SEZ amendments
One of our most enlightened experts in the field, wrote to me yesterday,
The Government of India has brought in two major changes in the SEZ Rules by issuing a Notification No. G.S.R. 1744 (E), dated October 12, 2007. The first amendment is restricting the size of multiproduct SEZ with a minimum contiguous area of 1000 hectares with a upper ceiling of 5000 hectares and stipulating that 50% of this should be catered to processing area. The other significant amendment is deletion of a clause in Rule 18 which hitherto prohibited shifting of used plant and machinery to an SEZ. Now with this deletion this transfer of used plant and machinery is allowed. This gives a tremendous opportunity for all the EOUs to migrate to SEZs.
Not exactly! First a look at the Amendments.
In the SEZ Rules, Rule 5 (2)(a) has been amended to substitute,
(a) A Special Economic Zones for multi-product shall have a contiguous area of one thousand hectare or more but not exceeding 5000 hectares :
This was earlier,
A Special Economic Zone for multi product shall have a contiguous area of one thousand hectares or more:
So now there is an upper limit.
One of the provisos has also been amended
Provided further that at least fifty per cent of the area shall be earmarked for developing the processing area.
Earlier this was,
Provided also that as least thirty-five per cent of the area shall be earmarked for developing the processing area, which may be relaxed upto twenty-five per cent by the Central Government on recommendations of the Board for the reasons to be recorded in writing;
So, now, 50% of the area shall be for developing the processing area.
As per Rule 18 (4)(g), No proposal shall be considered for:- (g) the use of any plant or machinery previously used for any purpose in Domestic Tariff Area.
This sub clause (g) has now been omitted, prompting my friend to comment that, “This gives a tremendous opportunity for all the EOUs to migrate to SEZs.”
But the Commerce Ministry has explained this deletion.
The Ministry in its instructions explains,
apprehensions had been expressed by the Department of Revenue regarding shifting of existing businesses to SEZs to avail of the direct tax exemption on the export income as per the provisions of Section 10AA of the Income Tax Act, 1961. Accordingly in August 2006, vide SEZ (First Amendment) Rules, 2006, Rule 18(4)(g) had been inserted which prohibited consideration of any proposals intending to use any Capital Goods which have been previously used in the DTA.
By Finance Act, 2007 Section 10AA(4) has been substituted as follows
4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:
(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose
++ As the provisions of Rule 18(4)(g) and the new sub-section (4) to Section 10AA were in conflict, vide SEZ(Second Amendment) Rules, 2007 dated 12th October, 2007, Rule 18(4)(g) has been deleted.
++ While adequate provisions exist in Section 10AA of the Income Tax Act, to deal with tax related issues in case of previously used Capital Goods, it is not intended that any shifting of existing businesses takes place to SEZs which would offer a comparatively superior infrastructural and procedural environment.
++ Accordingly, in terms of the provisions of sub-section (8) of Section 15 of the Special Economic Zones Act, 2005 , it is prescribed that while granting any approval for setting up new units in any SEZ, the Approval Committee or the Development Commissioner, as the case may be, shall ensure that procurement of second hand capital goods shall be allowed only in terms of the provisions of sub-section (4) of Section 10AA read with Explanation 1 & 2 to sub-section (3) of Section 80IA of the Income Tax Act ,1961.
So it's all cosmetic tinkering and no serious change. Too many ministries, too many Acts and too many arrogant bureaucrats really make life miserable for somebody who wants to invest his precious money.
NOTIFICATION NO. G.S.R. 1744(E), Dated : October 12, 2007 and INSTRUCTION NO 8 . in No. Dated : October 12, 2007