With a view to overcoming the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a point to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was launched in April 2000. SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective by the provisions of relevant statutes. To instill confidence in investors and signal the Government’s commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating bigger economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders.
After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February 2006, giving for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.
The main objectives of the SEZ Act are:
- generation of additional economic activity
- promotion of exports of goods and services
- promotion of investment from domestic and foreign sources
- creation of employment opportunities
- development of infrastructure facilities
The SEZ Act 2005 envisages the main role for the State Governments in Export Promotion and creation of related infrastructure. A Single Window SEZ approval mechanism has been given by a 19 member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administration are taken by this BoA periodically. All decisions of the Board of approvals are with consensus.
The SEZ Rules provide for:
- Simplified steps for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs;
- Single window clearance for establishing of an SEZ;
- Single window clearance for establishing a unit in a Special Economic Zone;
- Single Window clearance on matters concerning to Central as well as State Governments;
- Simplified compliance steps and documentation with an emphasis on self-certification
The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment, include:-
- Duty-free import/domestic purchase of goods for development, operation and maintenance of SEZ units
- 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the plowed back export profit for next 5 years. (Sunset Clause for Units will become effective from 01.04.2020)
- Exemption from Minimum Alternate Tax (MAT) in section 115JB of the Income Tax Act. (withdrawn w.e.f. 1.4.2012)
- Exemption from Central Sales Tax, Exemption from Service Tax and Exemption from State sales tax. These have now subsumed into GST and supplies to SEZs are zero-rated under IGST Act, 2017.
- Other levies as imposed by the respective State Governments.
- Single window clearance for Central and State level approvals.
The major incentives and facilities available to SEZ developers include:-
- Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.
- Income Tax exemption on income came from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. (Sunset Clause for Developers has become effective from 01.04.2017)
- Exemption from Minimum Alternate Tax (MAT) in Section 115 JB of the Income Tax Act. (withdrawn w.e.f. 1.4.2012)
- Exemption from Dividend Distribution Tax (DDT) in Section 115O of the Income Tax Act. (withdrawn w.e.f. 1.6.2011)
- Exemption from Central Sales Tax (CST).
- Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).