SEZ – A New Dimension in Real Estate Development in India

SEZ – A New Dimension in Real Estate Development
Part 1

The Government of India had announced a SEZ scheme in April, 2000 with a view to provide an internationally competitive environment for exports. The objectives of SEZs include making available goods and services free of taxes and duties supported by integrated infrastructure for export production, expeditious and single window approval mechanism and a package of incentives to attract foreign and domestic investments for promoting export-led growth.

In order to give a long term and stable policy framework with minimum regulatory regime and to provide expeditious and single window clearance mechanism, the Special Economic Zones Act, 2005 has been brought into effect along with the Special Economic Zones Rules, 2006 from 10 February 2006. The same was further amended on March 16,2007.

The Act and the Rules together aim to provide a single self contained legislation governing the operations of SEZs and replaces the hitherto applicable legislations and rules governing the operations of SEZ in India.

Under the Act, SEZ could 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:

1) Manufacture of goods
2) Rendering services
3) Both manufacturing of goods and for rendering services
4) Free trade and warehousing

The Act provides for certain exemptions, drawbacks and concessions and other fiscal incentives to developers of SEZ and units established in SEZs. Exemptions, drawbacks and concessions .

Exemptions & Concessions are :

a) Exemption from customs duty on goods imported into the SEZ by the Developer or SEZ Unit to carry on the authorised operations

b) Exemption from customs duty on goods exported from the SEZ by the Developer or SEZ Unit to any place outside India

c) Exemption from excise duty on goods brought from Domestic Tariff Area ("DTA") to the SEZ by the Developer or SEZ unit to carry on the authorized operations

d) Drawback or such other benefits (as may be admissible from time to time) on goods brought from the DTA into a SEZ by the Developer or Unit to carry on the authorized operationse) Exemption from service tax on taxable services provided to a Developer or Unit to carry on the authorized operations in a SEZf) Exemption from the securities transaction tax in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre ("IFSC")g) Exemption from levy of Central Sales Tax on the sale or purchase of goods by the Developer or SEZ unit if such goods are meant to carry on the authorized operations

Fiscal incentives are :

a) Tax Holiday for SEZ units engaged in manufacture or providing services - A new section 10AA has been inserted in the IT Act by SEZ Act, 2005 which provides that the units in SEZ which start manufacturing or producing articles/ things or which start providing services on or after April 1, 2005 will be eligible for a deduction of 100 percent of export profits for the first five years from the year in which such manufacture/ provision of services commences and 50 percent of the export profits for the next five years. Further, for the next five years a deduction shall be allowed of upto 50 percent of the profit as is debited to the profit and loss account and credited to the Special Economic Zone Reinvestment Reserve Account (subject to conditions). Tax Holiday for Offshore Banking units in SEZ

b) Deduction in respect of certain incomes - Under the new section 80LA, to scheduled banks or foreign banks having an Offshore Banking unit in SEZ or to a unit of IFSC would be allowed deduction in respect of certian incomes. The deduction shall be for 100 percent of income for five consecutive years beginning from the year in which permission/ registration has been obtained under the Banking Regulation Act or the SEBI Act or any other relevant law and 50 percent of income for next five years. Interest received by non-residents and not ordinary residents on deposits made with an Offshore Banking Unit on or after April 1, 2005 shall be exempt from tax.

c) Exemption from Minimum Alternate Tax ("MAT") - Income arising or accruing on or after April 1, 2005 from any business carried on, or services rendered by SEZ unit would be exempt from MAT under section 115JB.

d) Exemption from Capital Gains - Capital gains arising on transfer of assets (machinery, plant, building, land or any rights in buildings or land) on shifting of the industrial undertaking from an urban area to any SEZ would be exempt from capital gains tax. The exemption would be allowable if within one year before or three years after such transfer. The amount of exemption for capital gains would be restricted to the costs and expenses incurred in relation to all or any of the purposes mentioned above.

e) Tax holiday for SEZ developers - A new section 80-IAB has been introduced in the IT Act vide SEZ Act, 2005 whereby a deduction of 100 percent of profits derived from the business of developing SEZ (notified on or after April 1, 2005) would be available to developer of SEZ for any 10 consecutive years out of 15 years beginning from the year in which SEZ has been notified. Exemption under section 10(23G) that was available to infrastructure capital fund or a cooperative bank on interest and long term capital gains investment had been extended to investment made by SEZ developers qualifying for tax holiday under section 80-IAB of the IT Act. However, this exemption has been withdrawn with effect from assessment year 2007-08.

f) Exemption from Dividend Distribution Tax ("DDT") - No DDT would be payable by a developer of SEZ on dividend declared, distributed or paid on or after April 1, 2005 out of current income. g) Exemption from MAT - Any income earned on or after April 1, 2005 by a SEZ developer would be exempt from MAT under section 115JB of the Act.








Contributed By : Sangeet Kumar