Compliance Requirements to set up Special Economic Zone Units

Special Economic Zones (“SEZ”) have been
established in India with the objective of attracting Foreign Direct Investment
(’FDI”) and to create an opportunity for domestic entities in our country to
compete in the global market. It has increased trade balance, employment, investments,
and effective administration.

Under
the Special
Economic Zone Act, 2005 (“the Act”) SEZ can be set up either
jointly or severally by the Central Government, State Government, or any person
(including a private or public limited company, partnership or proprietorship)
for the following purposes:

• Manufacture of goods; or
• Services to be rendered; or
• Both manufacturing of goods and for rendering of
  services; or
• As a Free Trade and Warehousing Sector.

The key role of a SEZ is envisaged by the Act for the State Governments as
Export Promotion and creation of related infrastructure. A Single Window SEZ Approval
mechanism has been provided through a 19-member inter-ministerial SEZ Board of
Approval (“BoA”). The applications duly suggested by the respective State
Governments/UT Administration are considered by the BoA from time to time. All
decisions of the BoA are decided by a general consensus of the members present.

Compliance Requirements
to set up a Company

When a company plans
to set up a unit in a specific SEZ, an application is required be made to the
Development Commissioner’s office under whose jurisdiction the Special Economic
Zones operate. For Example: Karnataka, Kerala, Lakshadweep and Mahe SEZs fall
under the Cochin Special Economic Zone (CSEZ), with offices in Bangalore and
Cochin.

Thus, a company intending to set up a
unit in a SEZ shall submit a consolidated proposal to the
Development Commissioner in Form F in five copies along with the following
documents:

In addition to the
aforementioned, a company proposing to set a unit in SEZ, shall also be
required to submit the following details pertaining to Setting up of units in SEZ; Annual permission for
sub-contracting; Allotment of IEC Number; Allotment of land/industrial sheds in
the SEZ; Water Connection; Registration-cum-Membership Certificate; Small Scale
Industries Registration; Registration with Central Pollution Control Board;
Power connection; Building approval plan; Sales Tax registration; Approval from
Inspectorate of factories; Pollution control clearance, wherever required; Any
other approval as may be required from the State Government.

This is a Single
Window Clearance. The Development Commissioner will thereafter submit this
proposal to the Approval Committee.

The Approval Committee
may either accept the proposal with or without modifications, or may reject the
proposal. In case of modification or rejection, the Approval Committee is
required to give an opportunity to be heard to the person concerned, after
which such approval or rejection will be given.

Guidelines
for Approval

Pursuant to Rule 18(2) of the SEZ Rules 2006(“Rules”),
the Approval Committee scrutinizes the proposal based on the following
parameters

• The
  proposal must meet with the positive net foreign exchange earning requirement
  calculated as per Rule 53[1] and
  prescribed value addition earning requirement[2]
  of the Rules.
• Availability
  of space and other infrastructure support applied for.

Any lease agreement between a developer and the
Company is to be entered into after the Issuance the Letter of Approval by the
Development Commissioner. A copy of such an Agreement must be furnished to the
Development Commissioner within six months from the issuance of the Letter of
Approval.  Failure to do so may result in
the cancellation of the Approval.

• The
  applicant undertakes to fulfill the environmental and pollution control norms.
• The
  applicant submits proof of residence, namely, passport or ration card or
  driving license or voter identify card or any other proof of the proprietor or
  the partners of partnership firms or Directors of the Company, to the
  satisfaction of Development Commissioner;
• The
  applicant submits the Income-tax returns, along with annexures, of the Proprietor
  or Partners, or in the case of a company, audited balance sheet for the
  previous three years.

Sector Specific
Requirements

Certain sector specific requirements are
prescribed under Rule 18(3) of the Rules:

(a) Export of
high-grade iron ore that is more than 63% Iron (except iron ore of Goa origin
and Redi origin) requires approval of the BoA;

(b) Sub-contracting or
job work of polyester yarn is not permitted in Domestic Tariff Area or in
Export Oriented Unit in other SEZs. This restriction does not apply to the
Units which intend to send the fabric made by them out of polyester or
texturised yarn for subcontracting.

As per 18(4) of the
Rules, Proposals will not be considered in the following cases:

(a) Recycling of
plastic scrap or waste

(b) Enhancement of the
approved import quantum of plastic waste and scrap beyond the average annual
import quantum of the unit since its commencement of operation to the existing
Units

(c) Reprocessing of
garments, used clothing, secondary textiles materials and other recyclable textile
materials into clipping, rags, industrial wipers, shoddy wool, yarn, blankets
or shawls

(d) Import of other
used goods for recycling. (This may be permitted on the condition that after
reconditioning, repair, and re-engineering, the products and scrap, remnants or
waste will be exported and none of these goods will be allowed to be sold in
the Domestic Tariff Area or destroyed;

(e) Export of Special
Chemicals, Organisms, Materials, Equipment and Technologies unless it fulfills
the conditions indicated in the Import Trade Control (Harmonized System)
Classifications of export and import items;

(f) If there is any
instance of violation of law or public policy by the promoters having a bearing
on the merits of the proposal

Units in Free Trade
and Warehousing Zones or such units set up in other Special Economic Zone will
be allowed to hold the goods on account of the foreign supplier for dispatches
as per the owner’s instructions and will be allowed for trading with or without
labelling, packing or re-packing without any processing. Free Trade and
Warehousing units undertaking these activities must allow refrigeration for the
purpose of storage and assembly of Completely Knocked Down or Semi Knocked Down
kits. The Units may also re-sell, re-invoice or re-export the goods imported by
them. All transactions by a Unit in Free Trade and Warehousing Zone must be in
convertible foreign currency.

Services
to Overseas

Units may also be set
up for providing or manufacturing services to Overseas Entities. But they are
subject to the following conditions:

(a) capital goods, raw
materials including consumables sub-assemblies, components, and/or semi-finished
goods must be supplied by the Overseas Entity free of cost;

(b) capital goods for
setting up such facilities may also be supplied on loan or lease basis,
provided the notional value of such capital goods be taken into account for
calculation of Net Foreign Exchange Earnings under Rule 53;

(c) finished goods
must be exported out of the country or transferred to the Customs Bonded
Warehouse to be maintained by the Overseas Entity, as per the instructions of
the Overseas Entity.

(d) the Unit will
receive the consideration for its manufacturing services in convertible foreign
exchange directly from the Overseas Entity;

(e) in case the manufacturing
facility is used by the Unit for carrying out production on its own account,
separate accounts are to be maintained for the manufacturing and service
activity.

Letter
of Approval

On approval of the
proposal, the Development Commissioner will issue a Letter of Approval in Form
G for setting up of the Unit. The Letter of Approval will contain
specifications like the nature of business, production details, net foreign
exchange details etc. The letter will be valid for one year within which time
the Unit must commence production or service or trading or Free Trade and
Warehousing activity. The date of Commencement must be intimated to the
Development Commissioner. This time can be extended upto two years upon
providing valid reasons to the Commissioner. An additional extension of one
year will also be given if two-thirds of activities including construction,
relating to the setting up of the Unit is complete and a chartered engineer’s
certificate to this effect is submitted by the Company.

The Letter of Approval
is valid for five years from the date of commencement of production or service
activity and can be used as a licence for all purposes related to authorized
operations. After the completion of five years, the Development Commissioner
may, at the request of the Unit, extend the validity for a further period of
five years, at a time.

An entrepreneur
holding the Letter of Approval will only be entitled to set up a Unit in the processing
area of the SEZ or Free Trade and Warehousing Zone as per demarcations.

If an enterprise is
operating both as a Domestic Tariff Area unit as well as a SEZ Unit, it will
have two distinct identities with separate books of accounts but the SEZ unit may
not be a separate legal entity.

Additional
Requirements as per State Policy

State policies may issue additional requirements to
be followed by SEZ units of their respective states. Following are some of the
conditions listed by the State High Level Clearance Committee, Karnataka[3]:

• Prepare a Human Resource Development plan to train the land losers /
  local persons and offer them employment opportunities. 
• Provide a minimum 80% job to local people on overall basis.
• Wherever there is a scope for Vendor Development, Units must prepare a
  Vendor Development Plan and provide Entrepreneurship Development Training to
  the local persons and facilitate setting up of service / manufacturing vendor
  enterprises.
• Amenities created by SEZ units in the non-processing area of the SEZ
  like schools, colleges, hospitals etc. must be accessible to local person. 

Transfer
of Units from one SEZ to another:

If a unit is to be transferred from one SEZ to
another, the Entrepreneur may make a proposal to the Department of Commerce for its Consideration and approval[4]. 

Conclusion:

The Central and State Government has ensured that
the procedure to set up a business unit in a SEZ is easy and transparent to
encourage investments businesses in this area. All procedures are explained in
detail in the Special Economic Zone Act of 2005, the Special Economic Zone
Rules, 2006, and further amendments and circulars that have been issued by the
Government thereafter. All the Forms are available online on the SEZ websites.

Contributed by – Aurelia Menezes , Rajashree Devchoudhury, Mariam Monaza
Designation – Principal Associate, Senior Associate, Associate

[1]
Special Economic Zones (Amendment) Rules, 2018

[2]
Special Economic Zones (2nd Amendment) Rules, 2019

[3]
Govt. Order No. CI 252 SPI 2001 dated 25.2.2002

[4] No.F.5/1/2019/SEZ

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