Special Economic Zones (SEZs): Setting up, Exiting, and Compliance Guide

In the dynamic landscape of global trade and investment, Special Economic Zones (SEZs) emerge as critical instruments for driving economic growth, enhancing exports, and attracting foreign investment. The SEZ framework, with its enticing incentives and streamlined procedures, has been adopted by many countries, including India, to promote industrialization and development. This comprehensive guide delves into the intricacies of setting up, operating within, and exiting from SEZs in India. It outlines the definitions, processes, and compliance requirements for SEZ Units and Developers, offering valuable insights for entrepreneurs, businesses, and policymakers navigating the SEZ ecosystem.

Q1. What is a Special Economic Zone (“SEZ”) and a SEZ Unit?

A SEZ is a designated geographical area within a country that is outside the customs territory of India. The activities of SEZs and their units are governed by the provisions of the Special Economic Zone Act, 2005 (“SEZ Act”) and the Special Economic Zone Rules, 2006 (“SEZ Rules”). SEZ Unit (“Unit”) is a unit set up inside the SEZ by an entrepreneur or businesses engaged in manufacturing, trading, or service activities. These Units benefit from the various incentives and facilities provided within the SEZ framework.

Q2. Who is a developer and co-developer in SEZ?

As per Section 2(g) of the SEZ Act, a Developer is a person or the State Government who has been granted a Letter of Approval (“LOA”) from the Central Government to conceptualise, plan, and develop the entire SEZ.

As per Section 2(f) of the SEZ Act, any person or a State Government who has been granted an LOA from the Central Government and who intends to provide infrastructure facilities pursuant to an agreement with the Developer is a Co-Developer.

Q3. What is a Domestic Tariff Area (“DTA”)?

As per Section 2 (i) a DTA means the whole of India (including the territorial waters and continental shelf) but does not include the areas of the SEZs.

Q4. What are the various incentives/benefits available to the Units or Developers in SEZ?

As per Chapter 6 of the SEZ Act, the various fiscal incentives offered under the SEZ framework are as follows:

Exemption from any customs duty or excise for import or procurement of goods into the Unit from the DTA;
Exemption from any customs duty for the export of goods from the Unit to any place outside India;
Benefits of duty drawback in case of goods and services provided to Units from a DTA;
Exemption from sales tax or service tax on taxable services provided to Developers or Units;
Single window clearance for Central and State level approvals;
Supply of goods and services by DTA to Units are treated as exports; and
Supply of goods and services by Units to DTA are treated as imports and are subject to customs duties just like in the case of normal imports to India.

Q5. Who is a Development Commissioner in SEZ?

The Central Government may appoint any of its officers not below the rank of Deputy Secretary to the Government of India as the Development Commissioner (“DC”).

The DC can be appointed for one or more SEZs. The DC is responsible for providing guidance in setting up and development of SEZs. DC ensures effective promotion of exports from the SEZ and monitors the performance of Units.

Q6. What is a Board of Approval and Unit Approval Committee?

As per Section 8 of the SEZ Act, the Board of Approval (“BOA”) is to be chaired by an officer not below the rank of Additional Secretary in the Department of Commerce and includes Member (Customs), CBEC as its member. The BOA approves the establishment of a SEZ.

As per Section 13 of the SEZ Act, a Unit Approval Committee is to be notified for each SEZ, within 6 months from the date of establishment of such SEZ. DC has administrative control over the SEZ and chairs the Unit Approval Committee.

The Unit Approval Committee approves the set up of a Unit in the SEZ and the procurement of goods and services Units indigenously or through imports.

Q7. How are SEZs set up in India? What is the application procedure for the setup?

Any person (Developer)/State Government/Central Government can either individually or jointly establish a SEZ.

In case a person intends to set up a SEZ he/she can either submit a proposal to the concerned State Government or even directly to the BOA. Where the proposal is received directly by the BOA, the person obtaining such approval shall take concurrence of the State Government within 6 months from the date of such approval.

In case a State Government intends to set up a SEZ it can do so by submitting a proposal directly to the BOA.

Central Government can Suo moto set up a SEZ after consulting with the concerned State Government without referring the proposal to anyone.

Every proposal mentioned above shall be made under Form A (given under the SEZ Rules) to the DC who shall further forward it to the State Government or the BOA as the case may be.

Once the BOA approves the proposal it shall comminate the same to the Central Government pursuant to which the Central Government shall grant a LOA to the person (Developer) or the State Government.

Q8. What is the time period within which the LOA is granted and what is its validity?

The Central Government shall grant the LOA within 30 days of the receipt of communication from the BOA. The LOA is valid for up to 3 years.

Q9. How is a SEZ notified by the Central Government?

After the Grant of LOA, the Developer shall submit the exact particulars of the identified area along with a certificate from the State Government stating that the developer has legal possession of the identified area and irrevocable rights to develop it. Post the submission the Central Government shall notify the identified area as SEZ. Once the SEZ has been notified the BOA may authorise the Developer to undertake operation in the SEZ. The Developer shall submit the details of the operation to be carried out in Form C7 to the DC.

Q10. How does the Co-developer seek approval for providing infrastructure facilities?

If a Co-Developer intends to provide infrastructure facilities in the SEZ he shall submit a proposal for the same to the BOA.

The Proposal shall be made in Form A1 to the DC who shall forward the same to the BOA within 15 days.

Q11. How are the processing and non-processing areas demarcated in SEZ?

The areas falling within the SEZ may be demarcated by the Central Government as:- (a) The processing area for setting up Units for activities, being the manufacture of goods, or rendering services; (b) The area exclusively for trading or warehousing purposes; and (c) The non-processing areas for activities other than given in (a) or (b).

Q12. How are SEZ Units set up in India? What is the application procedure for the setup of SEZ?

Any person intending to establish a unit for manufacturing goods or providing services within a SEZ is required to submit a proposal in Form F to the relevant DC. Upon receiving the proposal, the DC must forward it to the Approval Committee for evaluation and decision.

The Approval Committee holds the authority to approve the proposal, approve it with modifications, or reject it. This decision-making process must be completed within 15 days from the date of receiving the proposal.

Q13. Are there any conditions to be met to get approval for setting up a SEZ Unit?

Yes, as per Rule 18 of the SEZ Rules, the following conditions have to be fulfilled to seek approval from the Approval Committee:

The proposal meets with the positive net foreign exchange earning requirement;
There should be the availability of space and other infrastructure support;
The applicant undertakes to fulfill the environmental and pollution norms;
The applicant submits proof of residence to DC;
The applicant submits (a) income tax returns in the case of a partnership; or (b) audited balance sheets for the last 3 years in the case of a company.

Q14. What is the validity of the LOA for setting up SEZ Units?

The LOA shall be valid for 1 year within which period the Unit shall commence production or service. The Unit shall intimate the date of commencement of production or activity to DC. On receipt of a request from the entrepreneur, a further extension of 2 years can be granted by the DC. The DC may grant a further extension of 1 year subject to the condition that two-thirds of activities including construction, relating to the setting up of the Unit are complete. If the unit has not commenced production or service activity within the validity period or the extended validity period, the LOA shall lapse.

The LOA shall be valid for 5 years from the date of commencement of production or service activity.

After the completion of 5 years from the date of commencement of production, the DC may, at the request of the Unit, extend the validity of the LOA for a further period of 5 years.

Q15. What are the compliances for existing SEZ Units?

The following major requirements need to be complied with by the Units:

				SEZ RULES, 2006
S. No.	Rule No.	Compliance	Form No./Document	Timeline
	Rule 18	On receipt of the LOA for setting up of the Unit, the Unit has to accept the terms and conditions of the LOA within the stipulated time and take further action as per the terms & conditions mentioned in the said LOA for the implementation of the project.
b.	Rule 18(2)	Unit is required to submit a copy of the registered lease deed to DC concerned.	Registered lease deed	The Unit shall submit the lease deed within 6 months from the issuance of LOA.
c.	Rule 19 (4)	Commencement of production in the Unit shall take place within 1 year from the issuance of the LOA for setting up a Unit. The Unit shall intimate the commencement of production to the DC.		The Unit shall commence production within 1 year.
d.	Rule 19(6) and (6A)	Application for renewal of LOA for setting up Unit- The LOA shall be valid for a period of 5 years from the date commencement of production. The Unit shall apply for renewal of the LOA before 2 months from the expiry of the validity of the LOA in form F1.	Form F1	The Unit shall apply for renewal within 2 months before the expiry of the validity of LOA
e.	Rule 22. (1)(i)	Execution of Bond Cum legal undertaking.	Form H	The Unit shall execute the bond within 30 days of issuance of LOA.
f.	Rule 22(1)(v)	The Unit must obtain a Registration-cum-Membership Certificate from the Export Promotion Council for EOU & SEZ (EPCES) for availing of exemptions, drawbacks, and concessions.
g.	Rule 22(2)	Maintenance of proper accounts- The Unit shall maintain separate records for trading and manufacturing activity		Unit shall maintain the records for a period of 7 years from the end of the relevant financial year.
h.	Rule 22(3)	Submission of Annual Performance Report (“APR”)- The APR should be signed by the authorized representative of the Unit and shall be certified by a Chartered Accountant.	Form I	Unit shall submit the form within 180 days from the end of the relevant financial year.
i.	Rule 53	The Unit shall achieve positive Net Foreign Exchange Earnings which is calculated cumulatively for a period of 5 years from the commencement of production.
j.	Rule 78	E-filing – All applications and returns shall be filed online on the SEZ online portal	https://www.sezonline-ndml.com/	The Unit shall make fillings within a period of 1 month of an online system being commissioned.
S. No.	Circular No.	Compliance	Form No.	Timeline
	No. 14/2013-14 dated 1 July 2013-	The Unit shall file from SOFTEX in respect of the export of software	Form SOFTEX	The Unit shall file the form within 30 days from the date of invoice.

Q16. How can a Unit exit from the SEZ?

As per Rule 74 of the SEZ rules, a unit within a SEZ may choose to exit the SEZ with the approval of the DC. However, such an exit is contingent upon the payment of applicable duties and taxes on the imported or domestically sourced capital goods, raw materials, components, consumables, spares, and finished goods that are in stock at the time of exit.

Additionally, if the unit has not achieved a positive Net Foreign Exchange, the exit process will also be subject to penalties that may be imposed under the Foreign Trade (Development and Regulation) Act, 1992.

Before exiting the SEZ, the unit opting out must provide a legal undertaking in Form L, confirming their compliance with the necessary requirements and obligations for exit as per SEZ regulations.

Conclusion

Navigating the SEZ framework involves understanding its foundational concepts, engaging with the procedural nuances of setting up and operating units, and complying with regulatory mandates.

This guide serves as an essential primer, offering clarity on the designation of SEZs, the roles of developers and co-developers, the benefits available, and the critical aspect of compliance and exit strategies.

As SEZs continue to play a pivotal role in shaping the economic landscapes of their host countries, staying informed about these zones' operational and regulatory environments becomes indispensable for stakeholders aiming to leverage the full potential of SEZs for business growth and development.

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