Legal Matters

This column has been contributed by vakilsearch ( >www.vakilsearch.com ), an online legal guidance and legal solutions provider. You can ask your question on www.vakilsearch.com or contact +91 978 989 6023.

What is an SEZ and what are the principal advantages of setting up an SEZ?

SEZs as they exist today are new on the Indian business landscape but in fact, the first SEZ was set up in Kandla Port, Gujarat, in 1965. Their feasibility thus far was hampered by issues such as minimal infrastructure and unstable fiscal regimes.

The Government announced the Special Economic Zones policy in April 2000 and enacted the Special Economic Zones Act in 2005 to regulate their operations. The policies and rules were similar to China's SEZ model.

Under this policy, special areas or zones are created, within which the normal economic and tax regulations are suspended.

In simpler terms, the industries operating in these pockets would be operating as if they were in a separate economic territory altogether with separate regulations and tax structures, as governed by the Special Economic Zones Act, 2005. Broadly the benefits are:

Exemption from Customs/Excise duties for business in SEZs for authorised operations approved by the SEZ Board of Approval.

Income-tax exemption on income derived from the business in an SEZ for any 10 years out of the first 15 years from the date of commencement (Section 80-IAB of the Income Tax Act)

Exemption from Minimum Alternate Tax (MAT).

Exemption from Dividend Distribution Tax (DDT).

Exemption from Central Sales Tax (CST).

Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

What is an EOU and how is it different from an SEZ?

While SEZs focus on a broad spectrum of foreign trade and investments, EOUs have a more specific focus on export industries.

A company may be focussed on exports, in which case the Government offers multiple benefits, including tax breaks and incentives. However, in order to promote exports even further, the concept of an EOU was created, wherein goods would be free of tax as long as they were directly exported from the EOU to foreign countries.

It is even possible that in the campus of a large company, a single building or location may be an EOU. While the rest of the company is a domestic tariff Area, which means that local taxes and rates of taxation apply, that distinct building alone is an EOU, where no / minimal taxes will apply.

However, the benefits given to an EOU only apply in the case of exports. If the goods produced in an EOU are shipped locally, or even to another unit of the company, the tax benefits will not apply.

The major difference between an EOU and SEZ is that an Export Oriented Unit is dedicated to export, and the benefits are only available if the goods are exported. SEZs are far more widespread, and many of the products you use every day, like Nokia phones, are products of SEZs.

COMMENT NOW