What is SEZ? How does it operate? Explained.

Special Economic Zones are established for the promotion of exports and for matters connected therewith or incidental thereto.

 “Special Economic Zone” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 of SEZ act 2005 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone

“Free Trade and Warehousing Zone” means a Special Economic Zone wherein mainly trading and warehousing and other activities related thereto are carried on

“Import” means-

  1. bringing  goods or receiving services, in a Special Economic Zone, by a Unit  or  Developer from a place outside India by land, sea or air or by any other mode,  whether physical or otherwise; or
  2. receiving goods, or services by,  Unit or  Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone;

“Offshore Banking Unit”  means a branch of a bank located in a Special Economic Zone and which has obtained the permission under clause (a) of sub-section (1) of section 23 of the Banking Regulation Act, 1949;

Objective of Establishing SEZ Units

  1. generation of additional economic activity
  2. promotion of exports of goods and services; 
  3. promotion of investment from domestic and foreign sources;
  4. creation of employment opportunities; 
  5. development of infrastructure facilities; and 
  6. maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign State

Procedure for making a proposal to establish a Special Economic Zone.

  • A Special Economic Zone may be established under this Act, either jointly or severally by the Central Government, State Government, or any person for the manufacture of goods or rendering services or for both or as a Free Trade and Warehousing Zone.
  • Any person, who intends to set up a Special Economic Zone, may, after identifying the area, make a proposal to the State Government concerned for the purpose of setting up the Special Economic Zone. 

Notwithstanding anything contained in sub-section (2), any person, who intends to set up a Special Economic Zone, may, after identifying the area, at his option, make a proposal directly to the Board for the purpose of setting up the Special Economic Zone:

  • Provided that where such a proposal has been received directly from a person under sub-section, the Board may grant approval and after receipt of such approval, the person concerned shall obtain the concurrence of the State Government within the period, as may be prescribed. 
  • In case a State Government intends to set up a Special Economic Zone, it may after identifying the area, forward the proposal directly to the Board for the purpose of setting up the Special Economic Zone:
  • Provided that the Central Government may:-
    • after consulting the State Government concerned;
    • without referring the proposal for setting up the Special Economic Zone to the Board; and
    • after identifying the area; suo moto set up and notify the Special Economic Zone
  • Every proposal under sub-section (2) to (4) shall be made in such form and manner containing such particulars as may be prescribed.   
  • The State Government may, on receipt of the proposal made under sub-section (2), forward the same together with its recommendations to the Board (BOARD OF APPROVAL) within such period as may be prescribed.
  • Without prejudice to the provisions contained in subsection (8), the Board may, after receipt of the proposal under sub-section (2) to (4), approve the proposal subject to such terms and conditions as it may deem fit to impose, or modify or reject the proposal.
  • The Central Government may prescribe the following requirement for the establishment of a Special Economic Zone, namely:-
  • the minimum area of land and other terms and conditions  subject to which the Board shall approve, modify or reject any proposal received by it under sub-section (2) to (4); and
  • the terms and conditions, subject to which the Developer shall undertake the authorized operations and his obligations and entitlements.
  • Provided that different minimum are of land and other terms and conditions referred to in clause (a) may be prescribed by the Central Government for a class or classes of Special Economic Zones. 
  • If  the Board,- 
  1. approves without any modification, the proposal received under sub-section (2) to (4), it shall communicate the same to the Central Government;
  2. approves with modifications the proposal received under sub-section (2) to (4), it shall communicate such modifications to the person or the State Government concerned and if such modifications have been accepted by such person or the State Government, the Board shall communicate the approval to the Central Government;
  3. rejects the proposal, received under sub-section (2) to (4), it shall record the reasons therefor and communicate the rejection to the Central Government which shall intimate to the State Government or the person concerned.
  • The Central Government shall, on receipt of communication under clause (a) or clause (b) of sub-section (9), grant, within such time as may be prescribed, a letter of
  • approval on such terms and conditions and obligations and entitlements as may be approved by the Board, to the Developer, being the person or the State Government concerned:
  • Provided that the Central Government may, on the basis of approval of the Board, approve more than one Developer in a Special Economic Zone in cases where one Developer does not have in his possession the minimum area of contiguous land, as may be prescribed, for setting up a Special Economic Zone and in such cases, each Developer shall be considered as a Developer in respect of the land in his possession.  
  • Any person who, or a State Government which, intends to provide any infrastructure facilities in the identified area referred to in sub-section (2) to (4), or undertake any authorized operation may, after entering into an agreement with the Developer referred to in sub-section (10), make a proposal for the same to the Board for its approval and the provisions of sub-section (5) and sub-sections (7) to (10) shall, as far as may be, apply to the said proposal made by such person or State Government.
  • Every person or a State Government referred to in subsection (11), whose proposal has been approved by the Board and who, or which, has been granted a letter of approval by the Central Government, shall be considered as a Co-Developer of the Special Economic Zone. 
  • Subject to the provisions of this section and the letter of approval granted to a Developer, the Developer may allocate space or built-up area or provide infrastructure services to the approved units in accordance with the agreement entered into by him with the entrepreneurs of such Units.

 Processing and non-processing areas

The areas falling within the Special Economic Zones may be demarcated by the Central Government or any authority specified by it as- 

(a). the processing area for setting up Units for activities, being the manufacture of goods, or rendering services; or

(b). the area exclusively for trading or warehousing purposes; or

(c). the non-processing areas for activities other than those specified under clause (a) or clause (b).

Exemption from taxes, duties or cess.

Any goods or services exported out of, or imported into, or procured  from the Domestic Tariff Area by (“Domestic Tariff Area” means the whole of India (including the territorial waters and continental shelf) but does not include the areas of the Special Economic Zones) : –

(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

Every Approval Committee may discharge the functions and exercise the powers in respect of the following matters, namely:-

Powers and functions of Approval Committee.

  • approve the import or procurement of goods from the Domestic Tariff Area, in the Special Economic Zone for carrying on the authorized operations by a Developer;
  • approve the providing of services by a service provider, from outside India, or from the Domestic Tariff Area, for carrying on the authorized operations by the Developer, in the Special Economic Zone;
  • Monitor the utilization of goods or services or warehousing or trading in the Special Economic Zone;
  • approve, modify or reject proposals for setting up Units for manufacturing or rendering services or warehousing or trading in the Special Economic Zone [other than the grant of license under clause (e) of sub-section (2) of section 9] in accordance with the provisions of sub-section (8) of section 15;
  • Provided that where the Approval Committee is unable to decide whether a particular process constitutes manufacture or not, it shall refer the same to the Board of Approval for a decision. 
  • Every appeal made under sub-section (4) shall be in such form and shall be accompanied by a copy of the order appealed against and by such fees as may be prescribed.
  • The procedure for disposing of an appeal shall be such as may be prescribed: 

Provided that before disposing of an appeal, the appellant shall be given a reasonable opportunity of being heard.

Suspension of letter of approval and transfer of Special Economic Zone in certain cases :-

  1. If at any time the Board is of the opinion that a Developer –

(a)    is unable to discharge the functions or perform the duties imposed on him by or under the provisions of this Act or rules made thereunder; or 

(b)   has persistently defaulted in complying with any direction given by the Board under this Act; or

(c)     has violated the terms and conditions of the letter of approval; or

(d)    whose financial position is such that he is unable to fully and efficiently discharge the duties and obligations imposed on him by the letter of approval, and the circumstances exist which render it necessary for it in public interest so to do, the Board may, on application, or with the consent of the Developer, or otherwise, for reasons to be recorded in writing, suspend the letter of approval, granted to the Developer for a whole or part of his area established as Special Economic Zone, for a period not exceeding one year and appoint an Administrator to discharge the functions of the Developer in accordance with the terms and conditions of the letter of approval and manage the Special Economic Zone accordingly.

  1. Consequent upon appointment of an Administrator, the management of the Special Economic Zone of the Developer referred to in sub-section (1) shall vest in the Administrator.
  2. No letter of approval shall be suspended under sub-section (1) unless the Board has given to the Developer not less than three months’ notice, in writing, stating the grounds on which it proposes to suspend the letter of approval, and has considered any cause is shown by the Developer within the period of that notice, against the proposed suspension.
  3. The Board may, instead of suspending the letter of approval under sub-section (1), permit it to remain in force subject to such further terms and conditions as it thinks fit to impose, and any further terms or conditions so imposed shall be binding upon and be complied with by the Developer and shall be of like force and effect as if they were contained in the letter of approval.
  4. In case the Board suspends a letter of approval under this section, it shall serve a notice of suspension upon the Developer and fix a date on which the suspension shall take effect.
  5. Upon suspension of the letter of approval under subsection (1), the Special Economic Zone of the Developer referred to in sub-section (5) shall vest in the Administrator under sub-section (2) for a period not exceeding one year or up to the date on which his letter of approval for such Special Economic Zone is transferred, whichever is earlier, in accordance with the provisions contained in sub-section (7) and (9), as the case may be.
  6. Where the Board has given notice for suspension of letter of approval under sub-section (5), the Developer may, after prior approval of the Board, transfer his letter of approval to any person who is found eligible by the Board for grant of such approval.
  7. If at any time, it appears to the Board that the purpose of the order appointing the Administrator has been fulfilled or that for any reason it is undesirable that the order of appointment should remain in force, the Board may cancel the order and thereupon the Administrator shall be divested of the management of the Special Economic Zone which shall, unless otherwise directed by the Board, again vest in the person, being the Developer, in whom it was vested immediately prior to the date of appointment of the Administrator. 
  8. Were the Board suspends the letter of approval, under this section, in respect of any Developer, the following provisions shall apply, namely:-   
  • the Board shall invite applications for transferring the letter of approval of the Developer, whose approval has been suspended and select the person or persons, in accordance with the procedure as may be prescribed, to whom the letter of approval of the Developer in the Special Economic Zone may be transferred;
  • upon selection of person or persons under subsection (a), the Board may, by notice in writing, require the Developer to transfer his letter of approval in a Special Economic Zone to the person or the persons so selected and thereupon the Developer shall transfer his interests, rights, and liabilities in the Special Economic Zone (hereafter in this section referred to as the “transferee”) who has been selected by the Board on such terms and conditions and consideration as may be agreed upon between the Developer and the transferee;
  • all the rights, duties, obligations and liabilities of the Developer, on and from the date of suspension of letter of approval or on and from the date, if earlier, on which his letter of approval in the Special Economic Zone of the Developer has been transferred to the transferee, shall cease absolutely except for any liabilities which have accrued prior to that date;
  • the Board may make such interim arrangements in regard to the operation of the Special Economic Zone as may be considered appropriate;
  • the Administrator shall exercise such powers and discharge such functions as the Board may direct.

  1. The Board may, in order to promote exports or to protect the interest of Units or in the public interest, issue such directions or formulate such scheme as it may consider necessary for the operation of the Special Economic Zone.

Development Commissioner

  1. The Central Government may appoint any of its officers not below the rank of Deputy Secretary to the Government of India as the Development Commissioner of one or more Special Economic Zones
  2. The Central Government may appoint such officers and other employees as it considers necessary to assist the Development Commissioner in the performance of his functions in the Special Economic Zones established by a Developer (other than Central Government) under this Act on such terms and conditions as it deems fit.

Every Development Commissioner, officers and other employee shall be entitled to such salary and allowances and  subject to such terms and  conditions of service in respect of leave, pension, provident fund and other matters as may, from time to time, be specified  by the Central Government.

Every Development Commissioner shall take all steps in order to discharge his functions under this Act to ensure speedy development of the Special Economic Zone and promotion of exports therefrom.

Without prejudice to the generality of the foregoing provisions, the Development Commissioner shall:-

(a). guide the entrepreneurs for  setting up of Units in the  Special Economic Zone;

(b). ensure and take suitable steps for effective promotion of exports from the  Special    Economic Zone;

(c). ensure  proper co-ordination with the Central Government or  State Government Departments concerned or agencies with respect to, or for the purposes, of clauses  (a) and (b); 

 (d). Monitor the performance of the Developer and the Units in a Special Economic Zone ;

 (e). discharge  such other functions as may be assigned to him by the Central Government under this Act or any other law for the time being in force; and

 (f). Discharge such other functions as may be delegated to him by the Board.

Every Development Commissioner shall be overall in charge of the Special Economic Zone and shall exercise administrative control and supervision over the officers and employees appointed under sub-section (2) of section 11 (including the officials deputed to such Special Economic Zone) to discharge any of the functions under this Act.

Approval Committee

Every Approval Committee shall consist of :–

  1. the Development Commissioner – Chairperson, ex  officio;      
  2. two officers of the Central Government to be nominated by the Central Government   –    Members, ex officio;                                                           
  3. two officers of the Central Government to represent the Ministry or Department dealing with revenue – Members, ex officio;  
  4. one officer of the Central Government to be nominated by that Government to represent the Ministry or Department dealing with the economic affairs (financial services) – Members, ex officio;  
  5. two officers of the State Government concerned to be nominated by that Stated Government – Member, ex officio; 
  6. a representative of the Developer concerned – Special invitee.

Every Approval Committee shall meet at such times and places as it considers necessary and shall have the power to regulate its own procedure.  

One half of the total Members of the Approval Committee shall form a quorum, and all the acts of the

Approval Committee shall be decided by a general consensus of the Members present.

Provided that in case the Approval Committee is unable to decide any matter by a general consensus, such matter shall stand referred to the Board of Approval.

Powers and functions of Approval Committee.

Every Approval Committee may discharge the functions and exercise the powers in respect of the following matters, namely:-

Powers and functions of Approval Committee.

  1. approve the import or procurement of goods from the Domestic Tariff Area, in the Special Economic Zone for carrying on the authorized operations by a Developer;
  2. approve the providing of services by a service provider, from outside India, or from the Domestic Tariff Area, for carrying on the authorized operations by the Developer, in the Special Economic Zone;
  3. monitor the utilization of goods or services or warehousing or trading in the Special Economic Zone;
  4. approve, modify or reject proposals for setting up Units for manufacturing or rendering services or warehousing or trading in the Special Economic Zone [other than the grant of license under clause (e) of sub-section (2) of section 9] in accordance with the provisions of sub-section (8) of section 15;
  5. Provided that where the Approval Committee is unable to decide whether a particular process constitutes manufacture or not, it shall refer the same to the Board of Approval for a decision. 
  6. allow, on receipt of approval under clause (c) of subsection (2) of section 9, foreign collaborations and foreign
  7. direct investments (including investments by a person outside India) for setting up a Unit;
  8. monitor and supervise compliance of conditions subject to which the letter of approval or permission, if any, has been granted to the Developer or entrepreneur; and
  9. perform such other functions as may be entrusted to it by the Central Government or the State Government

Cancellation of letter of approval to entrepreneur:-

  1. The Approval Committee may, at any time, if it has any reason or causes to believe that the entrepreneur has persistently contravened any of the terms and conditions or its obligations subject to which the letter of approval was granted to the entrepreneur, cancel the letter of approval: Provided that no such letter of approval shall be cancelled unless the entrepreneur has been afforded a reasonable opportunity of being heard.
  2. Where the letter of approval has been cancelled under subsection (1), the Unit shall not from the date of such cancellation, be entitled to an exemption, concession, benefit or deduction available to it, is a Unit, under this Act.
  3.  Without prejudice to the provisions of this Act, the entrepreneur whose letter of approval has been cancelled under sub-section (1), shall remit, the exemption, concession, drawback and any other benefit availed by him in respect of the capital goods, finished goods lying in stock and unutilised raw materials relatable to his Unit, in such manner as may be prescribed.
  4. Any person aggrieved by an order of the Approval Committee made under sub-section (1), may prefer an appeal to the Board within such time as may be prescribed.
  5. No appeal shall be admitted if it is preferred after the expiry of the time prescribed therefor:  Provided that an appeal may be admitted after the expiry of the period prescribed therefor if the appellant satisfies the Board that he had sufficient cause for not preferring the appeal within the prescribed time.
  6. Every appeal made under sub-section (4) shall be in such form and shall be accompanied by a copy of the order appealed against and by such fees as may be prescribed.
  7.  The procedure for disposing of an appeal shall be such as may be prescribed:

Provided that before disposing of an appeal, the appellant shall be given a reasonable opportunity of being heard.

Setting up and operation of Offshore Banking Unit.

  1. An application for setting up and operation of an Offshore Banking Unit in a Special Economic Zone may be made to the Reserve Bank in such form and manner as may be prescribed. 
  2. On receipt of an application under sub-section (1), the Reserve Bank shall, if it is satisfied that the applicant fulfills all the conditions specified under sub-section (3), grant permission to such applicant for setting up and operation of an Off-shore Banking Unit.
  3. The Reserve Bank may, by notification, specify the terms and conditions subject to which an Offshore Banking Unit may be set up and operated in the Special Economic Zone.

Setting up of International Financial Service Centre

The Central Government may approve the setting up of an International Financial Services Centre in a Special Economic Zone and may prescribe the requirements for setting up and operation of such Centre:-

 Provided that the Central Government shall approve only one International Financial Services Centre in a Special Economic Zone.

Designated Courts to try suits and notified offenses.

  1. 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:-
    1. to try all suits of a civil nature arising in the Special Economic Zone; and
    2. to try notified offenses committed in the Special Economic Zone.
  2. No court, other than the court designated under subsection (1), shall try any suit or conduct the trial of any notified offense referred to in that sub-section: 

 Provided that the courts, in which any suit of a civil nature in a Special Economic Zone had been filed before the commencement of this Act, shall continue to try such suit after such commencement:  Provided further that the courts in which any trial of any notified offense is being conducted before the commencement of this Act, shall continue to conduct the trial of such offense after the commencement of this Act:

 Provided also that the courts competent to try any notified offense before the commencement of this Act shall conduct the trial in respect of such offense after the commencement of this Act until the courts have been designated under sub-section (1) and all such cases relating to such trials shall thereafter be transferred to such Courts so designated which shall conduct the trial from the stage at which such cases were so transferred.

Appeal to High Court

Any person aggrieved, by any decision or order of the court designated under sub-section (1) of section 23, may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Courts so designated to him on any question of fact or law arising out of such orders:

  Provided that the High Court may if it is satisfied that the appellant was prevented by sufficient cause from filing an appeal within the said period, allow it to be filed within a further period not exceeding sixty days.

Explanation – In section 23 and this section “High Court” means the High Court of the State in which the Special Economic Zone is situated.

Exemptions, drawbacks, and concessions to every Developer and entrepreneur

  1. exemption from any duty of customs, under the Customs Act, 1962 or the Customs Tariff Act, 1975  or any other law for the time being in force, on goods imported into, or service provided  in, a Special Economic Zone or a Unit, to carry on the authorized operations by the Developer or entrepreneur;
  2. exemption from any duty of customs, under the Customs Act, 1962 or the Customs Tariff Act, 1975   or any other law for the time being in force, on goods exported from,  or services provided,  from a Special Economic Zone or from a Unit to any place outside India: 
  3. exemption from any duty of excise, under the Central Excise Act, 1944  or the Central Excise Tariff Act, 1985 or any other law for the time being in force, on goods brought from Domestic Tariff Area to a Special Economic Zone or Unit, to carry on the authorized operations by the Developer or entrepreneur;
  4. drawback or such other benefits as may be admissible from time to time on goods brought or services provided from the Domestic Tariff Area into a Special Economic Zone or Unit or services provided in a Special Economic Zone or Unit by the service providers located outside India to carry on the authorised operations by the Developer or entrepreneur;
  5. exemption from service tax under Chapter-V of the  Finance Act, 1994 on taxable services provided  to a Developer or Unit to carry on the authorised operations in a Special Economic Zone;
  6. exemption from the securities transaction tax leviable under section 98 of the Finance (No. 2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the Intern

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