PPC

SEZ & Shared Services – brief

discussion on Tax Issues.

Puneet Puri
Partner, International Taxation
Puneet Puri & Company

CEO, Research & Strategies

SEZ

Special Economic
Zones (SEZ)—

The Next Frontier for India

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Why SEZs

The drivers of Economic Growth are:

Investment & Capital Formation
Improved Export Competitiveness

Need for:
World-class infrastructure
Hassle free taxation laws and
procedures
Competitive fiscal package

Limitations in achieving this all over the country

Special Economic Zones (SEZs) as vehicle

to create environment for investments and
exports.

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Legislative framework
SEZ Act 2005 SEZ Rules 2006
Rules & regulations defining
Basic framework for guidelines & procedures for effective
construction,development, operation & operation of the SEZ Act 2005.
maintenance of SEZs prescribed under
the Act & prescribes the tax and other
fiscal incentives Available.

State SEZ Policy

Prescribes guidelines & various policies for

giving effect to SEZ Act 2005 & provides for
substantive & procedural benefits offered by
the State to SEZ developers & units

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SEZ Act & Rules-Main Features
 Simplification of procedures

• Single window clearance for setting up SEZ;

• Single Window clearance on matters relating to

Central as well as State Governments for setting
up units in a SEZ;

• Simplified compliance procedures and

documentation with an emphasis on self
certification;

• One Stop Shop;

• Tax concessions for both Developers & Units.

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SEZ FORMATS
Type of SEZs Minimum Area Requirement Minimum
(in hectares) Processing
Area (presently
permitted)

Multi Product 1,000 hectares to 50%

5000 hectares (maximum)
50% (To promote
widespread development,
in certain states and union
territories the
minimum area
requirement has been
reduced to 200 hect.)
Multi Services/ 100 50%
Sector Specific (To promote
widespread development,
in certain states and union
territories the
minimum area
requirement has been
reduced to 50 hectares)
IT/ ITES, Gems & 10 with minimum built up area 50%
of:
Jewellery, Bio-Tech
- 100,000 sq meters for IT
and Non- - 50,000 sq meters for Gems &
Conventional Energy Jewellery
- 40,000 sq meters for Bio-Tech
and Non-Conventional Energy
Free Trade 40 with minimum built up area 50%
of 100,000 sq.meters
Warehousing Zone

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Regulatory Framework – An overview

SPECIFIC CONDITIONS:

 Land in SEZ cannot be sold

 Development Commissioner to demarcate processing

area –subsequent to which proposals for setting up of units will
be entertained

 Only units with valid Letter of Approval from Development

Commissioner can set up operations

 Land may be allotted for development of infrastructure facilities

for use by Units - specific approval may be obtained for lease
of land for creation of facilities such as canteen, PCOs, first aid
centres, creche,etc for exclusive use of unit

 Only authorised persons with identity cards permitted to enter

processing area

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Tax Framework

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Direct Tax Incentives…for SEZ Developers
& Units
• SEZ developers given IT exemption for 10 consecutive
assessment year out of first 15 years of its operations.
Exemption from Corporate Tax to SEZ units for 15 years
(5 + 5 + 5).
•100% for first 5 years;
•50% for next 5 years; and
•50% for next 5 years to the extent of profits ploughed
back

• Corporate Tax exemption extended to export of services

also.

• Exemption from MAT to SEZ Developers and SEZ Units.

• SEZ Developers exempted from Dividend Distribution Tax.

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Indirect Tax Incentives
 Customs duty exemption for goods imported into or
services provided in SEZs or to Unit
 Customs duty exemption on goods exported from or
services provided from SEZs or Unit to any place outside
India.
 Exemption from Central excise duty on goods brought from
DTA to SEZs or Unit
 Exemption from service tax on taxable services provided to
SEZ developer or Unit for their authorised operations.
(However such exemption on exports made by unit need to
meet criteria of “Export of Service Rules”)
 Central sales tax exemption on sale/purchase of goods for
authorised operations other than newspapers where such
sale takes place in the course of interstate trade or
commerce
 Tax exemption on electricity and power consumption

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Special Economic Zones
 SEZs are the latest buzzword in the industry today

 Benefits under the SEZ scheme are high

 Transition from STP to SEZ

 Not allowed to migrate a unit/business registered
with STPI into an SEZ
 Issue is whether majority of the employees of a STP
unit can be transferred into SEZ unit
 In effect, the business, assets and employees of the
SEZ unit would have to be different and distinct from
those of an existing STP unit of the assessee

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Special Economic Zones
 Computation of benefit under Section 10AA
 Similar to section 10A, the benefit is computed
by a formula
 Formula for computing the benefit is
 Profits of the business of the undertaking X export turnover
in respect of articles or things or services / total turnover of
the business carried on by the assessee
 The above formula seems to be another challenge which the tax
payers would face
 If it is interpreted to mean that the denominator in the formula is
the entire turnover of the business of the assessee, the benefit
would be much lesser if the assessee carries on more than one
businesses

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 THANK YOU
Puneet Puri & Company &
Research & Strategy
www.ppcindia.co.in
www.researchandstrategy.com

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