proposal 6 1 3. The UAC may approve (with / without modifications) or reject the proposal Letter of Approval 4. In case of rejection provisions for appeal to the Board of Approval (BoA) Applicant Unit 5. The BoA after hearing the applicant renders its final decisions Approved!!! 6. In case of acceptance, DC to issue Letter of approval to applicant 4 5 7. Post receipt of Letter of Approval, the applicant to carry out post approval formalities. Appeal Final decision BOA
Tax considerations
Tax benefits - SEZ Income Tax holiday (MAT/DDT applicable) Indirect Tax exemptions and refunds Customs duty exemption SEIS incentives
Income-tax benefits SEZ Unit Income tax exemptions under the Income-tax Act, 1961 subject to certain conditions being satisfied Deduction under section 10AA of the Income-tax Act, 1961: Year Benefit 1-5 years 100% of profits 6-10 years 50% of profits 11-15 years Max of 50% profits subject to certain conditions The profits of SEZ unit however is subject to Minimum Alternative Tax @ 21.55 (approx.) Income tax benefit is available for SEZ unit which commences operations on or before March 31, 2020 [ sunsetdate ] No minimum export obligation Local sale of goods/ rendering of services allowed Sub-Contracting Job works are allowed Note: SEZ units are obliged to achieve positive net foreign exchange earning
Certain conditions relating to SEZ unit Restrictive conditions under section 10AA: - Unit is not formed by splitting up, or reconstruction, of a business already in existence; - Unit is not formed by the transfer to a new business, of machinery or plant previously used for any purpose in excess of 20% of the machinery or plant used in new business. Movement of employees: CBDT Circular No. 14 of 2014 Mandates satisfaction of either of the two conditions to claim tax benefit (with respect to manpower) Transfer or deployment of manpower from the existing unit to the new unit to the extent of 50% of the total technical manpower actually engaged in the new unit, would not be construed as splitting up or reconstruction of existing business; Net addition of the new technical manpower in all units of the assessee is at least equal to 50% of the total technical manpower of the new unit SEZ law - No restrictions on transfer of manpower / and plant and machinery [Instruction No. 70]
Illustration 20% criteria Illustration capturing 20% criteria: Particulars Particulars New SEZ unit New SEZ unit . Value of installed capital goods (Imported - Used) A 20 Value of installed capital goods (Imported - New) B 100 Value of installed capital goods (Domestic - New) C 40 Value of installed capital goods (Domestic - Used) D 10 Value of capital goods proposed to be procured (Domestic - Used) E 10 Observations Observations Remarks Remarks First condition - % of employees transferred to the new unit ((A+D+E)/(B+C)) <20% 28.57% With imported used goods Allowed First condition - % of employees transferred to the new unit ((D+E)/(A+B+C)) <20% 12.5% Without imported used goods Allowed
Illustration Employee Transfer Illustration capturing transfer of technical manpower: Particulars Particulars Existing unit Existing unit New SEZ unit New SEZ unit . No of employees as at the beginning 10,000 (A) - No. of employees transferred from existing unit to new unit (1,000) (B) 1,000 (C) Net additions of new employees during the year 500 (D) 100 (E) Total No of employees as the end of the year 9,500 (F=A-B+D) 1,100 (G =C+E) Observations Observations Remarks Remarks First condition - % of employees transferred to the new unit (C/G=1000/1100) 90.09% Given that the % of employees transferred to the new unit exceeds 50% of the total manpower engaged in the new SEZ unit, this requirement is not satisfied Second condition - Increase in employees as a percentage of total number of technical manpower in SEZ unit [(D+E)/G = 600/1100] 55% Given that increase in employees in the SEZ unit as a % of total manpower in the SEZ unit is more than 50%, this condition is satisfied Eligibility to avail deduction under section 10AA Yes Given that one of the above conditions is satisfied, the unit will not be regarded as unit formed by splitting or reconstruction
Indirect Tax benefits Import of goods: Import of goods for authorized operations would be duty free Import of services: Import of services for authorized operations would be exempt from Integrated Goods and Service Tax (IGST) Domestic procurements: Domestic procurement of goods (inputs and capital goods) for authorized operations would not be subjected to Goods and Service Tax (GST) Domestic procurement of services for authorized operations would not be subjected to GST. In case where GST is paid then refund of the same can be claimed. 18
SEZ - Procurement SEZ Imports SEZ/ FTWZ STPI/ EOU Domestic Goods: Exempt Services: Exempt Goods: Zero Rated Services: Zero Rated Goods: Zero Rated Services: Zero Rated Intrastate Interstate Goods: Zero Rated Services: Zero Rated Goods: Zero Rated Services: Zero Rated
SEZ - Sale SEZ Export SEZ/ FTWZ STPI/ EOU Domestic Goods: Customs duty exempt ? IGST exempt up to March 2020 Services: IGST payable Goods: Zero Rated Services: Zero Rated Goods: Zero Rated Services: Zero Rated Intrastate Interstate DTA would pay: Goods: Customs duty and IGST Services: IGST DTA would pay: Goods: Customs duty and IGST Services: IGST
SEZ Recent Updates Management Consultancy Services added Instruction No 94 Setting up of special facilities for unit s exclusive use Instruction No 95 Cafeteria Creche Gymnasium Any other similar facilities Approving Authority : Development Commissioner or Unit Approval Committee Requirement: NOC from Developer and from relevant statutory authorities (fire, health and safety, pollution control etc) Trusts included in the definition of person
Key questions What benefits will be available if a unit moves into an SEZ after the sunset i.e. post 1 April 2020? Can a tenant occupy an SEZ building and not avail any benefits? Whether movement of units from one SEZ to another SEZ is permissible? Can domestic business be conducted from SEZ location? What would be the impact if the SEZ unit scales its operations over a period of time and there is significant expansion in phases post April 1, 2020? Will the tax benefit be available if an existing DTA/ STP unit moves lock, stock and barrel into an SEZ? New country entrants and what should they do?
Key aspects to be considered GST credit to be distributed through ISD mechanism to SEZ? Removal of inputs and capital goods to DTA and requirement of surrendering deemed export benefit Approved list of services (67) vis- -vis GST law of ZeroRated supplies FTWZ model (Insurance to intermediary issue) intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account; Watch out for Super Manufacturing Zones
Specific Instructions Removal of goods for testing, replacement, repairs, R&D permissible on self attestation basis under intimation to SO Instruction No.84 Monitoring of amount in Bond cum undertaking is responsibility of the unit Instruction No.72 DRC/BCP for SEZ unit: Outside SEZ or within another SEZ permitted with prior approval. Third party DRC/BCP centre permitted to be set up in a SEZ
Compliance requirements - SEZ Monthly performance reports (MPR) Service Export Reporting Form (SERF) Annual Performance Report (APR) SOFTEX
Legal Framework - STPI Chapter 6 of Foreign Trade Policy 2015-20 Notification 52/2003 - Customs Regulated by Software Technology Parks Authority of India under MeiTy
Tax benefits - STPI Income Tax holiday exhausted in FY 2011 Indirect Tax exemptions and refunds Customs duty exemption
STPI/ EOU - Procurement STPI/ EOU Imports SEZ/ FTWZ STPI/ EOU Domestic Goods: Custom duty exempt IGST exempt up to March 2020 Services: IGST payable Goods: Custom duty exempt IGST exempt up to March 2020 Services: IGST payable Goods: Deemed export Refund claim of GST paid by Supplier or receiver Services: IGST payable Intrastate Interstate Goods: Deemed export (mftr goods) Refund claim of GST paid by EOU or DTA Services: IGST payable Goods: Deemed export (mftr goods) Refund claim of GST paid by EOU or DTA Services: IGST payable
STPI/ EOU - Sale STPI/ EOU Export SEZ/ FTWZ STPI/ EOU Domestic Goods: Zero Rated Services: Zero Rated Goods: Zero Rated Services: Zero Rated Goods: Deemed export Refund claim of GST paid by Supplier or receiver Services: IGST payable Intrastate Interstate Goods and Services: CGST/ SGST payable Goods and Services: IGST payable
STP units are not bonded warehouses Customs Notification No. 44/2016- Cus (amends notification no. 52/2003- Cus) Customs Circular No. 35/2016- Cus DGFT Notification No. 23/15-20
Impact of the notifications 1/3 Warehousing Provisions under Chapter IX of Customs Act, 1962 not applicable w.e.f 13th August 2016 Make in India initiative - Ease of doing business Maintenance of records in Form A is only prospective, however details regarding goods lying in stock as on 13th Aug 2016 shall be integrated into Form A Units stand delicensed as warehouses Digital copy of Form A containing the transactions for the month shall be provided to the proper officer by 10th of next month in a CD or Pen Drive Warehousing bond register not required to be maintained. Records of receipts, storage, processing and removal of goods imported to be maintained in Form A in digital form Software to maintain the data elements of such Form A should have the facility of audit trial
Impact of the notifications 2/3 Alternative procedure prescribed as follows Unit shall continue to furnish the procurement certificate at the customs station Upon receipt of goods in unit, a copy of relevant BOE shall be provided to jurisdictional office Requirement of sending re-warehousing certificates has been dispensed with Jurisdictional office shall reconcile the imports with procurement certificates
Impact of the notification 3/3 Inter unit transfer of capital goods/ manufactured goods Alternative procedure prescribed as follows Procurements to be supported by procurement certificate Supply of goods from one unit to another shall be based upon usual commercial documents such as invoice and delivery challan Bond to bond transfer procedure dispensed with Upon receipt of goods, copies of documents shall be provided to the jurisdictional office of the sending and receiving unit by way of intimation
Compliance requirements - STPI Quarterly performance reports (QPR) Annual Performance Report (APR) SOFTEX Form A
GST implications on IUTs From To Category GST STP STP Intra State NA STP STP Inter State IGST STP SEZ Intra State Zero Rated STP SEZ Inter State Zero Rated SEZ SEZ Intra State Zero Rated SEZ SEZ Inter State Zero Rated SEZ STP Intra State Deemed Imports Notification No 52/2003 ? SEZ STP Inter State
Thank You CA Guruprasad G This document is for informational purposes only and should not be construed as professional advice. Dhruva Advisors LLP (Dhruva) disclaims any and all liability to any person for any loss or damage caused by errors or omissions, whether such errors or omissions result from negligence, accident or any other cause. Dhruva assumes no liability for the interpretation and/or use of the information contained on this document, nor does it offer a warranty of any kind, either expressed or implied.
