Investing in India – A look at the advantages of setting up in SEZ

Introduction

Special Economic Zones (SEZs) in India offer numerous advantages for companies seeking to invest in the country. These designated areas provide a favorable business environment and various incentives to promote industrial development and foreign direct investment (FDI). SEZs are equipped with state-of-the-art infrastructure, including well-planned industrial parks, reliable power supply, transportation networks, communication systems, and other necessary utilities. This enables companies to start operations quickly and efficiently.

The primary objective of SEZs is to promote exports and foreign exchange earnings. This focus aligns with global market demand and export-driven strategies of businesses. Companies operating in SEZs can leverage the advantages provided by the zone to enhance their competitiveness in international markets and expand their export potential.

Analysis

SEZs attract FDI by offering a conducive investment climate and a range of incentives. They serve as attractive destinations for multinational companies looking to establish a presence in India or expand their existing operations. Foreign investors can benefit from a favorable business environment, ease of doing business, and access to a large consumer market.

The SEZ Act, 2005[1], supported by the SEZ Rules, simplifies procedures and provides single window clearance on matters related to both the Central and State Governments. The main objectives of the SEZ Act/policy 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 provides several tax incentives and other facilities for SEZ developers and units. These include:

Direct Tax Benefits:

Entrepreneurs operating in SEZs can avail significant direct tax benefits, aimed at promoting exports and fostering economic growth. These benefits include a 100% income tax exemption on export income for the first five years, followed by a 50% exemption for the subsequent five years. Additionally, entrepreneurs can enjoy a 50% exemption on the ploughed-back export profit for the next five years. [2]These exemptions incentivize SEZ units to focus on increasing their export activities, thereby boosting foreign exchange earnings and contributing to the country’s overall economic development.

Indirect Tax Benefits:

SEZs provide various incentives and benefits to promote industrial development and boost exports. One such benefit is the provision for duty-free import or domestic procurement of goods required for the development, operation, and maintenance of SEZ units. This allows businesses operating within SEZs to import or procure goods without paying customs duties or taxes, making it more cost-effective and efficient for them to establish and operate their units.

Additionally, SEZ units enjoy exemptions from Service Tax as per Sections 7, 26, and the Second Schedule of the SEZ Act. This exemption relieves businesses from the burden of paying service tax on specific services availed within the SEZ. Furthermore, SEZ units are also exempt from Central Sales Tax, facilitating seamless inter-state trade and reducing administrative complexities. These incentives collectively encourage investments, spur economic growth, and promote export-oriented industries within SEZs.

Other Benefits:

The government has implemented several measures to boost SEZs and attract investments. SEZ units are allowed to engage in external commercial borrowing up to $500 million annually, without any maturity restrictions. This provides SEZ units with significant financial flexibility for their development and expansion activities. Additionally, a single window clearance system has been established, simplifying the process of obtaining central and state-level approvals for SEZ projects.

This streamlined approach reduces bureaucratic hurdles and ensures a smoother and more efficient process for businesses. Moreover, SEZ units enjoy exemptions from state VAT tax, stamp duty, and other levies as extended by the respective State Governments. These exemptions alleviate the tax burden on SEZ units, making them more cost-effective and competitive in the market.[3]

To further stimulate growth, the government is establishing port-based chemical parks within existing and new SEZs. These parks encourage the clustering of chemical-related industries by providing specialized infrastructure and offering tax concessions. The SEZ Rules have been designed to simplify procedures for developing, operating, and maintaining SEZs, as well as setting up units and conducting business within them. SEZ units are entitled to a tax holiday for 15 years, starting from the year of commencement of manufacturing, production, or service provision.

The tax holiday is structured with 100% exemption for the first five years, followed by 50% exemption for the next five years, and another 50% exemption for the subsequent five years, with certain restrictions. However, it should be noted that SEZ units are still subject to Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) provisions. Overall, these measures aim to create a favorable environment for investment and business growth within SEZs, attracting both domestic and international companies.

Conclusion

Special Economic Zones in India provide a host of advantages for companies considering investment. These advantages include tax benefits, duty-free imports, state-of-the-art infrastructure, simplified regulations, networking opportunities, a skilled workforce, an export-oriented focus, and attractive investment opportunities. By leveraging these benefits, businesses can enhance their competitiveness, reduce costs, and tap into the potential of the Indian market. SEZs provide a simplified and streamlined regulatory framework, making it easier for companies to set up and operate businesses. They have a single-window clearance mechanism that expedites the approval process for licenses, permits, and clearances, reducing bureaucratic hurdles and administrative complexities and facilitating a smoother business setup.

FAQs

[1]https://www.indiacode.nic.in/bitstream/123456789/2042/3/a2005-28.pdf

[2]https://mea.gov.in/images/pdf/22899_India_in_Business.pdf

[3]https://cag.gov.in/uploads/download_audit_report/2014/Union_Performance_Dept_Revenue_Indirect_Taxes_Special_Economic_Zones_SEZs_21_2014.pdf

Contributed By – Tanishq