SEZ Units In India Tax Benefits, Compliance Requirements And GST Implications

 

If you are thinking about setting up a business unit in India and someone mentioned SEZ to you probably nodded along without understanding what it means for your taxes, compliances and overall business structure. You are not alone. A lot of businessmen and professionals get confused when it comes to Special Economic Zones especially after GST came into the picture and changed a thing.

 

Let me explain it to you in terms.

So, what is an SEZ?

An SEZ or Special Economic Zone is a area within India that operates under economic rules compared to the rest of the country. The idea is to increase exports attract investment and create jobs. The government has been promoting SEZs since the SEZ Act was passed in 2005.

These zones are like a free-trade area within India. Units operating inside an SEZ are treated as if they are outside the tariff area for the purpose of trade and taxation. This is important because a lot of the tax benefits come from this concept.

 

Tax Benefits for SEZ Units

Now let’s talk about what most people want to know. The tax savings.

Income Tax Deduction under Section 10AA

This is the one. SEZ units registered under Section 10AA of the Income Tax Act get a profit-linked deduction. Here is how it works:

 For the 5 years: 100 percent deduction on profits from export

 For the 5 years: 50 percent deduction on export profits

 For the following 5 years: 50 percent deduction but only if the amount is transferred to a Special Economic Zone Re-investment Reserve Account

So, a new SEZ unit can enjoy tax benefits for up to 15 years from the date it starts production or services. That is a time.

The deduction is only available on export profits. If the unit also serves the market that portion will not get the benefit. A lot of businesses make the mistake of assuming all profits are covered.

Customs Duty and Excise

Goods. Procured domestically by SEZ units for authorized operations are exempt from basic customs duty, anti-dumping duty and countervailing duties. This can lead to savings especially for manufacturing units that rely heavily on imported machinery or raw materials.

MAT and Dividend Distribution Tax

SEZ units are subject to Minimum Alternate Tax at 15 percent plus surcharge and cess on book profits. Units that started operations before March 31 2005 have a different treatment.

GST and SEZ

GST has changed how transactions involving SEZ units are treated.

Supply to SEZ. Zero Rated Supply

Under GST law any supply of goods or services to an SEZ unit or SEZ developer is treated as a zero-rated supply. This means the supplier can either:

 Supply under LUT without paying GST. Then claim a refund of input tax credit

 Supply by paying IGST and then the SEZ unit can claim a refund

Most suppliers prefer the LUT route because it improves cash flow.

Procurements within SEZ

Transactions happening entirely within the SEZ between two SEZ units are not treated as supply under GST. So, no GST liability arises on inter-unit transactions within the zone.

SEZ to DTA. This is Where Duties Apply

When goods move from an SEZ unit to the tariff area it is treated as import of goods into India. So, the buyer in DTA will have to pay customs duty plus IGST.

Compliance Requirements

Running an SEZ unit comes with a compliance burden.

Annual Performance Review

Every SEZ unit has to maintain a Net Foreign Exchange position over a 5-year period. If the unit fails to maintain NFE it can lose its SEZ status and the tax benefits that come with it.

Softex Forms for IT/ITES Companies

If you are an IT or software company in an SEZ you need to file SOFTEX forms for export of software through the DC.

Customs Compliance

The import and export of goods from an SEZ are monitored by customs authorities. Bonds, insurance and proper documentation are mandatory.

 

GST-Specific Compliances

 SEZ units need to be registered under GST

 Refund applications need to be filed in proper format with supporting documentation

 Regular reconciliation of GST returns with customs records and books of accounts is

 

Transfer Pricing

If your SEZ unit is dealing with associated enterprises transfer pricing regulations apply.

Common Mistakes to Avoid

I have seen businesses lose their SEZ benefits or face penalty notices because of some avoidable mistakes.

 Not maintaining books of accounts for SEZ and non-SEZ operations

 Failing to file Form 56FF on time

 Mixing up zero-rated supply compliances with export procedures

 Ignoring the NFE monitoring on a basis

 

Should You Set Up an SEZ Unit?

It depends on your business model, scale and export orientation. If a significant portion of your revenue is from exports and you are willing to meet the compliance requirements the tax savings can be enormous, over a 15-year period.

If you are a small operation still figuring out whether you will be export-focused in the long run jumping into SEZ might not be the right move yet. The compliance costs and administrative requirements are real.