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Options for Exiting from a SEZ Unit – A complete overview

Varun Hariharan

| Updated: May 15, 2020 | Category: FEMA

Exiting from a SEZ Unit

In the year 2000, the Government of India established a scheme for setting up of business zones or units to increase the production processes, gross domestic (GDP) and generate employment opportunities. These units or zones are called Special Economic Zones (SEZs).  This was brought out by the government of India when there was an amendment to the Export-Import policy in 2000. The reason behind bringing the SEZ establishments was due to Chinese developments.  Some of the benefits which are allowed for SEZs are not permitted in standard operating zones. Over time the development of Special Economic Zones has diversified, and there are different categories of special economic zones.  Companies have the option of exiting from a SEZ unit. However, there are specific criteria required to be followed before exiting from a SEZ Unit.

Special Economic Zones (SEZ) are zones which are delineated to enjoy different tax benefits. Some of these benefits allow companies to operate in these zones on a duty-free basis. Therefore these zones form foreign territories for conducting industrial activities, manufacturing activities, software activities, financial and trade activities. The fiscal and regulatory norms in these zones are liberalized and relaxed so that companies can generate more revenue. The generation of income will indirectly affect the development of the GDP of the country. Apart from this, the development of special economic zones attracts more amount of foreign direct investment in India.

These SEZ go by different names. Some of the names provided to an SEZ go by the services that are offered in the particular zone. There are different types of SEZs in India. Apart from this, an SEZ is classified on the activities carried out in a specific area. For understanding the options for exit by SEZ units, the following zones have to be categorized.

Types of Zones- Exiting from a SEZ Unit

  1. Export Oriented United (EOU) – Export Oriented Units are zones or units that concentrate their major activities on exports. These units allow manufacturing activities, development of software, repair activities, re-engineering activities. All the goods produced in these zones are exported outside India.
  2. Software Technology Park (STP) – Software Technology Parks are considered as zones that classify their activities based on companies that primarily operate in the development of software and software-related activities. STP would include the development of software, outsourcing of software and integration.
  3. Electronic Hardware Technology Park (EHTP) – Electronic Hardware Technology Park is another zone that allows exporters to set up their units. These units can be engaged in manufacturing and production activities. However, in this zone, major electronic activities would be carried out.
  4. Bio-Technology Park (BTP) – Units are allowed to establish their activities in BTPs. Companies here produce biotechnology products and activities related to the use of biotechnology.

Therefore these zones are established for companies or units to enjoy the benefits. At the same time, companies are allowed to carry out their activities. When a company opts for exiting from a SEZ Unit, then specific requirements have to be followed by the company.

Advantages of SEZ Units- Exiting from a SEZ Unit

There many advantages enjoyed by a company that establishes itself in an SEZ. Some of the incentives enjoyed by the company/ unit are:

  • Duty-Free Import- Companies that operate in an SEZ unit do not have to pay the import duty or any other duty that is levied on the Domestic Tariff Area (DTA). The domestic tariff area is the zone which is not included in the SEZ. Therefore companies or units operating in these zones are subject to payment of import duties and other forms of duties.
  • Taxation Benefits- Apart from no import duty payable on the goods, there is no form of tax required to be paid by units in these zones. There is a 100 percent tax exemption for the SEZ units in these zones.
  • Export and Import Business- Companies that establish themselves in SEZ are free to carry out the activities of export and import. These zones are not restricted to particular activities. Manufacturing and Construction activities can take place in these zones. Goods that are sent outside these zones are considered as exports and products received in these zones are imports.
  • Use of External Commercial Borrowings- SEZ units can use External Commercial Borrowings. Up to USD 500 million can be used in a year. There is no amount of maturity on these borrowings.

Though there are advantages for setting up of units in a SEZ, there are also disadvantages. One of the main problem faced by companies in these zones are exiting from a SEZ Unit. Before exiting from a SEZ unit, a company has to get various clearances and pay a specific amount of tax/ duty on the establishment. Some of the common issues faced by a company before exiting from a SEZ Unit are as follows:

  • Clearances from the Development Commissioner- While exiting from a SEZ unit, one of the main problems faced by companies is to get a clearance certificate from the development commissioner. Sometimes this certificate would be delayed for reasons which are beyond the control of the company.
  • Amount of Net Foreign Exchange (NFE) Earned by the Unit- This is another issue faced by a company exiting from a SEZ Unit. The amount of foreign exchange which is earned by the unit would contribute to the overall Net Foreign Exchange earned by the unit. The unit has to ensure that the Net Foreign Exchange earned by the unit is more.  The amount of Net Foreign Exchange is crucial for the development of a SEZ. This must be compliant with the rules related to the World Trade Organisation (WTO). If the SEZ unit has a positive Net Foreign Exchange, then it would make the SEZ attractive to other units during exit. Therefore a company or unit has to make sure that the NFE is always higher before exiting from the SEZ unit.
  • Lease/ property-related problems- Many companies that set up units at the SEZ would face property related issues. The SEZ developer would have unreasonable policies that affect the unit before exit. This will indirectly affect the company before exiting from the SEZ Unit. As companies have to get clearance certificates from concerned authorities, this would be an issue for the company.
  • Conducts of Business- Units have to conduct their business in an organized manner. Companies in the SEZ unit have to reach specific goals before performing their exit. There are circumstances where this would not be possible for many units. Companies have to ensure that they are making sufficient profits before exiting from a SEZ unit.
  • Procedural/ Administrative matters- Apart from the above problems, SEZ units have to face various procedural and administrative burdens. There may be a delay related to specific clearances, which will indirectly cause this delay. Moreover, there is no form of regulation pertaining to the time required to be spent by the company taking up a particular unit. The agreements for occupying the premises would be dependent on the SEZ developer and the unit.

Therefore a company or unit has to keep in mind the above issues when exiting from a SEZ unit.

Legal Framework for SEZ- Exiting from a SEZ Unit

The framework related to special economic zones is the Special Economic Zone Act of India 2006. The government of India amends this from time to time. Apart from this, various rules govern the law behind the special economic zones. The Special Economic Zone Amendment Act, 2019, is the latest amendment on the law relating to the supervision of special economic zones in India. Apart from this, the Special Economic Zone Rules, 2006 provide special rules on the running of special economic zones in India. The Foreign Trade Regulation Act 1992 regulates exiting from a SEZ Unit. Specific rules have to be adhered to and followed for a company exiting from a SEZ unit.

Application for Setting up a Special Economic Zone

An individual or company that wants to establish an SEZ has to make a proposal to the government of the state. Once this proposal is made in the prescribed form, the applicant has to specify the prescribed area in which the special economic zone will be set up.  This area of land has to be identified by the applicant.  The proposal for setting up an SEZ can also be directly addressed to the board. When the proposal is made to the board, the applicant has to wait for the approval. Once the board approves, then an agreement has to be made between the applicant and the state government.

The state government will consider the application on a case to case basis. The concerned state government would forward the proposal to the board along with recommendation letters. The minimum area requirement for setting up a special economic zone has to be satisfied. There are different types of special economic zones, and their area requirements vary on a case to case basis.

After going through the proposal, the board has the authority to ask for more information. The board may accept the proposal or reject the proposal. However, the board can accept the proposal after making specific changes to the proposal. Whatever action is taken by the board has to be communicated to the Central Government. For setting up the SEZ, the Unit Approval Committee has the power to either accept or reject the proposal.

Once the SEZ units are formed, they will be continuously monitored on their performance. The performance would be taken into consideration when a company is exiting from the SEZ Unit. Apart from the performance criteria that are monitored by the Unit Approval Committee, there are several compliances which have to be followed by the company before exiting from a SEZ unit. One of the requirements is for the company or the unit to have a positive NFE earning. This is required so that the SEZ can be more attractive to other investors. The performance of the SEZ unit has to be according to the guidelines which are present under various regulations. Therefore a company has to follow these guidelines before exiting from a SEZ Unit.

Guidelines for Exiting from a SEZ Unit

Under paragraph 6.18 (d) of the Foreign Trade Policy, provide specific guidelines for exiting from a SEZ unit. This is also present in the Legal Undertaking for the Exit of the Unit in Appendix 14-I-L. These guidelines have to be adhered to by all units exiting from a SEZ unit. If the above guidelines are not followed, then specific penalties would be levied on the unit. These guidelines would apply even to EOU/EHTP/STP UNITS. The following are the guidelines for exiting from a SEZ unit:

  • A company considering exiting from a SEZ unit has to pay all the applicable excise duties and customs on the goods. Payment of duty would be on the capital goods which are used to make finished goods, indigenous goods, spares of inventory and machinery and goods which are finished. The authority may allow the unit to dispose of raw material, consumables that are not used, and components. This would be against duty-free licenses. A company exiting from a SEZ unit would also be allowed to export the raw materials and consumable goods.
  • If a unit does not pay the duties applicable above, then a penalty would be imposed under the Foreign Trade (Development and Regulation) Act, 1992. This penalty will be imposed for not complying with the conditions for an SEZ unit. If a unit appeals the exit to an authority, then the exit would be allowed. The competent authority would impose a stay order on the exit of the unit. The unit would also have to obtain a bank guarantee on the payment of the penalty. However, this would not be applicable if the competent authority exempts the unit from such payment or compliance.
  • If the unit of company has failed to adhere to specific terms and conditions in the Letter of Approval (LOA), then penal proceedings would be filed against the unit or company for recovery of the same.  This would be signed and executed by the Development Commissioner.
  • If a unit wants to continue or extend the period with the DTA, then they have to follow specific compliances related to location. Apart from that, there are various environmental compliances which have to be followed. For Example- A unit that is involved in treatment would have to take sanction from the Air and Water Boards of particular states.
  • When a company opts for Exiting from a SEZ, the conditions above must be adhered to for a minimum period of 6 months. This would be six months from the date of issue of the first exit letter (or principle exit letter). The final permission related to exit would be obtained from the Development Commissioner. Permission would be granted by the Secretariat of Industrial Assistance (SIA) in case the manufacturing of the item requires a specific industrial license. If the unit does not do this, then the approval would lapse.
  • The development commissioner may extend the period of the SEZ in case of fulfilment of the above conditions.
  • The unit would further be continued to be treated as an SEZ/ EOU/STP until the new exit letter is provided to the unit.  If a new letter of permission is given to the unit then the unit can operate as a new unit carrying out new services. Until then, the SEZ would have to adhere to the above conditions.
  • All the obligations have to be achieved by the company exiting from a SEZ Unit.
  • The Central Goods and Service Tax, State Goods and Services Tax, and IGST also have to be paid by the unit.
  • A unit having operations in gold, diamond, and other precious metals would have to cease its operations. Materials that are available for manufacturing and other precious metals would be handed over to an agency which is nominated by the department of commerce. The agency would determine the price according to the prevailing market conditions.
  • The unit has to make sure it has a positive NFE.

Therefore a company exiting from a SEZ unit would have to follow the above guidelines. Apart from this, the company would have to obtain several clearances from the government and concerned authorities.

Conclusion

Special Economic Zones (SEZ) are specially designated zones for carrying out specific economic activities. These zones allow industries operating in different sectors to operate at maximum efficiency. There is no excise or any form of duties applicable in these zones. Goods that are sent from these zones are goods exported. Goods received in these zones are considered as imported goods. No duty is payable on imported goods in these zones. Domestic Tariff Areas (DTA) are zones outside the SEZ which have normal conditions related to business. Goods can be imported to SEZ from DTA.  There are guidelines that the company has to follow before exiting from a SEZ unit. If these guidelines are followed, then a unit can exit from a SEZ without any issues.

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Varun Hariharan

Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.

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