Special Economic Zones and Tax Incentives

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The Special Economic Zones and Tax Incentives offered as per the SEZ policy of India are indeed alluring for the investors, both domestic and foreign investors. The Special Economic Zones and Tax Incentives offered covers areas like state and local taxes, levies, stamp duty and other duties.

The Special Economic Zones and tax incentives as offered in India are as follows -

Local sales tax / value added tax laws

  • Section 50 of the Special Economic Zone Act of India, empowers all the concerned State Governments to issue notifications allowing exemptions to developer or entrepreneur on state taxes, levies and duties.
  • Rule 5(5) of Special Economic Zone of India provides that before recommendation of any proposal for establishment of a Special Economic Zone, the State Government should offer various incentives, including exemption from state and local taxes, levies, stamp duty, other duties and taxes levied by local bodies on goods required for operations of such authorized unit. Further, the goods sold by such unit in the domestic tariff area (DTA) should also be extended all such exemptions support, except the goods procured from domestic tariff area should be sold as it is

  • Therefore, the Special Economic Zone Act and the Rule of India involves all the state governments with clear indication of incentives offered as per the respective state policy.

Central Sales Tax Act, as per 1956 draft

  • Section 8 (6) of the Central Sales Tax Act of India exempts from Central Sales Tax all inter-state sale of goods made by a dealer to a registered dealer for the purpose of setting up, operation, manufacture, production, processing, assembling, trading, maintenance, repairing, reconditioning, re-engineering, packaging or for use as packing material or packing accessories in any Special Economic Zone unit for development, operation and maintenance of SEZ developer.

  • The above-mentioned benefit are offered if such registered dealer is authorized to establish such an unit within the designated Special Economic Zone or to develop and maintain such Special Economic Zone by the body authorized by the Central Government to act for and on their behalf.

Income Tax Incentives

All the Special Economic Zones function under the guardianship and the jurisdiction of the Commerce Ministry, Government of India. The relevant or applicable exemptions and incentives as offered for the operation of the Special Economic Zones are provided in the Special Economic Zone Act of India. These exemptions on income taxes are detailed in the Second Schedule to the SEZ Act. Section 27 of the SEZ Act provides -
  • Provisions of Income tax Act;
  • As in force for time being;
  • Shall apply to developer or entrepreneur;
  • For carrying on authorized operations in an SEZ or Unit;
  • Subject to modifications specified in Second Schedule;

Second Schedule of the Special Economic Zone Act of India

  • Section 10[15][viii]: Interest on deposits in an offshore bank on or after 1st April 2005 of a Non-resident or Not Ordinarily Resident is exempted form paying tax.

  • Section 10[23][g]: Dividends or interests or long-term capital gains earned from any infrastructure based fund or infrastructure based capital company or cooperative bank from investments made on shares or long-term finance in any enterprise or undertaking those are dedicatedly involved in the business of development of Special Economic Zone.

  • Section 54GA: The transfer of assets in cases of shifting of any industry from an urban area to any Special Economic Zone is exempted from tax on capital gains.

  • Section 80LA: 100% tax deduction is offered for the first 5 years & 50% deduction for the next 5 years in respect of income from International Financial Services Center or an offshore banking unit in a Special Economic Zone.

    • Further, such deductions are also offered on income from other business activities, which are referred in Section 6[1] of Indian Banking Regulations Act, with an undertaking located in any designated Special Economic Zone or any other undertaking, which helps in the development and /or operation of any such Special Economic Zone.
  • Section 115JB(6): The provisions of section 115JB becomes ineffective if the income accrued or arises on or after 1st April 2005 from any business activities carried therein
Last Updated on May 29, 2015