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Brief Highlights about SEZs

Special Economic Zone schemes provides for setting up of SEZs, which have been introduced by the Indian Government with the basic idea of providing the world class infrastructure and other facilities which are required for successful growth of the business and thereby growth of the economy. These are treated as they are separate islands outside India for Custom purposes. SEZs are grown engines that can boost manufacturing, augment exports and generate employment. It is pertinent to note that SEZ are allowed to be set up for manufacturing of goods, rendering of services and trading of goods.

Generally, there are three types of SEZs

(a) Multi-product SEZ should have an area of 1000 hectare or more but less than 5000 hectares,

(b) Sector Specific SEZ should have area of around 10 hectares,

(c) SEZ for Free Trade and Warehousing can have area of 40 hectares or more.

It is also worthwhile to mention that the provisions of Central Excise Act, 1944 is not applicable on any manufacturing in SEZ as specifically mentioned in Section 3(1)(a) of the Act. SEZ are regulated by the Special Economic Zones Act, 2005 which came into effect from 10th February 2004.

Setting Up of a new SEZ

For a developing country like India, it is very important to prioritize the industrial operations for the faster development of the economy and with such initiatives only it can alleviate the problems of unemployment which is a plague to the Indian Economy. Despite having the gift of the largest reserves of natural resources and rich culture, our economy is lagging behind due to staggering Industrial Growth. In order to address the above mentioned issues, Government of Indiahas introduced the concept of SEZ in India by passing SEZ Act, 2005.

A Board of Approval has been constituted by the Central Government u/s 8(1) of the SEZ Act, vide Notification dated 10-02-2006. The Additional Secretary to the GOI is the chairperson of the Board of Approval. The Board and the Unit Approval Committee of the Board shall take up all the issues pertaining to setting up of SEZ.

The Letter for approval of the unit in SEZ is sent to the Approval Committee and once approval is granted then the Letter of Approval shall be issued by the Development Commissioner in Form G which shall be valid for a period of five years & it can be extended for five years at a time.

Overriding effect of SEZ Act

It is pertinent to note that the SEZ Act has an overriding effect over anything inconsistent contained in any other law or instrument having force of law.

Other Important Issues

The Custom Officers have jurisdiction over the units located in SEZ to issue notices or take actions as held by Hon’ble Gujarat High Court in case of UOI vs. OswalAgrocomm Pvt Ltd (2011) 268 ELT 21.

The unit shall issue a Bond-cum-legal undertaking in Form H and the Developer/Co-Developer shall issue a Bond-cum-legal undertaking in Form D which shall be accepted by the Development Officer and the Specified Officer. The Bond should be monitored by the SEZ unit itself and if any short fall is observed then it should furnish an additional bond on its own. Such bond is given to cover duties leviable on import or DTA procured raw materials for a period of three months. However, a bond for a longer period such as one year or five year can also be furnished as per MC&I(DC) SEZ Instruction No. 72 dated 30-10-2010.

While setting up a unit, it should be kept in mind that the value of the old plant and machineries should not exceed 20% of the total value of plant & machinery for availing benefit under the Income Tax Act, 1961.

Exit of SEZ (De-Bonding)

The unit is required to pay customs duty on the imported machinery on the basis of depreciated value as per Rule 49(1) of the SEZ Rules (provision similar to Rule 3(5A) of CCR’04) wherein it has been stated that depreciation rate shall be 4% per quarter in the first year, 3% per quarter in the second and third year, 2.5% per quarter in the fourth and fifth year and 2% per quarter in the subsequent years. In case of computer peripherals, 10% per quarter in the first year, 8% per quarter in the second year, 5% per quarter in third year and 1% per quarter in fourth and fifth year.

Now a question arises, whether depreciation is allowed till the date of application or date of payment. In this regard, reliance can be placed on the decision of Hon’ble CEGAT in case of CCE vs. Solitaire Machine Tools (2003) 152 ELT 384. The same view has been re-iterated in MF(DR) Circular No 14/2004-Cus dated 13-02-2004.

Supplies to SEZ and Supplies from SEZ

It is pertinent to note that the supplies made by the Domestic Tariff Area (DTA) to SEZ are exports as held in case of ShriBajrang Power &Ispat Limited (2012) 282 ELT 108. The suppliers to SEZ are entitled to many benefits such as (a) Duty Drawback u/s 75 of the Customs Act (b) DEPB Benefit in lieu of Duty Drawback benefit – MF(DR) Circular No 6/2005-Cus (c) Rebate u/r 18 of Central Excise Rules (d) EPCG Scheme even if payment is received in Indian Currency (Para 5.7.2 of HOP Vol 1) (e) DFIA/FPS schemes are available.

Further, in case of Tiger Steel Engineering (2010) 29 STT 25, Hon’ble Tribunal held that supplies made to SEZ are not eligible for benefit under Rule 5 of CCR’04. However, the said view of the Hon’ble Tribunal would be contrary to the purpose of setting up of SEZ. Further, as per Rule 6(6) supports the view that the intention of the legislature is to make the supplies made to SEZ zero rated.


The supplier should prepare a bill of export treating the supply to SEZ as export. The Duty Drawback shall be granted to the supplier on the basis of the Disclaimer certificate given by the DTA Unit – MF(DR) Circular No 24/2003-Cus. Further, in a plethora of judicial pronouncements it has been held that even if bill of export is not submitted, the substantive benefit of rebate cannot be denied if evidence of receipt of material in SEZ in Form ARE-1 is available – Shree Parvati Metal Private Limited (2013) 290 ELT 638. For claiming duty drawback, the procedure specified in Circular No. 43/2007-Cus dated 05-12-2007 wherein it has been stated that JC/DC/AC is the ‘Specified Officer’ to whom the claim for duty drawback can be filed. SEZ or SEZ unit should file the claim with him. If duty drawback is to be claimed by the DTA unit, then disclaimer should be obtained from SEZ or SEZ unit and then submit it to the Jurisdictional Commissionerate.

During export the DTA unit should file Bill of Export along with Invoice and after assessing the BOE by the Customs Officer, the DTA unit can clear the goods without payment of duty under ARE-1 procedure which shall be submitted to the Central Excise Super-Intendent of DTA unit within 45 days. It is important to note that export duty is not payable in case of supply made by DTA to SEZ unit – Essar Steel (2010) 232 ELT 617 Gujarat High Court.

There is no restriction on sale by SEZ to DTA units but it should achieve positive NFE within five years of commercial production as per MC&I(DC) SEZ Instruction No. 70 dated 09-11-2010.

SEZ schemes have so far been a successful initiative by the government of India in the path of development of the country.

Disclaimer: This article is the property of the author. No one shall publish, reproduce or use it in any manner, for commercial purposes, without the permission of the author. The author shall not be responsible or liable for anything done or omitted to be done on the basis of this article.

By Aditya Singhania &Nischal Agarwal


Published by

CA Nischal Agarwal
Category Others   Report

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