30 September 2018

EY Flash News

Key amendments to Special Economic Zones Rules, 2006

Tax Alerts cover significant tax The Ministry of Commerce and Industry has announced significant amendments[1] [2] news, developments and changes to the Special Economic Zone (SEZ) Rules, 2006 in the backdrop of the report issued by the Comptroller & Auditor General of India in relation to performance of in legislation that affect Indian SEZs. As per this report the Ministry was required to prescribe measurable businesses. They act as technical performance indicators in line with the objectives and functions of the SEZs so summaries to keep you on top of that the real socio-economic benefits accrue for citizens and the states. Certain the latest tax issues. For more procedural changes are welcome and have been synced with Goods and Services information, please contact your Tax (GST) provisions but changes relating to computation of Net Foreign Exchange earnings (NFE) need attention of stakeholders. The computation Ernst & Young advisor. mechanism of NFE has been tilted in favour of and services for .

Some of the key amendments are as follows: ► Alignment of the existing SEZ law with GST. ► No minimum area required for setting up SEZs in Biotechnology & Health Sector. ► Merger of two or more units in the same SEZ of the same legal entity has been permitted. ► Specified categories of supplies to Domestic Area (DTA) would not to be considered for computation of NFE.

[1] Notification No. G.S.R. 909(E) dated 19 September 2018 [2] Report No. 21 of 2014 issued in November 2014

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1. Setting up of SEZs by Developer 2. Setting up of SEZ Units

1.1 Rule 3 – Proposal for setting up of SEZ 2.1 Rule 17 – Proposal for approval of Unit

► Development Commissioner (DC) required to ► A consolidated application seeking forward proposal for setting up of SEZ to permission for setting up of a Unit and Board of Approval (BOA) alongwith other clearances is to be made to the DC in recommendation for National Security Form F in one copy only instead of five Clearance as per guidelines issued by the copies earlier. Ministry of Home Affairs apart from State Government’s recommendation and other 2.2 Rule 18 – Consideration of proposals for requisite details. setting up of SEZ Unit

1.2 Rule 5(2) – Area for establishment of SEZ ► Proposals for setting up of SEZ Unit shall be required to adhere to policy in ► No minimum area required for setting up Bio- force, as provided in Schedule 2 to the and Health Sector (excluding Indian Trade Classification (Harmonised hospitals) SEZs. However the zones would System) of Export and Import Items, 2017. need to meet the minimum built-up processing area requirements as per ► Minimum value addition norms have been category of city. prescribed for Gems & Jewellery sector. This is in line with the provisions of Foreign 1.3 Rule 12 – Import and procurement of goods Trade Policy 2015-2020. by the Developer 2.3 Insertion of Rule 18(4A) and Rule 18(4B) – ► In addition to maintaining a proper account Existing plastic or used clothing units in of the import or procurement, consumption SEZ and utilisation of goods, Developers are now required to maintain records of services as ► Rule 18(4A): Amendments in relation to well and include details in the quarterly and existing plastic or used clothing units in SEZ half- yearly returns to the DC in Form E. include:

► Developers to be permitted to produce half- ► broad banding and splitting of license yearly certificate from an independent for setting up of sub-Units shall not be Chartered Accountant regarding utilization allowed and all transactions of a Unit of goods and services. Presently, a shall be regulated through a single bank Chartered Engineer is required to certify account; such utilization. ► no third party exports shall be allowed by any such Unit;

► all Units shall set up facilities to make products out of used clothing or plastic waste;

► 100 per cent inspection of the consignment of used clothing sale to DTA shall be undertaken.

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► Rule 18(4B): Procedure to be followed for commencement of production of the verification of documents prior to clearing Unit which commenced operation first; the consignment for used clothing: and

► each consignment of used clothing ► income tax exemption period shall be imported by the Unit shall be considered from the date of start of accompanied with certificate from operation of the first Unit. exporter or agency regarding dis-infection and fumigation of the containers from an ► Rule 19(6A) and Rule 19(6B) have been agency licensed in the country of origin of inserted to provide for procedures for worn clothing along with import renewal of LOA. documents; ► Units intending to renew the validity of ► in case of mis-declaration action as per LOA shall submit, before two months the relevant provisions of the Foreign from the date of expiry of LOA, the Trade (Development and Regulation) Act, completed application, in Form F1. In 1992 (22 of 1992) shall be taken against case application is not submitted within such importer; the stipulated time period, then application shall be placed before the ► to ensure that used clothing re-processing Approval Committee for condonation of Units in SEZ fulfil their export obligations delay. such units shall be required to ensure that a minimum percentage of the Units ► DC may renew the LOA for a period of 5 annual turnover is physically exported out years or for a shorter period, in Form F2 of the country; and based on the evaluation of the Unit as per Rule 19(6B). ► before clearance of used clothes to DTA, all imported consignments shall be subject ► Renewal of LOA shall be based on the to 100 per cent scrutiny by SEZ evaluation of the following criteria: authorities. i) Export performance of the unit in 2.4 Rule 19 – Letter of Approval (LOA) to a SEZ the last block vis-a-vis the initial Unit export projection submitted by the unit; ► The LOA shall specify the items of ii) Projected employment vis-à-vis manufacture along with the corresponding actual employment generated. Indian Trade Classification (Harmonised iii) Instance of violation of applicable System) of Export and Import Items, 2017 or statutes related to the functioning of particulars of service activity, including the unit; trading or warehousing, projected annual iv) Cases of default, if any, of statutory export and NFE for the first five years of payments; operations, limitations, if any on DTA sale of v) Undertaking of any activity not finished goods, by-products and rejects and sanctioned or approved by the DC. other terms and conditions, if any.

► Merger of LOAs of two or more units allowed subject to following conditions:

► Units belong to the same company or firm and fall within the same SEZ; ► after merger, block period for calculation of NFE shall be from the date of

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3. Operational Issues 3.3 Rule 27 – Import and procurement

3.1 Rule 24 – Procedure for grant of drawback ► Units/ Developers can import or procure for supplies from DTA goods from warehouses also.

► Reference to Duty Entitlement Pass Book ► Exemptions from payment of duty on taxes (DEPB) scheme has been removed – since the or cess or drawbacks and concessions on all scheme is no longer applicable for supplies types of goods and services, required for from DTA to SEZ. setting up and maintenance of the factory building allowed to a unit shall also be ► For the purpose of claim of drawback, bill of available to the contractors including export or any other equivalent document as subcontractors appointed by such unit. All may specified under GST law shall be treated documents in such cases shall bear the as claim for drawback. name of the unit alongwith the contractor and these shall be filed jointly in the name ► Claims of duty drawback pertaining to SEZ of the unit and the contractor. unit/Developer shall be processed in the section of the SEZ and the specified ► SEZ may be permitted to procure goods officer shall be the disbursing authority. from DTA for setting up and maintenance of educational institutions, hospitals, hotels ► DTA supplier claiming drawback shall claim it and other facilities in non-processing area. from their Jurisdictional GST commissioner (subject to disclaimer from SEZ 3.4 Rule 30 - Procedure for procurements unit/developer that it does not intend to from DTA claim the benefit). ► Documents mentioned in GST law and ► Drawback claim for supplies from DTA Central law or copy of Bill of Export, allowed only if payment has been made by as the case may be, with an endorsement SEZ unit from its Foreign Currency Account. by the authorised officer that goods have However, for supplies to SEZ Developer the been admitted into the SEZ shall be treated same shall be admissible even if paid in as proof of export. Copy of the same is Indian rupees. required to be forwarded to the GST /Central Excise officer of the supplier by 3.2 Rule 26 – General conditions of import and the SEZ unit/developer within 45 days export failing which tax/duty may be demanded from the supplier. ► Export of or supply from DTA of any ore shall be subject to the conditions as imposed by ► Changes made to replace ARE-1 with Central Government. documents issued under GST law.

3.5 Rule 34 – Utilisation of goods ► SEZ units may be permitted to export prohibited goods provided goods used for manufacture are imported. SEZ units may ► In case a Unit is unable to utilise the goods also be permitted to import prohibited goods or services imported or procured from DTA, provided they are used in manufacture of it may, - export goods. In both cases, application would be placed before the Board of (i) export the goods; or Approval for consideration. (ii) sell the same to other Unit or to an EOU or EHTP or STP or Bio Technology Park, without payment of duty; or

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(iii) sell to an EOU or EHTP or STP or Bio 4. Amendments relating to NFE Technology Park – obligations

► on payment of IGST as applicable under ► Comprehensive changes have been section 5 of the IGST Act, 2017; and suggested in Rule 53 to increase ► without payment of duty of customs manufacturing activities in SEZ and leviable thereon under the Customs exports. For this purpose, condition of Tariff Act, 1975 (51 of 1975); or supply of goods manufactured in SEZs has been incorporated, as in terms of para 7.01 (iv) dispose the same in DTA on payment of of Foreign Trade Policy, deemed export applicable duties or taxes on the basis of benefits are admissible only if goods are an import license submitted by the DTA manufactured in the country. This will help buyer, as applicable. increasing value addition/manufacturing in SEZs. 3.6 Rule 43 – Work from home ► Supply of goods in the DTA counted ► Provisions relating to allowing of authorized towards NFE in 15 categories have been employees of IT/ITES units in SEZ to work reduced to 11 categories. Significant from home or place outside the SEZ unit changes include: have been incorporated in line with Instruction No. 55, 58 and 85. ► Trading income would not be included in value of exports; 3.7 Rule 46 – Procedure for export ► Services rendered in DTA and earning foreign currency would not be counted ► Limit of USD 25,000 has been removed in for NFE; and respect of exemption from declaration in ► Supply of goods to DTA against payment relevant documents. in foreign exchange from EEFC account or Free Foreign Exchange received from ► Where Merchandise Exports from India overseas would not be considered while Scheme (MEIS) benefit is claimed, then computing NFE examination of export cargo shall be done as per examination norms set by Central Board ► Cost of indigenous inputs used for of Indirect Taxes and Customs (CBIC) instead authorized operations to be deducted to of self-certification. arrive at NFE

► Transfer of goods by SEZ unit to DTA/ EOU - ► Value Addition earning requirement for Receiving unit shall file Bill of Entry for home Gems & Jewellery units prescribed through consumption instead of warehousing and Ministry’s instructions have been other specified documents to the Authorised incorporated in the Rule excepting for Officer. Nominated Agency working as a service unit in SEZ. This is also essential 3.8 Rule 74 – Exit of Units specifically keeping in mind the implementation of GST wherein now ► Format for Legal Undertaking for exit of the exemption from IGST has also been unit from the SEZ scheme has been provided for. prescribed in Form L. ► Upon failure to achieve NFE due to adverse market conditions or any ground of genuine hardship having adverse impact on functioning of the Unit, the five years block period for calculation of NFE may be

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extended by the BOA for a further period of Comments upto one year, on a case to case basis.

While the amendments bring about some ► SEZ unit, in case of bona fide default in welcome changes in the current SEZ Rules, achieving NFE or prescribed value addition, especially in matters of setting up and may deposit an amount equal to 1% of operating SEZs/ SEZ units however, the shortfall in FOB value, to regularize the direction of the legislation now seems to default. suggest that SEZs are purely export zones.

Excluding income from DTA activity from the Conclusion computation of NFE is a retrograde step and

may hamper the economic activity in the The changes drive towards alignment with GST country. Supplies to DTA was an avenue for the laws and intend to discourage supplies (by way of SEZ unit to utilize excess/ idle capacity of the trading) to DTA by SEZ units. unit and achieve economies of scale.

However, it is imperative to mention that the intent The authorities should have also proposed of a law should be to encourage economic activity transition provisions for existing units or and not merely promote exports. Precluding SEZ introduce a “grandfather clause” so as to units from making supplies to DTA may have an ensure that existing operations are not effect of discouraging such growth. adversely impacted.

With the phasing out of income tax holiday for SEZ Units by March, 2020 the continued availability of indirect tax benefits and regulatory freedom might be the only saving grace for the future of SEZs in the country.

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