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1 GLOBAL TAX ADVISORY SERVICES Special Economic Zones (SEZ) The Next Frontier for India Presentation by: Yogendra Garg Director SEZ, Department of Commerce Government of India, New Delhi

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GLOBAL TAX ADVISORY SERVICES

Special Economic Zones (SEZ)The Next Frontier for IndiaPresentation by: Yogendra Garg Director SEZ,Department of Commerce Government of India, New Delhi

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INDIA -Demographics “India needs to generate 200 million additional jobs over the next

20 years”.- Planning Commission

people < 25 yearsin rural areasWorking age population in 2005 (15-64 yrs as % of total population)Working age population in 2020People entering workforce by 2010People entering workforce in rural areas

500 mn333 mn673 mn

872 mn71 mn48 mn

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Why SEZsThe drivers of Economic Growth are:Investment & Capital FormationImproved Export Competitiveness

Need for:World-class infrastructureHassle free taxation laws and procedures Competitive fiscal package

Limitations in achieving this all over the country

Special Economic Zones (SEZs) as vehicle to create environment for investments and exports

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Objectives of Indian SEZ Act, 2005Generation of additional economic activity

Development of infrastructure facilities;

Promotion of investment from domestic and foreign sources

Creation of employment opportunities

Promotion of exports of goods and services

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Legislative & Regulatory Framework

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Legislative frameworkSEZ Act 2005 SEZ Rules 2006

Basic framework for construction, development, operation & maintenance of SEZs prescribed under the Act & prescribes the tax and other fiscal incentives available

Rules & regulations defining guidelines & procedures for effective operation of the SEZ Act 2005

State SEZ Policy

Prescribes guidelines & various policies for giving effect to SEZ Act 2005 & provides for substantive & procedural benefits offered by the State to SEZ developers & units

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SEZ Act & Rules-Main Features• Simplification of procedures

• Single window clearance for setting up SEZ;

• Single Window clearance on matters relating to Central as well as State Governments for setting up units in a SEZ;

• Simplified compliance procedures and documentation with an emphasis on self certification;

• One Stop Shop;

• Tax concessions for both Developers & Units.

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SEZ Formats

50%40 with minimum built up area of 100,000 sq meters

Free Trade Warehousing Zone

50%10 with minimum built up area of:- 100,000 sq meters for IT- 50,000 sq meters for Gems & Jewellery- 40,000 sq meters for Bio-Tech and Non-

Conventional Energy

IT/ ITES, Gems & Jewellery, Bio-Tech and Non-Conventional Energy

50%100(To promote widespread development, in certain states and union territories the minimum area requirement has been reduced to 50 hectares)

Multi Services/ Sector Specific

50%1,000 hectares to 5000 hectares (maximum)(To promote widespread development, in certain states and union territories the minimum area requirement has been reduced to 200 hectares)

Multi Product

Minimum Processing Area (presently permitted)

Minimum Area Requirement (in hectares)

Type of SEZs

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SEZ - Developer/ Co-developer

Entry

Exit

Restricted entry/ exit

SEZ

EntryExit Processing Area*

Manufacturing & service export units approved by regulatory authorities

Support infrastructure including roads, sewerage, ports, airports, road & rail network, power & water supply, residential & business complex, hotels, educational institutions, hospitals, recreational facilities, etc – developer/ co-developer

Non-processing Area**

* Processing area is the demarcated area in SEZ where units can be located for manufacture of goods or rendering of services

** Non-processing area is intended to provide support facilities to SEZ processing area and may include commercial and social infrastructure

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Key stakeholders

DeveloperDeveloper

Co-developerCo-developer

• Person granted approval to develop, operate and maintain SEZ including infrastructure facilities

• Person granted approval to develop SEZ in conjunction with developer for setting up facilities in the non-processing area

ContractorContractor

• Appointed by developer/ co-developer to undertake authorized operations in SEZ

• Eligible to exemptions, drawbacks and concessions available to developer/ co-developer

UnitUnit

Person undertaking export activities and approved for• Manufacture or production• Processing• Trading and Warehousing• Services

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Specific conditionsSpecific conditions

Processing area - permitted development …..Regulatory Framework – An overview

Land in SEZ cannot be sold

Development Commissioner to demarcate processing area –subsequent to which proposals for setting up of units will be entertained

Only units with valid Letter of Approval from Development Commissioner can set up operations

Land may be allotted for development of infrastructure facilities for use by Units - specific approval may be obtained for lease of land for creation of facilities such as canteen, PCOs, first aid centres, creche, etc for exclusive use of unit

Only authorised persons with identity cards permitted to enter processing area

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Non-processing area - permitted development…

General conditionsGeneral conditions

For development of business and social purposes such as educational institutions, hospitals, hotels, recreation and entertainment facilities, residential and business complexes and other infrastructure needed for development, operation and maintenance of SEZ

No Vacant land in non-processing area shall be leased for business and social purposes such as educational institutions, hospitals, hotels, recreation and entertainment facilities, residential and business complexes to any person except a co-developer approved by the Board

Exemption available only with respect to set up/ development of such facilities as approved by the Board of Approvals.

Development activities in the non-processing area are to support the SEZ

Regulatory Framework – An overview

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Tax Framework

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Direct Tax Incentives… for SEZ Developers & Units• SEZ developers given IT exemption for 10 consecutive

assessment year out of first 15 years of its operations.

Exemption from Corporate Tax to SEZ units for 15 years(5 + 5 + 5). •100% for first 5 years;•50% for next 5 years; and •50% for next 5 years to the extent of profits ploughed back

• Corporate Tax exemption extended to export of services also.

• Exemption from MAT to SEZ Developers and SEZ Units

• SEZ Developers exempted from Dividend Distribution Tax.

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Indirect Tax IncentivesCustoms duty exemption for goods imported into or services provided in SEZs or to UnitCustoms duty exemption on goods exported from or services provided from SEZs or Unit to any place outside IndiaExemption from Central excise duty on goods brought from DTA to SEZs or UnitExemption from service tax on taxable services provided to SEZ developer or Unit for their authorised operations. However such exemption on exports made by unit need to meet criteria of “Export of Service Rules”Central sales tax exemption on sale/purchase of goods for authorised operations other than newspapers where such sale takes place in the course of interstate trade or commerceTax exemption on electricity and power consumption

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SEZ – Current Status362 SEZs formally approved:

17 Multi Product SEZs;

6 Port based Multi Product SEZs;

114 Sector Specific SEZs;

225 EH/IT/ITES SEZs

177 valid in-principle approvals;

132 SEZs notified; 45 SEZs functional

06-07 Exports at Rs. 34787 Crores

Growth in exports 52% over 2005-06

Projected exports – 2007-08 – Rs. 67088 crores (200% increase in two years)

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SEZ – Success StoriesMOTOROLA

NOKIA

FOXCONN

APACHE

LOTUS FOOTWEAR

BRANDIX APPAREL

SUZLON

FLEXTRONICS

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SEZ – IssuesLand Acquisition

Cap on number of SEZs

Cap on maximum size of SEZ

Quantum of Processing Area

Regulation of Land use in the SEZs

Protection of Worker’s Rights

Review of Tax Concessions

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Chinese SEZsXiamen : 131 sq. kmShenzen : 327 sq. kmHainan : 34000 sq. km

Total Land Area 2973190 sq kmAgricultural area 54.5% 1620388 sq kmNon Agricultural area 1352802 sq km

SEZs formally approved (362) 487 sq kmIn-principal approvals (177) 1571 sq km[Area for SEZs so far notified amounts toonly 177 sq km]

Total Area proposed for SEZ 2058 sq kmAs % of total land area 0.069% As % of Agri land 0.13%

SEZ ground realities

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THANK YOUTHANK YOU

SEZs in India New Delhi

SEZs spread

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Thank you