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Special Economic Zones Act, 2005.

May 8, 2013

The policy relating to SEZs was earlier contained in Foreign Trade Policy. However, to give a long term and stable policy framework with minimal regulation, the SEZ Act was enacted. The Act received the assent of the President on 23rd June, 2005 and has come into force with the Special Economic Zones Rules, 2006 on 10th February, 2006. An SEZ is conceived of as an engine to economic growth of the country with a view to attracting investment into the country and generation of foreign exchange through export of goods and services.

  • The Special Economic Zones Act, 2005, provides the legal framework for establishment of Special Economic Zones and also for units operating in such zones.

  • This Act, 2005 has been enacted with the major objective of generation of additional economic activity, promotion of export of goods and services, investment from domestic and foreign sources and creation of employment opportunities.

  • This Act is unique as it helps in ‘backward and forward’ linkages of the economy, and to satisfy the requirements of all principal stakeholders in an SEZ – the developer and operator, occupant enterprise, out zone supplier and residents.

Salient Features: The SEZ Act deals primarily with the following matters:
  1. Matters relating to establishment of Special Economic Zone and for setting up of units therein, including requirements, obligations and entitlement

  2. Matters relating to requirements for setting up of off-shore banking units and units in International Financial Service Center in Special Economic Zone, including fiscal regime governing the operation of such unit

  3. The fiscal regime for developers of Special Economic Zones and units set up therein

  4. Single window clearance mechanism at the zone level

  5. Establishment of an Authority for each Special Economic Zone set up by the Central Government to impart greater administrative autonomy

  6. Designation of special courts and single enforcement agency to ensure speedy trial and investigation of notified offences committed in Special Economic Zones

  7. Exemptions, drawbacks and concessions including exemptions from customs duty (on goods brought into or exported from the SEZ), excise, service tax, securities transaction tax, sales tax and income tax.

The SEZ Act in nut shell:

The Special Economic Zones Act consists of 58 sections divided into VIII chapters and Three Schedules. It has three defining features. Firstly Outlines, Chapter I deal with the preliminary aspects of Short title and commencement and definitions. Chapter II deals with the process of setting of SEZ Chapter III deals with the constitution of board of approval. Chapter IV explains the functions of Development Commissioner. Chapter V deals with special benefits to the developers like Single Window Clearance. Special Fiscal Provisions for Special Economic Zones are laid down in Chapter VI and chapter VII deals with Special Economic Zone Authority and the concluding chapter VIII is titled Miscellaneous.

Chapter I: Definition

Section 2 of the SEZ Act provides definitions. The precept in the definition clause provides ‘unless the context otherwise requires’ meaning that the words need to be understood as denoted in the section unless the context requires otherwise. Some important definitions are as hereunder

Special Economic Zone: “Special Economic Zone” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (l) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone. An SEZ is conceived of as an engine to economic growth of the country with a view to attracting investment into the country and generation of foreign exchange through export of goods and services.

Chapter II:

It contains the most important aspects of establishment of Special Economic Zones, such as procedure for making proposal to establish Special Economic zone, Requirements for establishment of SEZ, The Duties of the board and establishment of Special Economic Zone and approval and authorization to operate it, Developer, guide lines for notifying Special Economic Zone, Processing and non-processing areas, and exemption for taxes, duties or cess.

Chapter III:

Provides the Constitution of the Board of Approval, Duties powers and functions of the Board, and Suspension of letter of approval and transfer of Special Economic Zone in certain cases.

Chapter IV:

Appointment of Development Commissioner, Functions of developmental Commissioner, Constitution of approval committee

Chapter V:

This chapter deals with the single window clearance. Constitution of Approval committee, powers and functions of the Approval Committee, Setting up of Unit, cancellation of letter of approval to entrepreneur, setting up and operation of Offshore Banking unit, setting up of International Financial Services center, Single application form return etc, Agency to inspect, Single enforcement officer or agency for notified offences, Investigation inspection search or seizure, Designated courts to try suits and notified offences, appeal to High court, offences by companies

Chapter VI:

This chapter deals with special fiscal provisions for special Economic zones such as exemptions, drawbacks and concessions to every developer and entrepreneur. Provisions of Income Tax Act, 1961 to apply with certain modifications in relation to Developers and entrepreneurs, duration of goods or services in special economic zones, transfer of ownership and removal of goods, domestic clearances by units

Chapter VII:

This chapter deals with constitution of Special Economic Zone Authority, Officers of the Authority and other staff, Special provision for transfer of officers or other employees to the Authority and the functions of the Authority, Grants and loans by Central government, constitution of Fund and its application, Accounts and Audit, directions by Central government, Returns and reports, power to supersede Authority, members officers and other employees of authority

Non-Applicability: Chapter VIII:

This chapter deals with miscellaneous aspects such as the Reference of dispute, limitations in case of dispute, Applicability of provisions of the Act to existing Special Economic Zones, person to whom communication may be sent under the Act, Employees Identity Card, authorities responsible for administration of the Special Economic zones, Protection of action taken in good faith to the Government, power to modify provisions of the Act or other enactments in relation to Special Economic Zones, power of state Government to grant exemptions to from state taxes levies and duties to the Developer or the entrepreneur, Overriding effect is given to the Act on any law for the time being in force, certain provisions contained in the Customs Act, 1962 and the SEZ Rules 2003 and the SEZ Customs Procedure Regulations - not to apply to the Special Economic zones, special economic zones to be ports, air ports, inland container depots, land stations etc., in certain cases, rule-making power to remove difficulties to Central Government and specific power to amend First schedule, Amendment of certain enactments specified in the Third Schedule and Savings.

Taxation of SEZ:
  • Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by –(i) a Unit in a Special Economic Zone; or(ii) a Developer

  • Shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule

  • The Second Schedule to the Act makes modifications to the Income-Tax Act, 1961

  • The Developer of SEZs, who was hitherto getting a deduction under Section 80IA (4) (iv), will get such exemption under Sec. 80IAB

  • The units located in SEZs, hitherto getting deduction under Sec. 10A (1A), will continue to get the deduction under the new Sec. 10AA. Additional tax on dividend distributed out of the profits from units in SEZs will not be levied in view of the amendments to Sec. 10(34) and 115-O

  • The financiers being an infrastructure capital fund or infrastructure capital company for such projects, hitherto exempt under Sec. 10(23G), will continue to get the same exemption in respect of projects covered by SEZs by an amendment made in 10(23G) by substituting Sec. 80IA(4) by Sec. 80IAB(3)

  • Tax on capital gains on shifting of assets to an SEZ is spared by insertion of Sec. 54GA. The benefit of the above concessions would be for ten consecutive years out of the first 15 years

  • Banking Units — scheduled banks in India, foreign banks having offshore banking units in an SEZ and units of International Financial Services Centre — are entitled to a 100 per cent deduction of income for the first five consecutive years and 50 per cent thereafter

  • This is secured by insertion of Sec. 80LA, while a consequential amendment to Sec. 197A ensures that no deduction of tax at source will be made for any payment of interest on deposits or borrowings made to a non-resident or a resident not ordinarily resident, while Sec. 10(15) (viii) exempts such non-residents themselves who will not be liable to tax

Grievance Redressal:

The State Government, in which the Special Economic Zone is situated, may, with the concurrence of the Chief Justice of the High Court of that State, designate one or more courts to try all suits of a civil nature arising in the Special Economic Zone; and to try notified offences committed in the Special Economic Zone.


A Special Economic Zones (SEZ) is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws. India has in fact, the right mix of factors such as availability of large & skilled workforce, intrinsic comparative advantage in several industries, a strong policy framework, availability of complementing & supporting ancillary industry, an already buoyant export sector & vast local markets. SEZs can combine these factors into a powerful alchemy to power investment creation.

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