What Is the SEZ Scheme?
A Special Economic Zone is a specifically notified area governed by the Special Economic Zones Act, 2005 and the SEZ Rules, 2006. An approved SEZ unit may undertake authorised manufacturing, trading or service activities from premises located within the notified zone. For authorised operations, the framework allows specified duty and tax benefits, simplified customs procedures and a dedicated administrative mechanism.
An SEZ unit remains export oriented and is generally required to achieve positive Net Foreign Exchange cumulatively over the prescribed block. Approval is not automatic merely because a business takes premises in an SEZ. The entity must obtain a Letter of Approval and complete post approval formalities before availing SEZ benefits.
Who Can Consider Setting Up an SEZ Unit?
- Manufacturers supplying goods to overseas customers
- IT, ITeS, software development, engineering, design, research, analytics and business support service providers
- Export oriented companies requiring duty free import or domestic procurement of eligible inputs, capital goods and services
- Global capability centres and businesses providing services from India to overseas group entities or third party customers
- Existing exporters evaluating relocation, expansion or a separate SEZ undertaking
- Businesses proposing trading, warehousing or other permitted activities in an appropriate SEZ, subject to sectoral and zone specific conditions
The commercial case should be evaluated before committing to a lease. Export revenue, foreign exchange outgo, domestic sales, input profile, GST cash flow, employee location, operational controls and exit implications can materially affect the suitability of the SEZ route.
Key Benefits of an SEZ Unit
- Duty free imports: Eligible goods may be imported without payment of applicable customs duties for approved authorised operations, subject to prescribed procedures and records.
- Duty free domestic procurement: Eligible goods may be procured from the Domestic Tariff Area under the SEZ framework for authorised operations, subject to the applicable tax and documentation route.
- Zero rated supplies under GST: Supplies to an SEZ developer or unit for authorised operations are treated as zero rated supplies under the IGST law. Documentation and endorsement requirements remain important.
- Operational customs framework: Import, export, procurement, inter unit transfer, subcontracting and other authorised transactions are administered through the SEZ customs mechanism.
- Single administrative interface: The Development Commissioner and Unit Approval Committee provide a dedicated institutional framework for approvals and specified operational matters.
- Infrastructure and business ecosystem: Established zones may provide ready premises, utilities, security, connectivity and an export focused operating environment.
- State level incentives: Additional benefits may be available under the relevant state policy, subject to location, activity, eligibility and continuing conditions.
Important position on income tax benefits. The earlier Section 10AA profit linked deduction is not available to a new SEZ unit commencing operations after the statutory sunset. It may continue only for qualifying legacy units within their eligible deduction period and subject to the Income Tax Act. A new project should therefore be evaluated primarily on operational, customs, GST, infrastructure and business considerations, without assuming an income tax holiday.
Core Conditions and Compliance Obligations
- The unit must carry out only the activities and items approved in its Letter of Approval and authorised operations.
- Positive Net Foreign Exchange must ordinarily be achieved cumulatively over the applicable five year period in accordance with the SEZ Rules.
- Duty free goods must be used, accounted for and disposed of only in the manner permitted under the SEZ framework.
- Prescribed records, customs documents, accounts and supporting evidence must be maintained and produced when required.
- Annual Performance Reports and other periodic returns must be filed within the prescribed time and reconciled with financial, customs, GST and foreign exchange records.
- DTA sales and supplies are subject to the applicable import policy, duties, taxes and conditions. They should not be treated as equivalent to ordinary domestic sales from a DTA unit.
- Changes in items, services, capacity, ownership, shareholding, name, constitution, premises or business model may require prior approval, intimation or amendment of the Letter of Approval.
Process for Setting Up an SEZ Unit
- Feasibility assessment. Review the proposed activity, export model, inputs, capital goods, foreign exchange inflows and outflows, DTA exposure, GST position, location and state policy benefits.
- Selection of SEZ and premises. Identify a notified and operational SEZ suitable for the proposed sector and obtain the required space allotment, lease or provisional offer documents.
- Application preparation. Prepare the application in the prescribed form with project report, promoter details, financial projections, foreign exchange calculations, proposed items or services, employment, investment and supporting corporate documents.
- Filing and representation. Submit the application through the prescribed SEZ Online and jurisdictional process and address observations raised by the Development Commissioner or Unit Approval Committee.
- Letter of Approval. On approval, review the conditions, accept the Letter of Approval and complete incorporation, lease, registration and banking actions applicable to the project.
- BLUT and customs formalities. Execute the Bond cum Legal Undertaking in Form H, obtain acceptance and complete registration with the Specified Officer and SEZ customs system.
- Operational readiness. Align IEC, GST, bank accounts, RCMC where applicable, invoice formats, procurement controls, SOFTEX or export documentation, accounting codes and internal compliance processes.
- Commencement and ongoing compliance. Commence authorised operations within the permitted validity, maintain transaction records, monitor NFE and file periodic returns and renewal or amendment applications on time.
Our SEZ Consultancy Services
SEZ Entry and Unit Setup
- SEZ feasibility and benefit analysis
- Selection of suitable SEZ and review of proposed operating structure
- Application for setting up a manufacturing or service unit
- Project report, NFE projections and regulatory documentation
- Representation before the Development Commissioner and Unit Approval Committee
- Letter of Approval review and acceptance
- Form H BLUT, customs registration and operational onboarding
Operational Approvals and Amendments
- Addition or modification of products, services and authorised operations
- Capacity enhancement, broad banding and capital goods approvals
- Change in name, constitution, ownership, shareholding or management
- Expansion, additional space, relocation, merger, demerger or transfer of unit
- Subcontracting, job work, temporary removal and inter unit transactions
- DTA sales, disposal of goods, transfer and other transaction specific advisory
- Extension of validity and renewal of Letter of Approval
SEZ Compliance and Advisory
- Positive NFE computation, monitoring and corrective planning
- Annual Performance Report preparation and filing support
- Reconciliation of customs, GST, export, SOFTEX, banking and financial records
- Advisory on duty free procurement, authorised operations and endorsement requirements
- Review of internal controls and transaction documentation
- Assistance during audit, verification, notices and proceedings before SEZ authorities
Exit, Debonding and Restructuring
- Feasibility analysis for exit from the SEZ scheme
- Duty and tax impact assessment for imported and domestically procured goods
- Debonding application, NFE and compliance reconciliation
- No dues coordination and final exit approvals
- Conversion, transfer or restructuring of the undertaking, where permissible
Why Businesses Choose Osgan Consultants
SEZ matters require more than filing an application. The approval, customs, GST, foreign exchange and operational positions must work together throughout the life of the unit. Osgan Consultants provides integrated assistance designed around the client's actual transaction flow.
- End to end assistance from feasibility to commencement and continuing compliance
- Practical interpretation of SEZ, customs, GST, FEMA and foreign trade requirements
- Detailed documentation and issue focused representation before authorities
- Support for both routine compliance and complex restructuring, audit and exit matters
- Clear timelines, responsibility mapping and senior level involvement
Frequently Asked Questions
1. What is an SEZ unit?
An SEZ unit is an approved undertaking located within a notified Special Economic Zone and authorised to manufacture goods, render services or undertake another permitted activity. It must obtain a Letter of Approval and comply with the SEZ Act, SEZ Rules and the conditions of approval.
2. Can a service company set up an SEZ unit?
Yes. Eligible service businesses, including IT, ITeS, engineering, design, research, analytics and business support operations, may set up in a suitable SEZ. The proposed services, export model, premises and foreign exchange projections are examined during approval.
3. Is there a minimum investment requirement for an SEZ unit?
There is no universal minimum investment amount for every SEZ unit. Investment, space and infrastructure must be commercially credible and appropriate for the activity. A particular zone, sector or state policy may prescribe additional conditions.
4. Is an SEZ unit required to export?
An SEZ unit is export oriented and must ordinarily achieve positive Net Foreign Exchange cumulatively over the prescribed block. The business plan should therefore demonstrate adequate eligible export earnings relative to foreign exchange outgo.
5. How is positive Net Foreign Exchange calculated?
NFE is broadly determined by comparing eligible foreign exchange earnings with specified foreign exchange outgo in accordance with Rule 53 of the SEZ Rules. The calculation is cumulative for the relevant period and should be monitored using reconciled customs, banking and financial data.
6. Can an SEZ unit sell goods or services in the Domestic Tariff Area?
DTA transactions are permitted only subject to the SEZ Act, SEZ Rules, import policy, applicable duties, taxes and conditions. Clearance of goods from an SEZ into the DTA is generally treated as an import. Any time bound concessional notification must be tested separately for eligibility.
7. Are supplies to an SEZ exempt from GST?
Supplies to an SEZ unit or developer for authorised operations are zero rated under the IGST framework. The supplier may follow the permitted route under GST law, but contracts, endorsement, invoice wording and supporting evidence must be correctly maintained. Zero rating should not be assumed for supplies unrelated to authorised operations.
8. Is an income tax holiday available to a newly established SEZ unit?
The earlier Section 10AA benefit is not available to a new unit commencing after the statutory sunset. Eligible legacy units may continue to claim the deduction for their remaining eligible period, subject to fulfilment of the Income Tax Act. A project report should not assume an income tax holiday without a specific tax review.
9. What is a Letter of Approval?
The Letter of Approval is the principal authorisation issued to the SEZ unit. It specifies the approved activity, products or services, capacity and conditions. Changes outside its scope may require an amendment or prior approval.
10. How long is an SEZ Letter of Approval valid?
The initial approval provides a period for commencing authorised operations and may be extended in accordance with the SEZ Rules. After commencement, the operational approval is generally valid for the prescribed block of 5 years and must be renewed on time.
11. What annual compliance is required?
Key requirements generally include the Annual Performance Report, NFE monitoring, maintenance of prescribed records and reconciliation of authorised procurements, imports, exports, GST, banking and financial data. Additional filings may apply depending on the activity and jurisdiction.
12. Can an SEZ unit be closed or debonded?
Yes. Exit requires a structured process involving NFE review, payment of applicable duties and taxes, disposal or transfer of goods, surrender or amendment of approvals, no dues confirmation and final permission from the competent authorities.
Speak With an SEZ Consultant
Planning to establish an SEZ unit, amend an existing approval, resolve an operational issue or exit the scheme?
Osgan Consultants can review the proposed transaction, identify the applicable approvals and prepare a clear implementation plan for the project.
Contact us for a preliminary discussion on SEZ setup, compliance, restructuring or debonding.
