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Impact of GST on Special Economic Zone – Part I

Updated on: Jul 6th, 2021


4 min read

Understanding Special Economic Zone

A special economic zone (SEZ) is a dedicated zone wherein businesses enjoy simpler tax and legal compliance. SEZs are located within a country’s national borders, however, they are treated as a foreign territory from taxability perspective.

Some of their key objective include:

  • Increase in Foreign Trade by promotion of exports of goods and services
  • Increased Foreign Investment
  • Domestic Job creation and;
  • Effective Administration and Compliance Procedures.
  • Better Infrastructure Facilities

To promote entrepreneurs to set up units in these Economic Zone, various attractive financial policies have been established. These policies include promotional offers and simplicity in investing, taxation, trading, quotas, customs and labor regulations. Moreover, units set up in these zones are offered special tax holidays.

Impact of GST on SEZ
Impact of GST on SEZ

The term special economic zone can further include:

  • Free trade zones (FTZ)
  • Export processing zones (EPZ)
  • Free zones/ Free economic zones (FZ/ FEZ)
  • Industrial parks/ industrial estates (IE)
  • Free ports
  • Bonded logistics parks (BLP
  • Urban enterprise zones

As per the legal definition, A Special Economic Zone (SEZ) is a geographically bound zone where the economic laws relating to export and import are more liberal as compared to other parts of the country. Within SEZs, a unit may be set-up for the manufacture of goods and other activities including processing, assembling, trading, repairing, reconditioning, making of gold/silver, platinum jewelry etc. SEZ units are considered to be outside the customs territory of India. All supplies made to a unit operating in SEZ are considered as Export out of India. Goods and services rendered from SEZ to normal territory is considered as Import of such goods or services. Some of the incentives and facilities available to SEZ developers include:

  • Exemption from customs/excise duties for development of SEZs for authorized operations approved by the Board Of Approval.
  • Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.
  • Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.
  • Exemption from dividend distribution tax under Section 115O of the Income Tax Act.
  • Exemption from Central Sales Tax (CST).
  • Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Click Here to view other policies established by Government of India for the operation of Special Economic Zones in India. To read further on impact of GST on SEZ, Click Here.

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Quick Summary

Special Economic Zones (SEZs) provide tax and legal benefits to businesses, promoting exports, foreign investments, job creation, and infrastructure development. These zones operate as foreign territories within a country's borders, offering various financial incentives and tax holidays. SEZs include free trade zones, export processing zones, industrial parks, and more. Developers enjoy exemptions from customs duties, excise duties, income tax, minimum alternate tax, and more.

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