SEZs – The tax implications with regards to SEZs

Introduction: Unravel the world of Special Economic Zones (SEZs) – designated regions with distinct economic laws. Explore the tax implications, GST laws, and the latest amendments introduced by the Ministry of Commerce and Industry. Gain insights into the benefits that make SEZs a hub for economic growth.

What are SEZs?

SEZ stands for Special Economic Zone. It’s a region within a nation that has been given special economic rules and laws that set it apart from the rest of the nation. Establishing Special Economic Zones (SEZs) aims to increase economic activity, encourage exports, draw in foreign direct investment (FDI), and create jobs.

There is one more term which we need to understand, that is DTA (Domestic Tariff Area), its normal part of the country where standard economic regulations and taxes apply. There are no special exemptions or incentives unlike SEZ.

In simple terms, DTA (Domestic Tariff Area) and SEZ (Special Economic Zone) refer to different areas within a country that have distinct economic rules.

So, now let’s understand the very crucial point – What are the tax implications with regards to SEZs?

Generally, Special Economic Zones (SEZs) offer various tax incentives to attract businesses and promote economic growth. Given that every country may have its own set of laws and regulations governing SEZs, can differ from one to the next.

1. Income tax exemptions to SEZs

Newly started enterprises or units located in SEZs are eligible for a 15-year tax advantage under Section 10AA of the Income Tax. Nevertheless, there is a deadline for claiming a deduction under this clause. For example, it is only applicable if the SEZ unit started operating on April 1, 2005 or later but prior to April 1, 2021.

Furthermore, as per section 139(1), an assessee who fails to file a return of income by the specified deadline will not be eligible for any deduction following the latest revision.

Exemption shall be available on export profits, so let’s understand the how export profit is to be calculated with the help of formula and one simple example

Formula:
Profit from export = Total profit of the SEZ X SEZ’s Export Turnover / Total Turnover of the SEZ.

Rudra Limited. Has one unit at SEZ and other unit at DTA. The company provides following details for the year.

By applying the above given formula we can get export profits (exemption)

SEZ’s total profit * SEZ’s export Turnover/ SEZ’s total turnover     

=60,00,000*30,00,0000/40000000

= 450,000/-

Exemptions to be claimed throughout the 15 years given below :

1. for the first 5 years 100% exemption can be claimed i.e. 450000/-

2. next 5 years 50% exemption can be claimed i.e. 50% of 450000/- = 225000/-

3. rest 5 years amount transferred to SEZ reinvestment revenue Account* subject to 50% of the export profit.
(*reinvestment revenue account – special account opened to claim exemption for the rest five years out of 15 years block & purpose for the this account to ensure that amount should not be misused)

2. GST laws on SEZ

When it comes to taxes, there are certain benefits to being in a SEZ. Any supply of goods or services or both to a Special Economic Zone developer/unit will be considered to be a zero-rated supply.

This indicates that there is no GST tax applied to these supplies. Put differently, supplies into SEZ are treated as exports and are not subject to GST. As a result, the vendors providing products to SEZs are able to:

Provide services under a bond or letter of undertaking without paying the IGST and claiming an ITC credit; or Provide services after paying the IGST and requesting a refund of taxes paid.

Any delivery of goods or services, or both, to any individual from a SEZ will be deemed a normal interstate supply and subject to the IGST.

The only exception to this rule is when a SEZ exports products or services, or both, to a Domestic Tariff Area (DTA). In this case, the SEZ is exempt from customs duties and other import levies, and the recipient of the supplies in the DTA will be responsible for paying these costs.

MINISTRY OF COMMERCE AND INDUSTRY (Department of Commerce) NOTIFICATION New Delhi, the 6th December, 2023

1. The Special Economic Zones (Fifth Amendment) Rules, 2023 have been introduced by the Central Government in accordance with the Special Economic Zones Act, 2005.

2. The amendment adds a new rule, 11B that permits the designation of a non-processing region inside Special Economic Zones designated for information technology or information technology-enabled services. Subject to restrictions imposed by the Board of Approval, this space may be utilized by IT-related enterprises.

3. The non-processing region’s tax advantages must be reimbursed by the developer, and its demarcation is contingent upon the processing area remaining over a predetermined threshold.

4. Certain SEZ benefits are not available to businesses located in the non-processing region, and there are no tax benefits associated with operating and maintaining shared infrastructure.

5. These companies also have to abide by all applicable Central Acts, rules, and orders for entities.

Special Economic Zones (SEZs) in India are designated areas that offer a range of benefits to promote economic growth and attract foreign direct investment.

Here are Some points highlighting the benefits of SEZs in India:-

1. Tax Incentives: Businesses find Special Economic Zones (SEZs) in India appealing because they are able to take advantage of a number of tax incentives, including as exemptions from income tax, customs duty, and excise duty.

2. Infrastructure Development: SEZs are known for having well-developed infrastructure, which includes transport hubs, contemporary amenities, and a steady supply of electricity. This infrastructure fosters the growth of enterprises in the area.

3. International Direct Investment (FDI): SEZs are essential for FDI attraction because they provide a business-friendly environment, faster processes, and less administrative obstacles for international companies.

4. Foreign Direct Investment (FDI): SEZs are essential for FDI attraction because they provide a business-friendly environment, faster processes, and less administrative obstacles for international companies.

5. Employment Opportunities: By encouraging industrialization and economic activity, the formation of Special Economic Zones (SEZs) creates job opportunities in the manufacturing and service sectors.

6. Export Promotion: SEZs prioritize export-focused operations, fostering the expansion of exports by giving companies a venue to manufacture goods and services for the global market.

7. Customs Procedures: Special Economic Zones (SEZs) enjoy streamlined export-import and customs procedures, which expedite the clearance of commodities, lower transaction costs, and enhance overall efficiency.

8. Single Window Clearance: Special Economic Zones (SEZs) frequently provide a single-window clearance system that simplifies the permission, license, and clearance approval procedures and reduces bureaucratic.

Conclusion: The SEZ unit’s deadline to obtain the exemption and take advantage of these benefits was extended until June 30, 2020. Special Economic Zones (SEZs) no longer offer the once-guaranteed tax exemptions and benefits. Businesses considering entry into SEZs must be aware that the economic landscape has changed. The enticing advantages, including tax exemptions, income tax benefits, and duty concessions, are no longer assured.

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The above article is written by Ms. Laxmi Malge ([email protected]) and reviewed by Mr. Suyash Tripathi ([email protected]).