India’s Special Economic Zones & Tax Incentives

August 5, 2013 Posted by India Briefing Reading Time: 5 minutes

India-SEZs [Editor’s note: this article was originally published on Aug. 5, 2013, but has been since updated to reflect recently passed amendments]

Aug. 15 – Foreign investors wishing to take advantage of development zones for export-related manufacturing and assembly, and obtaining tax incentives when doing so, may consider establishing a presence in one of India’s special economic zones (SEZs).

India first allowed SEZs after its passage of the Special Economic Zones Act, 2005 on 23 June 2005. The Act provides for the establishment, development and management of SEZs for the promotion of exports and related activities.

Basically, a SEZ is a geographical region designed to export goods and provide employment opportunities that is exempt from certain federal laws regarding taxes, quotas, FDI-bans and labor laws in order to competitively price goods made there. SEZs also include free trade zones, export processing zones, free zones, industrial parks or industrial estates, free economic zones and urban enterprise zones

Indian SEZs closely follow the successful Chinese SEZ model and, like China, foreign-invested businesses may be established in SEZs for the manufacturing of goods, the provisioning of services, and other activities including processing, assembling, trading, repairing and reconditioning.

India’s SEZ sectors are classified into four types:

Special Economic Zones for Multiple Sectors
Special Economic Zones for Specific Sectors
Special Economic Zones for Free Trade and Warehousing
Special Economic Zones for IT/ITES/Handicraft and Other Industries

Tax Incentives for Investors
Incentives and facilities offered to units located within an SEZ can include:

Duty free importation of required machinery, production lines and related equipment
Duty free import and domestic procurement of component parts as required for the final product
100% VAT rebates on exported India sourced components;
Income tax breaks – depending on the scope of business and where the business is located

India has a number of SEZs located around its coastline, including Gujarat (Northwest), Mumbai (West coast), Noida (Delhi), Kolkata (Bay of Bengal), Chennai (East Coast) and Visakhapatnam (Southeast Coast). All of these are sited close to significant ports with excellent shipping and rail infrastructure. Common usages for SEZs are manufacturing and assembly with combined Indian and globally-sourced components, and the final product can be sold both domestically and/or exported.

Further, the Indian government just recently updated its SEZ rules by way of the Special Economic Zones (Amendment) Rules, 2013, this week. Specifically, the key changes are:

It now permits the sectoral broad banding guidelines as approved by the Board of Approvals (i.e., an SEZ may now house various types of business activities within a single sector if they are of similar products or services);
The minimum area requirements for multi-product SEZs is now reduced from 1000 hectares to 500 hectares, or from 100 hectares to 50 hectares for sector-specific SEZs and SEZs with one or more services;
The minimum area requirement for setting up an IT or ITes SEZ is now subject to the minimum built up processing area conditions of its respective state/city;
There is now a minimum area requirement of 10 hectares for SEZs proposed to be set up exclusively for electronic hardware and software (including ITeS), bio-technology, handicrafts, gems and jewelry, non-conventional energy and agro-based food processing;
Benefits (fiscal incentives) are now available for additions/inclusions to pre-existing structures; and
A Unit may now opt out of a SEZ by transferring its assets & liabilities to another person by way of transfer of ownership, including a sale of the SEZ Unit.

Portions of this article came from India Briefing Magazine’s current issue, “Trading with India,” which is immediately available as a complimentary PDF download on the Asia Briefing Bookstore. In this issue, we focus on the dynamics driving India as a global trading hub. Within the magazine, you will find tips for buying and selling in India from overseas, as well as how to set up a trading company in the country. India is poised to become a major global sourcing center, and we hope this issue both educates and informs our readers how best to approach this growing market.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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