Exploring Investment Opportunities In India: Examining The Benefits Of Setting Up In Special Economic Zones (Sezs)

What Is Special Economic Zone?

A Special Economic Zone (SEZ) is a designated area within a country, A precisely defined duty-free enclave, considered as foreign territory for trade operations, customs duties, and tariffs. Items and services entering the SEZ zone from the domestic tariff area are regarded as exports, whereas items and services arriving from the SEZ are classified as imports. The SEZ Act of 2005, in conjunction with the SEZ Rules, streamlines processes and offers a one-stop solution for matters involving both the Central and State Governments.

A Special Economic Zone (SEZ) offers various incentives and benefits to promote economic growth, exports, and foreign investment.

  • Customs, Excise, And Gst:

    SEZ units can freely import or obtain goods from various sources without licenses or approvals, including items for setting up the unit. The Goods imported/procured locally duty-free must be utilized within the validity period of LOP and eligible for Merchandise Export from India Scheme (MEIS) and served from India Scheme (SFIS) incentives.

  • Income Tax:

    SEZ units get 100% income tax exemption for the initial 5 years (Section 10A) and 50% for the next 3 years (if set up before 1.4.2005) and For SEZ units starting from 1.4.2006 to 1.4.2021, there’s full income tax exemption for 5 years (Section 10AA), 50% for the next 5 years, and 50% of reinvested profits.

  • Cess:

    The SEZ units are exempted from Cess on goods related to various Acts, including the Agricultural Produce Cess Act, Coffee Act, and more.

  • Foreign Direct Investment:

    FDI up to 100% is allowed for manufacturing in SEZs, except for specific restricted activities. The Services follow government-notified norms, and non-automatic cases are approved by the Board of Approvals.

  • Off-Shore Banking Units (Obus):

    SEZs allow Off-shore Banking Units (OBUs) with 100% income tax exemption for 5 years, 50% for the next 5 years, and access to international finance rates.

  • Banking/ External Commercial Borrowings:

    SEZ units enjoy multiple financial benefits, including up to $500 million in annual external commercial borrowings, no time limit on bringing in export proceeds, full flexibility with export proceeds, permission for commodity hedging, exemption from interest rate surcharge on import finance, and write-off of unrealized export bills.

  • Exemption From Central Sale Tax:

    Exemption from payment of Central sales tax on sales made from Domestic Tariff Area to the SEZ units in terms of section 26(1)(g) of SEZ Act, 2005 in respect of goods which are outside the purview of GST

  • Requirement Under Environment (Protection) Act:

    IT SEZ units do not need environment clearance, but they must obtain it as per the law. Public hearing and Environmental Impact Assessment are required for SEZ development.

  • Concession Under Companies Act:

    Enhanced limit of Rs. 2.4 crores per annum allowed for managerial remuneration, regional office of Registrar of Companies in SEZs and Exemption from requirement of domicile in India for 12 months prior to appointment as Director.

  • Concession Under Drugs And Cosmetics Act:

    Exemption from port restriction under Drugs & Cosmetics Rules.

  • Sub-Contracting:

    SEZ units may sub-contract part of production or production process through units in the Domestic Tariff Area or through other EOU/SEZ. Units, SEZ units may also sub-contract part of their production process abroad. And SEZ units may also undertake job-work from DTA unit for export.

  • Labour Laws For Sez Units:

    Labor laws apply to all SEZ units, but some State Governments declare SEZs as public utilities, allowing the Development Commissioner to have Labor Commissioner powers. Public utility status has been granted in several states, and powers have been delegated in Andhra Pradesh, West Bengal, Karnataka, and Uttar Pradesh.

  • Exemption From Employees’ Provident Funds Act And Esi Act:

    State Government can seek a 5-year exemption from the Employees’ Provident Funds Act for SEZs under Section 16(2). Decided case by case.

  • Benefits To Domestic Supplies/Supplier To Sezs:

    Domestic Tariff Area to SEZ supplies are treated as physical exports, allowing benefits like duty drawback, duty exemption, CST exemption, and more. DTA suppliers can claim duty drawback with a disclaimer from the SEZ unit/Developer.



In conclusion, despite the stringent and lengthy procedures involved in setting up a Special Economic Zone (SEZ) unit. the SEZ Act and Rules provide a comprehensive package of exemptions and benefits, including customs, excise, and GST concessions, income tax exemptions, relief from various cesses, encouragement of foreign direct investment, offshore banking units, favourable banking arrangements, and exemptions from central sales tax. Additionally, there are concessions under the Companies Act and Drugs and Cosmetics Act, provisions for sub-contracting, and specific labor law considerations. The SEZ framework offers a unique and advantageous environment for economic growth, trade, and investment.

Authors – Ketan Joshi, Senior Associate and Aditi Arora, Associate